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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13009
MEDICAL RESOURCES MANAGEMENT, INC.
(Name of small business issuer as specified in its charter)
Nevada 95-4607643
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
932 Grand Central Avenue Glendale, California 91201
(Address of principal executive offices) (Zip Code)
(818) 240-8250
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $.001 per share
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The Registrant's revenues for the fiscal year ended October 31, 1998 were $
11,321,693.
As of January 22, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant (based upon the average of the closing bid and
asked prices on such date) was approximately $ 651,000.
Documents incorporated by reference: Certain responses to Part III are
incorporated herein by reference to information contained in the Registrant's
definitive proxy statement for its 1999 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before March 1, 1999.
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PART I
Forward-Looking Statements
This Report on Form 10-KSB includes certain statements that may be deemed to
be "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The sections of this Report on Form 10-KSB
containing such forward-looking statements include "Description of Business,"
"Historical Background," "Growth," "Acquisitions," "Products and Services,"
"Marketing and Sales," "Markets," "Competition" and "Year 2000 Issues" under
Item 1 below, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" under Item 2 below. Statements in this Form 10-KSB
which address activities, events or developments that we expect or anticipate
will or may occur in the future, including such topics as future issuances of
shares, future capital expenditures (including the amount and nature thereof),
expansion and other development and technological trends of industry segments in
which the registrant is active, business strategy, expansion and growth of the
registrant's and its competitors' business and operations and other such matters
are forward-looking statements. Although we believe the expectations expressed
in such forward-looking statements are based on reasonable assumptions within
the bounds of our knowledge of our business, a number of factors could cause
actual results to differ materially from those expressed in any forward-looking
statements, whether oral or written, made by or on our behalf.
Our operations are subject to factors outside our control. Any one, or a
combination, of these factors could materially affect the results of our
operations. These factors include: (a) changes in levels of competition from
current competitors and potential new competition; (b) loss of a significant
customer; and (c) changes in availability or terms of working capital financing
from vendors and lending institutions. The foregoing should not be construed as
an exhaustive list of all factors that could cause actual results to differ
materially from those expressed in forward-looking statements made by us.
Forward-looking statements made by or on our behalf are based on a knowledge of
our business and the environment in which we operate, but because of the factors
listed above, actual results may differ from those anticipated results described
in these forward-looking statements. Consequently, all of the forward-looking
statements made are qualified by these cautionary statements and it is possible
that the actual results or developments anticipated by us will not be realized
or, even if substantially realized, that they will not have the expected
consequences to or effects on our business or operations.
Item 1. Description of Business
Medical Resources Management, Inc. makes mobile laser/surgical services
available to our customers by providing this equipment on a per procedure basis
to hospitals, out patient surgery centers, and physicians' offices. We provide
these mobile lasers with technical support to ensure the lasers are working
correctly for the physicians. We also provide other medical equipment on a
rental basis to hospitals and surgery centers. This equipment is used
throughout such facilities to supplement their requirement for certain medical
equipment. The combination of mobile laser/surgical services and medical
equipment rental illustrates our overall strategy and focus on diversification.
Our laser/surgical services focus on two of the most rapidly growing areas of
the health care industry: managed care and cosmetic surgery. For managed care,
minimally invasive procedures can be performed by physicians at hospitals that
find the investment in the latest laser surgery equipment and trained
technicians to be uneconomical. For cosmetic surgery, the physicians benefit
from having a multitude of different laser technologies available to offer to
their patients without the burden of investing a significant amount of money.
In both instances, physicians and hospitals receive technical support and
expertise which is provided with the equipment, which allows the staff to
concentrate on their duties without the additional tasks of running a laser.
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We believe we enjoy an advantage in the laser/surgical services market that
the small competitor cannot match due to the quantity and variety of our laser
equipment, our highly trained technicians, and the training courses we provide
for technicians and health care professionals. We have approximately 600 active
accounts in California, Arizona, Utah, Colorado and Nevada and experience a high
rate of repeat business from the hospitals, surgery centers and doctors that we
serve. The market encompasses many disciplines including plastic/cosmetic
surgery, dermatology, orthopedic surgery, otolaryngology, urology, obstetrics,
gynecology, ophthalmology, general surgery, podiatry and dentistry. Equipment
is becoming more specialized to the medical procedures involved, and technical
training of the physician, regarding the use of equipment, is a significant part
of our business.
We are the successor entity pursuant to a reorganization which occurred on
July 31, 1996 between Physiologic Reps, Inc. ("PRI"), which has been active in
this business since 1973, and Kendall Management Corporation, a public company
which was previously inactive. PRI operates as our largest wholly owned
subsidiary. THROUGHOUT THIS DOCUMENT, WE ARE REFERENCING OUR BUSINESS, AND OUR
SUBSIDIARIES, INCLUDING PRI, IN THE HISTORICAL CONTEXT. We are headquartered at
932 Grand Central Ave., Glendale, California. See "Reorganization" and
"Acquisitions."
HISTORICAL BACKGROUND
Our largest wholly owned operating subsidiary, PRI, was incorporated in
California in 1973 and moved to its present headquarters building in 1994,
located in Glendale, California. PRI also has sales and service offices in
Stockton, CA, Dublin, CA and Tempe, AZ. PRI produced approximately 73% and
83% our consolidated revenues during the fiscal years ended October 31, 1998 and
1997, respectively.
We entered the hospital equipment rental market in 1974, the mobile
laser/surgical services market in 1987, cosmetic skin resurfacing in 1994 and
leg vein treatment and tattoo removal in 1997. We began to expand our mobile
laser/surgical services to the doctors' offices and their clinics in 1995. This
business is complementary to our existing laser/surgical services which we
provide to hospitals. In 1997, we made the decision to expand our cosmetic
services to include specialized lasers for treatment of vascular lesions,
pigmented lesions and tattoo removal. Additionally, we have acquired new laser
technology to assist in the removal of leg veins, and we are continuing to
evaluate lasers for the removal of unwanted hair.
During the past few years, revenue from our mobile laser/surgical services
business has exceeded revenue from our medical equipment rental business.
However, we have a large array of general medical equipment which we rent,
primarily to hospitals, and have acquired substantial additional general medical
equipment during fiscal 1998 and fiscal 1997. Our inventory of medical
equipment includes an extensive variety of medical devices, serving a broad
range of hospital departments or needs. This wide array of medical rental
equipment, delivered to customers on very short notice, was our primary business
until about 1987, when we developed the mobile surgical laser business. During
fiscal 1997, we began to renew our emphasis on the rental of general medical
equipment.
GROWTH
We have historically focused on providing rental and other services to our
clients on an as needed basis. As a result, we have established long-term
relationships with a number of physicians, hospitals and other medical care
providers. We believe that such relationships provide an opportunity to
introduce additional products to these customers by expanding our product lines
beyond laser/surgical services and medical equipment rentals.
Our strategic plan is to grow both (1) through internal expansion and (2) the
acquisition of other companies in the medical services and equipment rental
business to take advantage of current opportunities in the market place.
Opportunities for growth are created because a wider range of new surgical laser
equipment is coming to market with features oriented toward a wider variety of
medical specialties. This is increasing the number of surgical laser procedures
performed. Another factor favoring growth of surgical laser rentals by
hospitals is the effort by managed care to reduce costs through less invasive
procedures. The managed care effort has also reduced funds available for
investment in new equipment and training. Part of our business strategy is to
take advantage of hospitals' decreased ability to invest in capital equipment,
as well as the synergy between mobile laser/surgical services and medical
equipment rental, to increase revenue and reduce costs.
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ACQUISITIONS
On March 31 1997, we acquired 100% of the issued and outstanding capital
stock of Pulse Medical Products, Inc. ("Pulse"), headquartered in Boise, ID, in
exchange for 325,000 shares of our common stock. As a result, Pulse became our
wholly owned subsidiary. Pulse rents medical equipment and sells related
equipment and supplies. Pulse conducts its business in Idaho, Montana, Utah,
Colorado, Minnesota and Wyoming. Pulse has continued to operate as our wholly
owned subsidiary, with its headquarters in Boise, ID.
On June 30 1997, we acquired 100% of the issued and outstanding capital stock
of Laser Medical, Inc. ("Laser Medical"), headquartered in Murray, UT, in
exchange for 190,000 shares of our common stock. As a result, Laser Medical
became our wholly owned subsidiary. In addition, we obtained a non-compete
agreement from the principal former shareholder of Laser Medical in
consideration for the payment of $80,000 in cash. Laser Medical provides
mobile laser/surgical services to hospitals, out patient surgery centers, and
physicians' offices. Laser Medical operates its business in Utah and Colorado.
Since the date of its acquisition, Laser Medical has operated as our wholly
owned subsidiary, with its headquarters in Murray, UT.
Also on June 30, 1997, we acquired 100% of the issued and outstanding
capital stock of Med Surg Specialties, Inc. ("Med Surg"), located in Brea,
CA, in exchange for 214,667 shares of our common stock. As a result, Med
Surg became our wholly owned subsidiary. In addition, we obtained a
non-compete agreement from the principal former shareholder of Med Surg in
consideration for the payment of $138,000 in cash ($50,000 in July 1997, with
the balance payable $50,000 in 1998 and $38,000 in 1999). Med Surg makes
mobile laser/surgical services available to hospitals, out patient surgery
centers, and physician's offices. Med Surg's operations, which were
conducted primarily in the Southern California area, were absorbed into PRI
at the time of the acquisition.
Effective November 1, 1997, we acquired 100% of the issued and outstanding
capital stock of Texas Oxygen Medical Equipment Company ("Tomec"), headquartered
in Mansfield, TX, in exchange for 40,000 shares of our common stock. As a
result, Tomec became our wholly owned subsidiary. Tomec rents medical equipment
and provides biomedical services. Tomec conducts its business in Texas, and has
continued to operate as our wholly owned subsidiary, with its headquarters
remaining in Mansfield, TX.
We intend to selectively continue the pursuit of our strategic plan of
acquiring other companies in the medical services and equipment rental business
to take advantage of current opportunities in the market place.
PRODUCTS AND SERVICES
Our technicians deliver equipment and provide technical support to physicians
and operating room ("O.R.") personnel as needed. Once our technician is at the
customer site, he posts required warning notices outside the O.R., issues safety
equipment to the O.R. staff, provides any disposable materials needed, and
supplies equipment certifications or documentation required for hospital
record-keeping. Our technician sets the physician's requested power settings
and maintains a laser safe environment during the surgical procedure. Hospitals
and surgery facilities, especially those with fluctuating occupancy levels, find
this outsourcing of trained technicians, on an as-needed basis, a cost effective
alternative to training and staffing their own personnel. More than 60% of our
revenue was generated from the rental of technician supported equipment during
each of the last two fiscal years.
Our lasers encompass the latest technology in CO2, Nd:YAG, Pulse Dye,
KTP/YAG, and Holmium YAG models. We have established an excellent working
relationship with the leading laser manufacturers and are often the first
service company to receive new laser technology in our markets. We are
constantly reviewing developments in the medical laser field to stay abreast of
the latest technology available.
We also provide our customers with disposable products and/or attachments
that are needed for a given procedure. This applies primarily to laser related
rentals requiring laser drapes, masks, fibers, tubing, etc. The customers
benefit from this added service since they save the added costs that would be
incurred if they had to purchase a large inventory of these disposable products.
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Additionally, we offer a broad spectrum of general medical equipment to the
medical market that we serve. Our inventory of equipment includes an extensive
selection of devices, serving a broad range of hospital departments and needs,
such as adult and infant ventilators, CO2 monitors, defibrillators, feeding
pumps, PCA pumps, ECG monitors, infusion pumps, neo-natal monitors, and pulse
oximeters.
Due in part to our varied inventory of equipment, we are usually capable of
offering delivery and support of rental items with only a few hours' notice.
Mobile laser/surgical services are ordered in advance and re-confirmed with the
customer the day before the procedure by the scheduling department.
MARKETING AND SALES
The principal focus of our business is providing mobile laser/surgical
services. Additionally, we are expanding our business of renting medical
equipment to hospitals, surgery centers and physicians in their offices. Our
sales efforts are supported by a direct sales force which focuses on providing
timely service and products to our customers. In addition, we sponsor
educational seminars on new laser technology, which are attended by physicians.
This allows our direct sales force to introduce new laser technology and
procedures to our customer base as soon as new lasers are offered by
manufacturers. This method has proven to be successful in developing new
business from physicians. We benefit from the physician training which occurs
at these educational seminars because the physicians can immediately implement
the new laser technology we offer.
Our sales representatives attend national and regional physician medical
seminars and trade shows to present our services and products. We also create
markets for our products and services through direct mailing of marketing
literature and promotional materials regarding our complete range of
laser/surgical services to hospitals, surgery centers and physicians.
MARKETS
Our principal markets, and percent of revenue from each, during the fiscal
years ended October 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
<S> <C> <C>
Mobile laser/surgical services 44% 53%
Cosmetic mobile laser/surgical services
(primarily physician office based) 9% 8%
Medical equipment rentals 30% 23%
Disposable and equipment sales 17% 16%
</TABLE>
HOSPITAL MOBILE LASER/SURGICAL SERVICES
We were one of the first companies to provide mobile laser/surgical services
to hospitals and surgery centers. The Southern California market has become a
mature market place with growth dependent on new procedures and products. This
situation does not exist in most other parts of the country, providing us with a
growth opportunity in other geographic markets.
Mobile laser/surgical services, both hospital/surgery center based and
physician office based, provide an entry into new geographic markets with
multiple strategies. Once a facility is established in a new geographic market,
the opportunity exists to use that facility as a dispatch point for equipment
rentals and new products.
COSMETIC MOBILE LASER/SURGICAL SERVICES
The cosmetic laser business is primarily physician office based. This market
did not emerge for us until early 1995, and has been characterized by rapid
changes in specific techniques as new technology emerges.
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In recent years, skin resurfacing cosmetic laser surgery has shown
significant growth. However, price competition is emerging in this market from
smaller start up companies. Recent legislation in California and some other
states restricting anesthesia in doctors' offices may redirect much of this
cosmetic surgery to hospitals and surgery centers, where we have a strong base.
As the skin rejuvenation market matures, new markets will be emerging for the
treatment of leg veins and the removal of unwanted hair. Because of customer
inquiries, we believe that recently developed laser technology for collapsing
veins so that they are no longer visible will produce a significant increase in
the number of doctors using mobile lasers. In addition, the anticipated
introduction to the market of new lasers for unwanted hair removal will add a
companion procedure to the vein procedure.
HOSPITAL MEDICAL EQUIPMENT RENTALS
We entered the hospital equipment rental market in 1974, and maintained that
business as our primary source of revenue until the mobile laser/surgical
services became predominate in 1987. That transition took place because of
competition from national medical rental companies and high demand for the newly
developed mobile laser/surgical services.
The hospital equipment rental market has been reduced to two dominant
national companies. The older and smaller of these companies is Universal
Hospital Services ("UHS"), which provides medical equipment within the hospital
on a fee for use basis. We believe that UHS does not focus on the larger
portion of that market which is supplemental equipment rentals. The larger
company is Mediq PRN ("Mediq"), which is dominant in the supplemental rental
business through contracts with large hospital management companies. We have
identified an excellent opportunity to service Mediq's customers on a second
call basis (as an alternative supplier to these customers) at reasonable prices.
We believe that we have a competitive advantage in the market, since we are
one of the few companies that provide both mobile laser/surgical services and
medical equipment rental. There are a number of synergies among the mobile
laser/surgical services and the medical equipment rental business, including:
Shared facilities
Shared warehouse and delivery employees
Shared delivery vehicles
Complimentary scheduling and booking staff
Common management
Shared sales staff at start up
EQUIPMENT AND DISPOSABLE SALES
We continue to evaluate several lines of disposable medical products to
introduce to our customers. As the medical rental market continues to be
challenged by smaller competitors we intend to respond by offering new products,
as well as remaining competitive on current market pricing. This is a natural
progression for us, since we have a large customer base typified by repeat
business and ongoing personal contact between our sales representatives and our
customers.
Another source of revenue is the re-marketing of used equipment. As a result
of our practice of updating laser and medical rental equipment, we occasionally
sell used equipment.
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GOVERNMENT REGULATIONS
The healthcare industry is subject to extensive federal and state regulation.
Promulgation of new laws and regulations, or changes in or re-interpretations of
existing laws or regulations, may significantly affect our business, operating
results or financial condition. We are not currently subject to regulation.
However, a court or governmental body could make a determination that our
business should be regulated. Our profitability might be negatively impacted if
we had to comply with government regulations. Furthermore, the manufacturers
of medical equipment utilized by us are subject to extensive regulation by the
Food and Drug Administration ("FDA"). Failure of such manufacturers to comply
with FDA regulations could result in the loss of approval by the FDA of such
medical equipment, which could adversely affect our operating results or
financial condition. As consolidation among physician groups continues and
provider networks continue to be created, purchasing decisions may shift to
persons with whom we have not had prior contact. We cannot be certain that we
will be able to maintain our physician, payor or manufacturer relationships
under such circumstances.
POTENTIAL EXPOSURE TO LIABILITY
Physicians, hospitals and other providers in the healthcare industry are
subject to lawsuits which may allege medical malpractice or other claims. Many
of these lawsuits result in substantial defense costs and judgments or
settlements. We do not engage in the practice of medicine, nor do we control
the practice of medicine by physicians utilizing our services or their
compliance with regulatory requirements directly applicable to such physicians
or physician groups. However, the services we provide to physicians, including
actions by our technicians, our establishment of protocols and our training
programs, could give rise to liability claims. Although we have not recently
been a party to any material litigation, including litigation relating to the
practice of medicine, we may become involved in such litigation in the future,
and it is possible that a claim or claims arising from such litigation might
exceed our insurance coverage. In addition, we may not be able to obtain such
insurance coverage in the future. See Item 3 "Legal Proceedings" below.
COMPETITION
The market for our services is highly competitive. Companies, particularly
in the laser surgery industry, compete by price, thereby impacting profit
margins. In spite of such competition, we believe that we can compete
successfully. We provide surgical laser equipment to hospitals, ambulatory
surgery centers and doctors' offices, and are able to build our business on the
interrelation of these market segments.
Our competition for mobile laser surgery equipment rental is primarily from a
number of small companies with only a few surgical lasers each. In most cases,
these competing companies are founded by technicians who have left doctors'
offices or hospitals and sell their services to a limited number of customers.
Major competitors in the hospital medical equipment rental market include
Universal Hospital Services and Mediq PRN. We believe that, as a specialist, we
can better satisfy the hospitals' needs for medical rental equipment at
satisfactory profit margins. We have no way to know whether we will be able to
successfully compete in the marketplace in the future.
REORGANIZATION
On July 31, 1996, PRI entered into a Plan and Agreement of Reorganization
("Plan") with Kendall Management Corporation ("Kendall"). Pursuant to the Plan,
Kendall acquired all of PRI's common stock in exchange for 5,100,720 shares of
Kendall common stock representing approximately 83.6% of the outstanding common
stock of Kendall. In addition, Kendall issued its options exercisable into
81,804 shares of Kendall common stock in exchange for PRI options. Subsequent
to the reorganization, Kendall changed its name to Medical Resources Management,
Inc. As a result, PRI became a subsidiary of Kendall.
The tax-free exchange was pursuant to the provisions of Sections 351 and
368(a)(1)(B) of the Internal Revenue Code. For financial statement purposes,
the transaction has been accounted for as a reverse acquisition as if PRI issued
its common stock for the net assets of Kendall. Kendall was not an operating
company.
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YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
of miscalculations, causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on a recent assessment, we expect to complete the upgrade of our
software in the fourth quarter of fiscal year 1999 so that our computer systems
will function properly with respect to dates in the year 2000 and thereafter.
We presently believe that with upgrades the Year 2000 issue will not pose
significant operational problems for our computer systems. However, if such
conversions are not made, or are not completed in a timely manner, the Year 2000
issue could have a material impact on our operations.
We have recently initiated formal communications with all of our significant
suppliers and large customers to determine the extent to which our interface
systems may be vulnerable to those third parties' failure to remediate their own
Year 2000 issues. However, we cannot guarantee that the systems of other
companies on which our systems rely will be timely converted and would not have
an adverse effect on our systems.
We will utilize both internal and external resources to upgrade and test our
software for Year 2000 modifications. Our total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 issues based on presently available information.
The total cost of the Year 2000 project has not yet been estimated, but we
anticipate that such costs will not be significant. To date, we have not
incurred any material costs related to the assessment of, and preliminary
efforts on, our Year 2000 project and the development of a modification plan,
purchase of new systems and systems modifications.
EMPLOYEES
As of October 31, 1998, we employed 97 full time persons, 58 of which were
involved in operations activities (most of these were active as field
technicians), 17 of which were involved in sales and marketing, and 22 of which
were involved in administration and accounting. In addition, we employ 10 part
time and occasional employees as technicians to handle overload situations.
None of these employees is represented by a union. We believe that our
relationship with our employees is good.
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ITEM 2. DESCRIPTION OF PROPERTY
We lease approximately 14,500 square feet of space for our headquarters in
Glendale, California on a lease that expires in 2001, for $13,153 per month,
with a CPI based rent escalation clause. This lease also provides an option to
rent this facility for an additional five years. We also lease about 2,000
square feet of space for our field and sales office in Dublin, California under
a lease that expires in 2001, for $2,609 per month, with a CPI based rent
escalation clause.
In addition, we lease field and sales offices in Stockton, CA, Boise, ID,
Englewood, CO, Tempe, AZ, Mansfield, TX and Las Vegas, NV. Total combined
square footage is 21,200 for approximately $8,700 per month, expiring through
2001.
ITEM 3. LEGAL PROCEEDINGS.
In February 1998, we were served with a lawsuit in which we, along with
various other parties, were named as a defendant in an action filed on October
29, 1996 in the Superior Court of the State of California for the County of Los
Angeles. The complaint alleges injury to the plaintiff in the course of a
cosmetic laser procedure performed in November, 1995 for which the plaintiff
seeks to hold us responsible. We intend to defend ourselves vigorously against
all of the allegations contained in the complaint. We do not believe that the
outcome of this litigation will have a material adverse effect on our
consolidated financial condition. Due to the early stage of this litigation,
and based on the information available to us, we cannot make an estimate of
loss, if any, or predict whether or not such litigation will have a material
adverse effect on our results of operations in any particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our Common Stock is traded under the symbol "MRMC" in the over-the-counter
market through the NASD's electronic OTC Bulletin Board service. The following
table sets forth the range of high and low bid prices per share of our Common
Stock for each of the periods indicated. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
----Bid Prices----
High Low
<S> <C> <C>
Quarter ended:
January 31, 1997 $ 2.25 $ 1.25
April 30, 1997 $ 2.00 $ 1.25
July 31, 1997 $ 1.87 $ 1.00
October 31, 1997 $ 1.50 $ 0.625
January 31, 1998 $ 1.375 $ 0.625
April 30, 1998 $ 1.25 $ 0.75
July 31, 1998 $ 1.75 $ 0.719
October 31, 1998 $ 0.984 $ 0.25
</TABLE>
HOLDERS OF COMMON STOCK
As of October 31, 1998, the number of holders of record of our Common Stock
was 408, excluding approximately 10 accounts in "nominee" or "street" name.
DIVIDENDS
To date, we have not paid any cash dividends on our Common Stock and do not
anticipate paying cash dividends in the foreseeable future. We anticipate that
all earnings, if any, for the foreseeable future will be retained for
development of our business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read together with the
financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items included in the Statements of Income:
<TABLE>
<CAPTION>
Year ended October 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net revenues ............................................... 100.0% 100.0%
Cost of revenues ........................................... 39.8 45.1
Depreciation expense ....................................... 12.8 10.7
------- -------
Gross profit ............................................... 47.4 44.2
Selling expenses ........................................... 18.0 18.3
General and administrative expenses ........................ 18.0 19.9
------- -------
Operating income ........................................... 11.4 6.0
Interest expense ........................................... 8.9 6.0
------- -------
Income before income taxes ................................. 2.5 0.0
Provision for income taxes ................................. 1.0 0.0
------- -------
Net income.................................................. 1.5% 0.0%
------- -------
------- -------
</TABLE>
YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997
Net revenues for the year ended October 31, 1998 were $11.32 million,
compared to $8.11 million for the fiscal year ended October 31, 1997, an
increase of $3.21 million, or 39.7%. The increase in net revenues is principally
due to the results of several acquisitions in the latter half of fiscal year
1997 and the beginning of fiscal year 1998 being included in the operating
results for all of fiscal year 1998. Net revenues of $3.32 million were
contributed from acquired entities in fiscal 1998 compared to $1.29 million from
these entities in fiscal year 1997. In addition, there was an increase in
revenues of Physiologic Reps, Inc. (PRI) in the amount of $1,190,000, primarily
as a result of increases in: (a) medical equipment rental revenues of $792,000
due to PRI's increased investment in medical rental equipment at the end of
fiscal 1997 and the first half of fiscal 1998, (b) revenues for mobile
laser/surgical services of approximately $354,000 due to both volume and price
increases and (c) other revenues of $44,000.
Cost of revenues (excluding depreciation expense) for the year ended October
31, 1998 was $4.51 million, or 39.8% of net revenues, compared to $3.65 million,
or 45.1% of net revenues, in the prior fiscal year, an increase of $855,000, or
23.4%. The increase in cost of revenues is primarily attributable to (1) cost of
revenues from acquired entities of $1.42 million in fiscal year 1998 compared to
$790,000 in fiscal year 1997 and (2) an increase in cost of revenues of PRI in
the amount of $223,000, due mostly to (a) an increase in volume of mobile
laser/surgical services and (b) higher wages paid to technicians during fiscal
1998.
Depreciation expense included in cost of revenues for the year ended October
31, 1998 was $1,451,000 compared to $869,000 for the prior fiscal year, an
increase of $582,000, or 67.0%. The increase in depreciation expense is
principally the result of (1) depreciation expense from acquired entities of
$499,000 in fiscal 1998 compared to $195,000 in the prior fiscal year and (2)
depreciation expense of $278,000 for PRI due mainly to the addition of equipment
at the end of fiscal year 1997 and during the first nine months of fiscal year
1998.
Gross profit for the fiscal year ended October 31, 1998 was $5.37 million, or
47.4% of net revenues, compared to $3.59 million, or 44.2% of net revenues, in
the year ended October 31, 1997, an increase of $1.78 million, or 49.6%. The
increase in gross profit is primarily attributable to (1) gross profit from
acquired entities of $1.39 million in fiscal 1998 compared to gross profit of
$305,000 in fiscal year 1997 and (2) gross profit of PRI in the amount of
$690,000, due principally to the increases in medical rental and mobile
laser/surgical services revenues described previously. The increase in gross
profit as a percentage of revenues is primarily attributable to an increase in
overall revenues from medical rentals, which generally have higher gross profit
margins than revenues from mobile laser/surgical services.
11
<PAGE>
Selling expenses for the year ended October 31, 1998 increased by $558,000,
or 37.6%, from $1.48 million during the prior fiscal year. As a percentage of
net revenues, selling expenses decreased to 18.0% in the year ended October 31,
1998, compared to 18.3% in the prior fiscal year. The increase in the amount of
selling expense is primarily the result of (1) selling expenses of acquired
entities of $540,000 in fiscal 1998 compared to $188,000 of selling expenses in
fiscal year 1997 and (2) selling expenses of PRI in the amount of $206,000,
primarily as a result of an increase in commissions relating to the overall
increase in revenues from medical equipment rentals and mobile laser/surgical
services.
General and administrative ("G&A") expenses increased from $1.61 million in
the year ended October 31, 1997 to $2.03 million in the year ended October 31,
1998, an increase of $418,000, or 25.9%. As a percentage of net revenues, such
expenses decreased from 19.9% in the prior fiscal year to 18.0% in the current
fiscal year. The increase in the amount of general and administrative expense is
mainly the result of (1) G&A expenses of acquired entities of $619,000 in fiscal
year 1998 compared to $175,000 of G&A expenses in fiscal year 1997 and (2) an
increase in G&A expenses in the amount of $73,000 of the parent company, MRM,
principally due to an increase in amortization of goodwill and non-compete
agreements. These increases were offset in part by a decrease in the G&A
expenses of PRI in the amount of $99,000 due to a general effort by PRI
management to reduce such expenses.
During the fourth quarter of fiscal 1998, operating income was $198,000
compared to an operating loss of $123,000 during the final quarter of fiscal
year 1997. The loss before taxes during the fourth quarter of fiscal 1998
decreased to $90,000 from a loss of $268,000 during the fourth quarter of
fiscal year 1997, principally due to a $53,000 increase in revenues coupled
with (1) a decrease in cost of revenue of $237,000, (2) a decrease in selling
expenses of $71,000 and (3) a decrease in G&A expenses of $146,000. The
revenue increase and expense decreases were offset in part by increases in
(1) depreciation expense of $186,000 and (2) interest expense of $143,000. In
general, cost of revenue, selling expenses and G&A expenses decreased due to
our efforts in reducing expenses, while depreciation and interest expense
increased due to the investments in equipment made at the end of fiscal year
1997 and during the first nine months of fiscal year 1998.
Operating income was $1.29 million in the year ended October 31, 1998, or
11.4% of net revenues, compared to $489,000 in the year ended October 31, 1997,
or 6.0% of net revenues. This increase in operating income of $803,000 from the
1997 fiscal year to the 1998 fiscal year is attributable to the factors
previously cited above.
Interest expense for the year ended October 31, 1998 was $1.01 million,
compared to $487,000 in the prior fiscal year, an increase of $525,000, or
107.7%. The increase in interest expense is the result of (1) interest expense
of acquired entities of $416,000 in fiscal year 1998 compared to $133,000 in
fiscal year 1997 and (2) an increase in interest expense of PRI in the amount of
$242,000, principally attributable to an increase in capital lease obligations
of PRI relating to medical rental equipment acquired at the end of fiscal year
1997 and during the first nine months of fiscal year 1998.
Income before income taxes was $280,000 in the year ended October 31, 1998
compared to income before taxes of $2,000 in the year ended October 31, 1997, an
increase of $278,000. Income before income taxes, as a percentage of revenues,
increased to 2.5% in the year ended October 31, 1998 from 0.0% in the year ended
October 31, 1997 as a result of the aforementioned factors.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise from the funding of our working capital
needs, principally accounts receivable and inventories, as well as our capital
expenditure needs. Our primary sources for working capital have historically
been borrowings under debt facilities, trade payables and the sale of our Common
Stock.
Net cash provided by operating activities during the year ended October 31,
1998 was $2.56 million, which resulted primarily from net income of $170,000
adjusted for (a) depreciation and amortization expense of $1.67 million, (b) an
increase in long-term deferred income tax liabilities of $246,000, (c) a loss on
sales of assets of $59,000 and (d) a net decrease of approximately $410,000 in
working capital items.
Net cash used for investing activities during the fiscal year ended October
31, 1998 was $719,000, which consisted of (a) $583,000 in capital expenditures,
(b) the payment of $50,000 for non-compete agreements and (c) an increase in
deposits and other assets of $132,000, all of which were offset in part by net
proceeds from the sales of assets of $46,000.
During the year ended October 31, 1998, cash used for financing activities
totaled $1.76 million, consisting of (a) $216,000 in principal payments on notes
payable, (b) $490,000 in principal payments on long-term debt, and (c) $1.33
million in principal payments on capital lease obligations. Such cash used for
financing activities was offset in part by (a) $170,000 of borrowings on notes
payable and (b) $105,000 of borrowings on long-term debt.
COMMITMENTS
We had no material commitments for capital expenditures at October 31, 1998.
However, although we have no present commitments or agreements to make such
capital expenditures, during the next 12 months we expect to make substantial
capital expenditures, in accordance with our historical practice. The mobile
laser/surgical services and medical equipment rental businesses are capital
intensive. We believe that funds generated from operations, together with funds
available from capital lease facilities that we expect to obtain during the year
ending October 31, 1999, will be sufficient to finance our working capital and
capital expenditure requirements for the next 12 months.
We currently have a term loan with Merrill Lynch. At the present time, we
are not in compliance with one of the financial covenants contained in the loan
agreement. However, we have obtained a waiver of this covenant through
October 31, 1999. We are negotiating with other financing sources to obtain new
credit facilities, including a working capital facility. It is our intention to
use some of the proceeds from these new credit facilities to repay in full the
term loan with Merrill Lynch. We currently expect to complete these new credit
facilities within the next six months. However, although we expect to obtain
these new credit facilities, we cannot be certain that such credit facilities
will be obtained or that, if obtained, such facilities will be in place within
the anticipated timeframe. Failure to obtain new credit facilities could have a
material adverse effect on our financial position.
ITEM 7. FINANCIAL STATEMENTS.
See financial statements included herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
13
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth our officers and directors, and their
principal occupations for the past five years, as of October 31, 1998:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITIONS WITH COMPANY
<S> <C> <C>
Allen H. Bonnifield 66 President, CEO, Chairman of the Board and acting
Chief Financial Officer
Gregory Bonnifield 35 Director and President of Physiologic Reps, Inc.
Stephen Coughlin 51 Director and President of Pulse Medical Products, Inc.
Michael Fewer 56 Vice President of Business Development and Secretary
Robert Stuckelman 67 Director
Douglas Hansen 49 Former Chief Financial Officer
</TABLE>
ALLEN H. BONNIFIELD. Mr. Bonnifield is our founder. He has been in the
medical equipment field for twenty-nine years. Mr. Bonnifield entered the
medical industry in 1968, selling patient monitoring systems to hospitals in
Southern California for a major manufacturer. He founded PRI in 1973. Mr.
Bonnifield attended schools in Stockton, California and pursued undergraduate
studies in engineering at U.C. Berkeley. He has been our President, CEO and
Chairman of the Board since our inception. Mr. Bonnifield has also been acting
Chief Financial Officer since Mr. Hansen resigned on January 15, 1999.
GREGORY BONNIFIELD. Mr. Bonnifield attended Delta College, majoring in
business administration and communications. He also attended and been awarded
training certificates in laser safety in nursing and physician education courses
in gynecology, urology, dermatology, orthopedics involving surgical laser
procedures. He was appointed to our Board of Directors in 1996, and has served
as President of PRI since December, 1997. Prior to joining us in 1987, Mr.
Bonnifield was the founder and owner of a sales and service company in Stockton,
California. He is the son of Allen Bonnifield.
STEPHEN COUGHLIN. Mr. Coughlin was appointed to our Board in March 1997,
when we acquired Pulse Medical Products, Inc. ("Pulse"). Mr. Coughlin was the
owner and founder of Pulse, a Boise, Idaho medical services company that
commenced operations in 1991. Previously, he served as Regional Manager for
Medirec, a health care services firm.
MICHAEL FEWER. Mr. Fewer joined us as a Vice President of Operations and
Secretary in 1991, and became Vice President of Business Development in
December, 1997. Previously he served as Western Divisional (USA) Manager of
Graesby Medical, Ltd., an international medical equipment manufacturer
specializing in infusion systems and patient monitoring equipment. From 1985 to
1990, he was General Manager of Rigel Medical Electronics (acquired by Graesby
Medical, Ltd.), the U.S. manufacturing and sales unit of Rigel, Ltd., a designer
and manufacturer of physiologic monitoring systems supplies to U.S.
manufacturers on an OEM basis. Mr. Fewer attended the University of Minnesota
and majored in history.
14
<PAGE>
DOUGLAS HANSEN. Mr. Hansen was our Chief Financial Officer until January 15,
1999. Prior to joining the Company in February 1997, Mr. Hansen was Chief
Financial Officer of Autec Power Systems, an electronics manufacturer, from 1996
to February 1997. From 1995 to 1996, he served as Controller of Taitron
Components, Incorporated, a public electronics component distributor. From 1993
to 1995, he was Chief Financial Officer of ATC, a laser printer manufacturer.
On January 15, 1999 we accepted the resignation of Mr. Hansen as our chief
financial officer. The resignation followed our discovery that in 1995, he had
consented, without admitting or denying underlying allegations of the Securities
and Exchange Commission ("Commission"), to the entry of (1) and judgment (a)
enjoining him from future violations of federal securities laws and (b) ordering
him to pay a $50,000 civil penalty, and (2) an order denying him the privilege
of appearing or practicing before the Commission. The judgment and order arose
out of an action by the Commission against Mr. Hansen in his capacity as chief
financial officer of Huntway Partners L.P. The action related to alleged
misstatements in Huntway's quarterly financial statements and management's
discussion and analysis and to an alleged check-writing scheme in 1992.
We are currently seeking a new chief financial officer. Mr. Hansen has
agreed to provide consulting services to us during the transition period.
ROBERT STUCKELMAN. Mr. Stuckelman became a director of the Company in July
1996. He was the founder of CompuMed, Inc., and served as its President from
1973 to 1982 and again from 1989 to 1994. He has been a director of CompuMed
from its inception to the present time. From 1982 to 1989 and from 1994 to the
present time, Mr. Stuckelman has been a business consultant to small companies
and large corporations. He has also served on the Board of Directors of
Impactor Environmental Products, Inc. from 1995 to the present time. Mr.
Stuckelman holds an MSEE from USC and a BEE from Cornell University.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in our Proxy Statement to be filed with the
Securities and Exchange Commission on or before March 1, 1999 with respect to
executive compensation and transactions is hereby incorporated by reference in
response to this item.
15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of our Common
Stock as of October 31, 1998 by: (a) each of our directors; (b) each person
known to us to be the beneficial owner of more than five percent of our Common
Stock; and (c) all of our officers and directors as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED(1) PERCENT OF CLASS
<S> <C> <C>
Allen H. Bonnifield(2)(3)(6) 2,382,792 29.03
Gregory A. Bonnifield(2)(3)(7) 345,278 4.21
Stephen D. Coughlin(4)(8) 300,800 3.66
Robert Stuckelman(2)(9) 126,718 1.54
Michael Fewer(2)(3)(10) 167,378 2.04
P.R.I. Stock Account Trust(5) 2,403,989 29.28
All Officers and Directors
as a group (5 in number)(12) 3,322,966 40.48
- ------------------------
</TABLE>
(1) Except as indicated in other footnotes, no effect has been given to the
possible issuance of up to 1,131,080 shares issuable upon the exercise of
outstanding warrants and 877,854 shares issuable upon the exercise of
outstanding options.
(2) The address of each of these persons is 932 Grand Central Avenue, Glendale,
California 91201.
(3) Includes shares beneficially owned through the PRI Employee Stock Ownership
Trust.
(4) The address of this individual is 5449 Kendall Street, Boise, Idaho 83706.
(5) The address of the beneficial owner is 3706 Fourteen Mile Drive, Stockton,
California 95219. Susan Bonnifield is the beneficiary of the trust. Ms.
Bonnifield is the ex-wife of Allen H. Bonnifield and the mother of Gregory
A. Bonnifield. Both Allen and Gregory Bonnifield disclaim any beneficial
interest in these shares.
(6) Includes 2,063,182 shares held in two trusts, each of which Mr. Bonnifield
is the beneficiary. Includes 220,800 shares subject to warrants.
(7) Includes 15,000 shares subject to warrants and 161,250 shares subject to
options.
(8) Includes 27,200 shares subject to warrants.
(9) Includes 15,000 shares subject to warrants and 6,700 shares subject to
options.
(10) Includes 130,384 shares subject to options.
(11) Includes 293,000 shares subject to warrants and 298,604 shares subject to
options owned by five officers and directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 31, 1997, in connection with a private placement, we issued
86,400 Units to Allen Bonnifield, our Chairman of the Board and Chief Executive
Officer, in exchange for a cancellation of our indebtedness owed to him in the
amount of $108,000. Each Unit consisted of one share of Common Stock, one Class
A warrant to purchase one share of Common Stock at a price of $2.50 per share,
and one Class B warrant to purchase one share of Common Stock at a price of
$4.00 per share. On April 24, 1997, we issued 116,440 Units in the
above-mentioned private placement to Susan Bonnifield, the wife of Allen
Bonnifield, in exchange for a cancellation of our indebtedness owed to her in
the amount of $145,550. In both of these transactions, the Units were exchanged
at a rate of one Unit for each $1.25 of indebtedness forgiven. In addition, in
January 1997, Mr. Bonnifield purchased 16,000 Units in the above-mentioned
private placement at a price of $1.25 per unit, or an aggregate of $20,000.
16
<PAGE>
Robert Stuckelman, a member of our Board of Directors, received $44,000 and
$48,000 from us in the form of consulting fees during the fiscal years ended
October 31, 1998 and 1997, respectively, as a result of having provided business
and marketing consulting services to us in connection with prior acquisitions
and certain other matters, and we may continue to retain Mr. Stuckelman to
render such business and marketing consulting services to us in the future. We
believe that the terms of the consulting services provided were no less
favorable to us than those that could have been obtained in a comparable
transactions with an unrelated party. In addition, in January 1997, Mr.
Stuckelman purchased 7,500 Units in the above-mentioned private placement at a
price of $1.25 per Unit, or an aggregate of $9,375.
In January 1997, Gregory Bonnifield, one of our officers and directors, and
Michael Fewer, another of our officers, each purchased 7,500 Units in the
above-mentioned private placement at a price of $1.25 per unit, or an aggregate
of $9,375.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Documents filed with as part of this report:
Page
------
<S> <C>
1. Financial Statements:
Report of Independent Auditors F-1
Consolidated Balance Sheet - October 31, 1998 F-2
Consolidated Statements of Income - Years Ended October 31,
1998 and 1997 F-4
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended October 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows - Years Ended
October 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
2. Exhibits:
</TABLE>
See Exhibits Index. The exhibits listed in the accompanying Exhibit
Index are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K:
A Report on Form 8-K was filed with the Securities and Exchange Commission
on July 2, 1998 including the audited financial statements of Pulse Medical
Products, Inc. for the years ended December 31, 1996 and 1995.
17
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Glendale, California on the 16th day of February, 1999.
MEDICAL RESOURCES MANAGEMENT, INC.
By /s/ Allen H. Bonnifield
----------------------------------------------------
Allen H. Bonnifield, President, CEO and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 16th day of February, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- ------
<S> <C>
By /s/ Allen H. Bonnifield
------------------------------
Allen H. Bonnifield President, CEO and Chief Financial Officer
By /s/ Gregory Bonnifield
------------------------------
Gregory Bonnifield Director and President of
Physiologic Reps, Inc.
By /s/ Stephen Coughlin
------------------------------
Stephen Coughlin Director and President of
Pulse Medical Products, Inc.
By /s/ Robert Stuckelman
------------------------------
Robert Stuckelman Director
</TABLE>
18
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION
NUMBER
<S> <C>
2.1 Articles of Incorporation and Amendments thereto. (1)
2.2 By-Laws of the Registrant. (1)
3.1 Copy of a Warrant Agreement and Warrant issued between
November 1996 and March 1997 to investors in the Registrant's
Private Placement. (1)
6.1 Plan and Agreement of Reorganization between the Registrant and
Physiologic Reps, Inc. dated July 31, 1996. (1)
6.2 Registrant's 1996 Stock Incentive Plan. (1)
6.3 Term Loan and Security Agreement dated March 28, 1995 between
the Registrant and Merrill Lynch Business Financial Services,
Inc. (1)
6.4 Term Loan and Security Agreement dated June 5, 1996 between
the Registrant and Merrill Lynch Business Financial Services,
Inc. (1)
6.5 WCMA Note, Loan and Security Agreement dated June 5, 1996
between the Registrant and Merrill Lynch Business Financial
Services,
Inc. (1)
6.6 Plan and Agreement of Reorganization between the Registrant and
Pulse Medical Products, Inc. dated March 31, 1997. (1)
6.7 Equipment Note Loan and Security Agreement dated April 24, 1997
between the Registrant and LINC Capital Management, a division of
LINC Capital, Inc. (1)
6.8 Collateral Note No. 1 dated April 28, 1997 between the Registrant
and LINC Capital, Inc. (1)
6.9 Lease Modification Agreement dated April 24, 1997 between Pulse
Medical Products, Inc. and LINC Capital Management, a division of
LINC Capital, Inc. (1)
6.10 Warrant Purchase Agreement dated April 24, 1997 between the
Registrant and LINC Capital Management, a division of LINC Capital,
Inc. (1)
6.11 Warrant to Purchase Shares of Common Stock dated April 24, 1997
between the Registrant and LINC Capital Management, a division of
LINC Capital, Inc. (1)
6.12 Term Note and Security Agreement dated July 10, 1997 between the
Registrant and Merrill Lynch Business Financial Services. (2)
19
<PAGE>
EXHIBIT EXHIBIT DESCRIPTION
NUMBER
6.13 Plan and Agreement of Reorganization between the Registrant and
Laser Medical, Inc. dated June 27, 1997. (3)
6.14 Plan and Agreement of Reorganization between the Registrant and
Med Surg Specialties, Inc. dated June 30, 1997. (3)
6.15 Plan and Agreement of Reorganization between the Registrant and
Texas Oxygen Medical Equipment Company dated November 14, 1997. (4)
</TABLE>
(1) Exhibit filed with Registrant's Form 10-SB on May 16, 1997 and incorporated
by reference herein.
(2) Exhibit filed with Registrant's Form 10-QSB for the quarter ended July 31,
1997 and incorporated by reference herein.
(3) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended
October 31, 1997 and incorporated by reference herein.
(4) Exhibit filed with Registrant's Form 10-QSB for the quarter ended January
31, 1998 and incorporated by reference herein.
20
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Medical Resources Management, Inc.
We have audited the accompanying consolidated balance sheet of Medical Resources
Management, Inc. and subsidiaries as of October 31, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the two years in the period ended October 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Medical
Resources Management, Inc. and subsidiaries at October 31, 1998, and the results
of their operations and their cash flows for each of the two years in the period
ended October 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
January 22, 1999
F-1
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Balance Sheet
October 31, 1998
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 141,228
Accounts receivable, less allowance of $100,000 (NOTE 4) 1,916,159
Inventories (NOTE 4) 775,735
Prepaid expenses 186,260
Income tax receivable 20,843
-----------
Total current assets 3,040,225
Property and equipment (NOTES 3 AND 4):
Rental equipment (NOTE 3) 18,949,720
Transportation equipment 878,641
Office furniture and equipment 354,683
Leasehold improvements 96,024
-----------
20,279,068
Less accumulated depreciation 8,090,817
-----------
Net property and equipment 12,188,251
Other assets:
Intangible assets, net of accumulated amortization of $157,278 626,883
Deposits and other assets 307,332
-----------
Total other assets 934,215
-----------
Total assets $16,162,691
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Balance Sheet (continued)
October 31, 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Accounts payable $ 1,332,956
Accrued expenses 793,514
Notes payable 10,500
Current portion of long-term debt (NOTE 4) 561,710
Current portion of obligations under capital leases (NOTE 3) 2,365,218
-----------
Total current liabilities 5,063,898
Long-term debt, net of current portion (NOTE 4) 1,723,691
Obligations under capital leases, net of current portion (NOTE 3) 4,975,770
Deferred income taxes (NOTE 5) 1,194,905
Commitments and contingencies (NOTES 4 AND 9)
Shareholders' equity (NOTE 6):
Common stock, $.001 par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 7,385,927 7,386
Additional paid-in capital 1,683,326
Retained earnings 1,513,715
-----------
Total shareholders' equity 3,204,427
-----------
Total liabilities and shareholders' equity $16,162,691
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended October 31
1998 1997
----------- -----------
<S> <C> <C>
Net revenue $11,321,693 $ 8,105,140
Cost of revenue 4,505,034 3,648,910
Depreciation expense 1,451,193 868,975
----------- -----------
Gross profit 5,365,466 3,587,255
Selling expenses 2,040,271 1,482,244
General and administrative expenses 2,032,788 1,615,612
----------- -----------
Operating income 1,292,407 489,399
Interest expense 1,012,097 487,391
----------- -----------
Income before income taxes 280,310 2,008
Provision for income taxes (NOTE 5) 110,485 800
----------- -----------
----------- -----------
Net income $ 169,825 $ 1,208
----------- -----------
----------- -----------
Net income per common share (basic and diluted) $ .02 $ .00
----------- -----------
----------- -----------
Weighted average common shares (basic and diluted) 7,384,502 6,773,302
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid-in Capital Earnings Total
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1996 6,100,720 $ 6,101 $ 233,573 $1,342,682 $1,582,356
Issuance of stock 1,245,207 1,245 1,405,793 -- 1,407,038
Net income for year -- -- -- 1,208 1,208
---------- ---------- ---------- ---------- ----------
Balance at October 31, 1997 7,345,927 7,346 1,639,366 1,343,890 2,990,602
Issuance of stock (NOTE 2) 40,000 40 43,960 -- 44,000
Net income for year -- -- -- 169,825 169,825
---------- ---------- ---------- ---------- ----------
Balance at October 31, 1998 7,385,927 $ 7,386 $1,683,326 $1,513,715 $3,204,427
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended October 31
1998 1997
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 169,825 $ 1,208
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of property and equipment 1,556,842 923,425
Amortization of intangibles 115,267 42,011
Provision for doubtful accounts 41,921 (9,463)
Deferred income taxes 246,409 (17,752)
Loss on sales of assets 58,854 1,000
Changes in operating assets and liabilities:
Accounts receivable (90,028) (333,221)
Inventories (132,808) (279,267)
Prepaid expenses (91,882) (39,890)
Income tax receivable 34,270 (18,859)
Accounts payable 432,820 (96,799)
Accrued expenses 215,442 (61,605)
----------- -----------
Net cash provided by operating activities 2,556,932 110,788
INVESTING ACTIVITIES
Purchases of property and equipment (583,179) (444,150)
Net proceeds from sales of assets 46,251 --
Payments for non-compete agreements (50,000) (130,000)
Increase in deposits and other assets (131,769) (157,331)
----------- -----------
Net cash used for investing activities (718,697) (731,481)
FINANCING ACTIVITIES
Issuance of common stock -- 324,480
Borrowings on notes payable 169,887 24,185
Borrowings on long-term debt 105,148 1,231,024
Borrowings on capital lease refinancing -- 1,185,810
Principal payments on notes payable (111,191) (215,844)
Principal payments on long-term debt (664,872) (490,447)
Principal payments on capital lease obligations (1,330,107) (1,316,869)
----------- -----------
Net cash (used for) provided by financing activities (1,761,363) 672,567
Net increase in cash and cash equivalents 76,872 51,874
Cash and cash equivalents at beginning of period 64,356 12,482
----------- -----------
Cash and cash equivalents at end of period $ 141,228 $ 64,356
----------- -----------
----------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest $ 959,086 $ 464,253
--------------- -----------
--------------- -----------
Taxes $ 2,730 $ 40,050
--------------- -----------
--------------- -----------
Capital lease obligations entered into for equipment $ 2,389,699 $3,089,726
--------------- -----------
--------------- -----------
Common stock issued for acquired companies $ 44,000 $ 802,634
--------------- -----------
--------------- -----------
Common stock issued in exchange for forgiveness of debt $ -- $ 253,550
--------------- -----------
--------------- -----------
Common stock issued for forgiveness of accrued liabilities $ -- $ 26,325
--------------- -----------
--------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Medical Resources Management, Inc. (MRM or the Company) engages in the business
of renting medical equipment, providing associated technical support, and also
selling related supplies. Customers of the Company are located throughout much
of the western United States. The financial statements include MRM, the holding
company, consolidated with all of its wholly owned subsidiaries (see Note 2 for
1998 and 1997 acquisitions). All significant intercompany accounts and
transactions have been eliminated.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with maturities of three months or less when purchased to be
cash equivalents.
INVENTORIES
Inventories, consisting primarily of supplies, are stated at the lower of cost
(first-in, first-out) or market basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which vary
from five to ten years. Capitalized leases and leasehold improvements are being
amortized using the straight-line method over the shorter of the lease term or
estimated useful lives.
Amortization of capital leases is included in depreciation expense.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged as incurred.
INTANGIBLE ASSETS
Intangible assets consisting of the excess of purchase price over assets
acquired and customer lists are being amortized over a period of 12 to 15 years.
Payments for non-compete agreements are capitalized and then amortized over the
period of the non-compete agreement.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which prescribes the use of the liability method
to compute the differences between the tax basis of assets and liabilities and
the related financial reporting amounts using currently enacted laws and rates.
F-7
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time that the rental service is rendered
to the customer, including the providing of technical support.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue doing so. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value-based
method of accounting for compensation costs related to stock options and other
forms of stock-based compensation plans. However, SFAS 123 allows an entity to
continue to measure compensation costs using the principles of APB 25 if certain
pro forma disclosures are made. The Company adopted SFAS 123 in fiscal year
1997. The Company provides proforma disclosures of net income and earnings per
share as if the fair value-based method prescribed by SFAS 123 had been applied
in measuring compensation expense (Note 8).
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with banks.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers primarily with small balances.
Management reviews these balances on a monthly basis and maintains reserves for
potential credit losses, which losses have historically been within management's
expectations. The Company generally sells on credit terms of 30 days and
requires no collateral.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could vary from those estimates.
EARNINGS PER SHARE
Earnings per share has been computed in accordance with Statement of Financial
Accounting Standards No. 128, "Accounting for Earnings per Share". Basic
earnings per share has been computed based on the weighted average number of
shares of common stock outstanding. Stock options and warrants for dilutive
earnings per share have not been considered because the effect was either not
material or antidilutive.
F-8
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Long-lived assets used in operations are reviewed periodically to determine that
the carrying values are not impaired. If indicators of impairment are present,
or if long-lived assets are expected to be disposed of at a loss, impairment
losses are recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's outstanding balances under its long-term
debt instruments approximates fair value because the interest rates on
outstanding borrowings vary according to current market rates or are set to
approximate market rates.
FINANCIAL STATEMENT PRESENTATION
Certain balances from the October 31, 1997 financial statements have been
reclassified to conform to the October 31, 1998 presentation.
NEW ACCOUNTING PRINCIPLES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This statement establishes standards for reporting and displaying
comprehensive income and its components (revenue, expenses, gains and losses) in
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. It is effective for fiscal years beginning after
December 15, 1997. The Company does not believe that the current financial
statement disclosures will need to be modified based upon current operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). This statement requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. Generally, financial information is required
to be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. The Company is
reviewing the standard and does not believe that there will be a significant
impact on financial disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated a
part of a hedge transaction and, if it is, the type of hedge transaction. SFAS
133 will be effective the first quarter of 2000. The Company is in the process
of determining the impact of this new standard and anticipates that it will not
have a material impact on the Company's financial results when effective.
F-9
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
Effective March 31, 1997, the Company acquired 100% of the common stock of Pulse
Medical Products, Inc. (Pulse). Pulse provides medical rental equipment in the
Rocky Mountain area. The purchase price was $357,500 consisting of 325,000
shares of MRM's common stock (valued at $1.10 per share). The transaction was
accounted for as a purchase and, accordingly, the results of operations of Pulse
have been included in the statement of income since April 1, 1997.
Effective June 30, 1997, the Company acquired 100% of the common stock of Laser
Medical, Inc. (Laser Medical). Laser Medical provides mobile laser/surgical
services principally in the states of Utah and Colorado. The purchase price was
$209,000 consisting of 190,000 shares of MRM's common stock (valued at $1.10 per
share). In addition, the Company obtained a non-compete agreement from the
principal former shareholder of Laser Medical in consideration for the payment
of $80,000 in cash. This transaction was accounted for as a purchase and,
accordingly, the results of operations of Laser Medical have been included in
the statement of income since July 1, 1997.
Also effective June 30, 1997, the Company acquired 100% of the common stock of
Med Surg Specialties, Inc. (Med Surg). The purchase price was $236,134
consisting of 214,667 shares of MRM's common stock (valued at $1.10 per share).
Med Surg provides mobile laser/surgical services in the Southern California
area. In addition, the Company obtained a non-compete agreement from the
principal former shareholder of Med Surg in consideration for the payment of
$138,000 in cash ($50,000 at closing, with the balance payable $50,000 in 1998
and $38,000 in 1999). This transaction was accounted for as a purchase and,
accordingly, the results of operations of Med Surg have been included in the
statement of income since July 1, 1997.
The following is the unaudited proforma summary statement of earnings for the
year ended October 31, 1997 of the Company and the acquisitions discussed
previously, assuming all were effective on November 1, 1996. The proforma
information gives effect to certain adjustments, including primarily the
amortization of excess of costs over net assets acquired. This proforma summary
does not necessarily reflect the results of operations as they would have been
if the Company and the acquisitions had been a single entity during such
periods:
<TABLE>
<C> <C>
Total revenues $ 9,887,000
Total expenses 10,028,000
-----------------
Net loss $ (141,000)
-----------------
-----------------
Net loss per common share $ (.02)
-----------------
-----------------
</TABLE>
Effective November 1, 1997, the Company acquired 100% of the common stock of
Texas Oxygen Medical Equipment Company (Tomec). Tomec provides biomedical
services and medical rental equipment in the state of Texas. The purchase price
was $44,000 consisting of 40,000 shares of MRM's common stock (valued at $1.10
per share). The transaction was accounted for as a purchase and, accordingly,
the results of operations of Tomec have been included in the statement of income
since November 1, 1997.
F-10
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
During 1997 and 1998, the Company acquired an approximate 22% equity interest
in three separate limited liability companies (LLCs) formed by the Company
and certain physicians for and investment by the Company of $17,500, $15,000
and $15,000, respectively. The Company manages the LLCs and provides
operations, management and other services to the LLCs. The Company accounts
for its interests in the LLCs using the equity method of accounting. In
fiscal 1998 the Company has recorded $257,012 in fees relating to management
and other services provided to the LLCs covering expenses ncurred by the
Company on behalf of the LLCs. Such amount has been recorded as a reduction
of cost of revenue. In addition, $13,770 was recorded for the Company's
equity interests in the profit of these LLCs during fiscal 1998.
3. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under capital lease obligations which
contain purchase options. Cost and accumulated depreciation of equipment under
capital leases included in equipment as of October 31, 1998 are as follows:
<TABLE>
<S> <C>
Rental equipment $ 9,276,996
Less accumulated depreciation 1,309,380
----------------
Net book value $ 7,967,616
----------------
----------------
</TABLE>
The following is a schedule by year of future minimum lease payments required
under the leases, together with their present value as of October 31, 1998:
<TABLE>
<S> <C>
1999 $ 3,397,280
2000 2,541,900
2001 1,967,450
2002 1,075,204
2003 398,984
----------------
Total minimum lease payments 9,380,818
Less amount representing interest 2,039,830
----------------
Present value of minimum lease payments due under capital leases 7,340,988
Less current portion 2,365,218
----------------
Obligations under capital leases, net of current portion $ 4,975,770
----------------
----------------
</TABLE>
F-11
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
<TABLE>
<S> <C>
Long-term debt consists of the following at October 31, 1998:
Note payable to a finance company, payable in 60 monthly
installments of $33,333 plus interest at the 30-day
commercial paper rate plus 2.70% (7.75% at October 31, 1998),
secured by accounts receivable, inventories, equipment and the
personal guarantee of certain shareholders $1,600,000
Various notes payable in monthly installments totaling $10,350
including interest varying between 9% and 15% per annum,
collateralized by trucks, vans and automobiles, maturing
through April 2002 233,236
Notes payable to a finance company for a line of credit of
$300,206 maturing April 2001, bearing interest at a rate of
12% per annum, interest payable monthly, secured by the
accounts receivable and inventories of Pulse 300,206
Other 151,959
----------
Total long-term debt 2,285,401
Less current portion 561,710
----------
Long-term debt, net of current portion $1,723,691
----------
----------
Long-term debt matures as follows during the years ending October 31:
1999 $ 561,710
2000 523,278
2001 786,364
2002 393,888
2003 20,161
----------
$2,285,401
----------
----------
</TABLE>
The note payable to a finance company is subject to a net worth covenant as
defined. The Company has obtained a waiver of this covenant through October
31, 1999.
F-12
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PROVISION FOR INCOME TAXES
The provisions for income taxes for the years ended October 31, 1998 and 1997
consist of the following:
<TABLE>
<CAPTION>
Year ended October 31, 1998
Current Deferred Total
----------------- -------------- ---------------
<S> <C> <C> <C>
Federal $ - $ 88,060 $ 88,060
State 2,680 19,745 22,425
----------------- -------------- ---------------
$ 2,680 $ 107,805 $ 110,485
----------------- -------------- ---------------
----------------- -------------- ---------------
<CAPTION>
Year ended October 31, 1997
Current Deferred Total
----------------- -------------- ---------------
<S> <C> <C> <C>
Federal $ - $ (13,698) $ (13,698)
State 800 13,698 14,498
----------------- -------------- ---------------
$ 800 $ - $ 800
----------------- -------------- ---------------
----------------- -------------- ---------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities at
October 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 648,636
Allowance for doubtful accounts 66,383
Other 57,927
-------------
Total deferred assets 772,946
-------------
Deferred tax liabilities:
Depreciation (1,961,331)
Other (6,520)
-------------
Total deferred liabilities (1,967,851)
-------------
Net deferred liabilities $ (1,194,905)
-------------
-------------
</TABLE>
A reconciliation of the provision for income taxes with the amounts obtained by
applying the federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
Year ended October 31
1998 1997
--------------------
<S> <C> <C>
Income tax based on federal statutory rate $ 95,305 $683
State tax, net of federal tax benefit 14,800 106
Non-deductible expenses and other 380 11
----------- ------
$ 110,485 $800
----------- ------
----------- ------
</TABLE>
F-13
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EQUITY
Between November 1, 1996 and March 31, 1997, the Company sold 291,600 Units in a
private offering. These Units consisted of 291,600 shares of common stock, as
well as 291,600 Class A warrants and 291,600 Class B warrants to purchase, in
the aggregate, 583,200 shares of common stock. The Units were sold at $1.25 per
Unit, resulting in gross proceeds of $364,500 and net proceeds of $324,480 after
expenses. The Class A and Class B warrants have an exercise price of $2.50 and
$4.00, respectively, and expire on November 1, 1999. As of October 31, 1998 no
such warrants had been exercised.
During March 1997, the Company issued an additional 202,840 Units to certain
shareholders (including the principal officer of the Company) in exchange for
$253,550 of indebtedness owed to these shareholders. These Units consisted of
202,840 shares of common stock, as well as 202,840 Class A warrants and 202,840
Class B warrants to purchase, in the aggregate, 405,680 shares of common stock.
The Units were issued at a rate of one Unit for each $1.25 of shareholder debt
forgiven. The Class A and Class B warrants have an exercise price of $2.50 and
$4.00, respectively, and expire on November 1, 1999. As of October 31, 1998 no
such warrants had been exercised.
In April 1997, in connection with a loan from a finance company, warrants were
granted to the finance company to purchase 100,000 shares of common stock at a
price of $2.00 per share, exercisable at any time during the six years following
the date of the loan.
7. BENEFIT PLAN
In June 1997, the Company adopted a defined contribution retirement plan (Plan)
which qualifies under Section 401(k) of the Internal Revenue Code. The Plan
covers substantially all employees with over one year of service. The Company
makes an annual election to provide matching contributions of up to 50% of each
participant's deferral up to a maximum of 3% of compensation. The amounts of
matching contributions included in expense were $83,758 and $26,468 for the
years ended October 31, 1998 and 1997, respectively.
F-14
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS
In September 1996, the Company adopted the 1996 Stock Incentive Plan (Plan) to
allow officers, employees and certain non-employees to receive certain options
to purchase common stock and to receive grants of common stock subject to
certain restrictions. Under the Plan, regular salaried employees, including
directors, who are full time employees, may be granted options exercisable at
not less than 100 percent of the fair market value of the shares at the date of
grant. The exercise price of any option granted to an optionee who owns stock
possessing more than ten percent of the voting power of all classes of common
stock of the Company must be 110 percent of the fair market value of the common
stock on the date of grant, and the duration may not exceed five years. Options
generally become exercisable at a rate of one-third of the shares subject to
option on each of the first, second and third anniversary dates of the grant.
The duration of options may not exceed ten years. A maximum number of 1,500,000
shares of common stock may be issued under the Plan.
In October 1998, the Board of Directors adopted a resolution under which
employees with existing options had the choice to surrender all or part of such
options and receive new options issued by the Company. In general, the Company
agreed to issue two new options for each three options surrendered by an
employee, and employees who chose to surrender existing options lost any vesting
they previously had with respect to the options surrendered. In connection with
this plan, employees surrendered a total of 1,084,000 options (generally at an
exercise price of $1.50 per share) and received a total of 724,050 newly issued
options at an exercise price of $0.25 per share, which was the fair market price
on the day of the grant of the newly issued options.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Year ended October 31
1998 1997
---------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,246,304 $ 1.44 424,804 $ 1.31
Granted 807,550 $ 0.34 874,000 $ 1.50
Exercised - - - -
Forfeited or cancelled (1,176,000) $ 1.38 (52,500) $ 1.50
-------------- ------------- -------------- ------------
Outstanding at end of year 877,854 $ 0.37 1,246,304 $ 1.44
-------------- ------------- -------------- ------------
-------------- ------------- -------------- ------------
Options exercisable at year-end 337,438 $ 0.45 149,856 $ 1.14
-------------- ------------- -------------- ------------
-------------- ------------- -------------- ------------
</TABLE>
The weighted average fair value of options granted during the years ended
October 31, 1998 and 1997 was $0.34 and $1.34 at October 31, 1998 and 1997,
respectively. The weighted average remaining contractual life of stock options
was 9.59 years as of October 31, 1998. The range of prices of outstanding
options under the Plan at October 31, 1998 was $0.25 to $2.125.
F-15
<PAGE>
Medical Resources Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
Year ended October 31
1998 1997
--------------- --------------
<S> <C> <C>
Net income as reported $ 169,825 $ 1,208
--------------- --------------
--------------- --------------
Proforma net income (loss) $ 105,739 $ (173,220)
--------------- --------------
--------------- --------------
Net income per common share as reported $ .02 $ .00
--------------- --------------
--------------- --------------
Proforma net income (loss) per common share $ .01 $ (.02)
--------------- --------------
--------------- --------------
</TABLE>
The Company utilized the Black-Scholes method to estimate the fair value of
options, which includes the weighted average calculation of the fair value using
the following assumptions: (i) a risk-free interest rate of 6%; (ii) an
expected life of 8 years; (iii) expected volatility of 1.07; and (iv) no
expected dividends.
9. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company leases premises under non-cancelable operating leases expiring in
various years through 2001. The lease on the corporate headquarters contains
provisions for cost of living increases and certain options to renew for a
period of five additional years. Other facilities are on a month to month basis.
Future minimum lease payments are as follows during the years ending October 31:
<TABLE>
<S> <C>
1999 $ 265,271
2000 236,075
2001 127,380
2002 -
2003 -
--------------
$ 628,726
--------------
--------------
</TABLE>
Rent expense was $296,435 and $218,337 for the years ended October 31, 1998 and
1997, respectively.
In February 1998, the Company was served with a lawsuit in which it, along
with various other parties, was named as a defendant in an action filed on
October 29, 1996 in the Superior Court of the State of California for the
County of Los Angeles. The complaint alleges injury to the plaintiff in
the course of a cosmetic laser procedure performed in November 1995 for which
the plaintiff seeks to hold the Company responsible. The Company intends to
defend itself vigorously against all of the allegations contained in the
complaint. The Company does not believe that the outcome of this litigation
will have a material adverse effect on its consolidated financial condition.
The Company has borrowed money from two principal shareholders, including the
principal officer of the Company. The notes payable to shareholders bore
interest at rates ranging from 10% to 12% and were subordinated to the notes
payable to a finance company. In 1997, amounts owed pursuant to such borrowings
were repaid with common stock of the Company (see Note 6).
The Company paid consulting fees to a member of the Board of Directors in the
amounts of $44,000 and $48,000 during the fiscal years ended October 31, 1998
and 1997, respectively. This consulting arrangement was terminated effective
October 1, 1998.
10. EMPLOYEE STOCK OWNERSHIP PLAN
On August 7, 1992, the Company formed an employee stock ownership plan (ESOP)
for the benefit of all employees meeting certain minimum age and length of
service requirements. Contributions are discretionary and are determined
annually by the Board of Directors. No contribution was made for either of the
years ended October 31, 1998 or 1997.
F-16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 141,228
<SECURITIES> 0
<RECEIVABLES> 2,016,159
<ALLOWANCES> 100,000
<INVENTORY> 775,735
<CURRENT-ASSETS> 3,040,225
<PP&E> 20,279,068
<DEPRECIATION> 8,090,817
<TOTAL-ASSETS> 16,162,691
<CURRENT-LIABILITIES> 5,063,898
<BONDS> 6,669,461
0
0
<COMMON> 7,386
<OTHER-SE> 3,197,041
<TOTAL-LIABILITY-AND-EQUITY> 16,162,691
<SALES> 11,321,693
<TOTAL-REVENUES> 11,321,693
<CGS> 5,956,227
<TOTAL-COSTS> 5,956,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,012,097
<INCOME-PRETAX> 280,310
<INCOME-TAX> 110,485
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,825
<EPS-PRIMARY> .023
<EPS-DILUTED> .023
</TABLE>
