SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 2, 1998
Commission File Number 0-8640
SYNCOR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0229124
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6464 Canoga Avenue, Woodland Hills, California 91367-2407
(Address of principal executive offices) (Zip Code)
(818) 737-4000
(Registrant's telephone number, including area code)
AMENDMENT NO. 1
The undersigned hereby amends the following items, financial statements,
exhibits or other portions of its Current Report on Form 8-K filed with the
Commission on January 31, 1998 (the "Current Report") as set forth herein
relating to the acquisition of International Magnetic Imaging (collectively,
"IMI"). Pursuant to Item 7 of Form 8-K, the financial statements filed with
this Amendment were omitted from the Current Report and are being filed
herewith.
The Current Report is hereby amended by deleting Item 7(2) thereof and
replacing it in its entirety with the following:
2. Audited financial statements of IMI:
a. Report of Independent Auditors
b. Consolidated Balance Sheets
c. Consolidated Statements of Operations
d. Consolidated Statements of Stockholders' Equity
e. Consolidated Statements of Cash Flows
f. Notes to Consolidated Financial Statements
g. Consent of Independent Auditors
3. Unaudited pro forma financial information:
a. Unaudited Pro Forma Condensed Consolidated Balance Sheet
b. Unaudited Pro Forma Condensed Consolidated Statement
of Operations
c. Notes and Unaudited Pro Forma Condensed Financial
Statements
SIGNATURE
Pursuant to 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.
SYNCOR INTERNATIONAL CORPORATION
/s/ Haig S. Bagerdjian
By:_____________________________
Haig S. Bagerdjian
Senior Vice President, Secretary
and General Counsel
Date: April 20, 1998
<PAGE>
INTERNATIONAL MAGNETIC
IMAGING, INC. AND SUBSIDIARIES
REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
____
International Magnetic Imaging, Inc. and Subsidiaries:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-5
Consolidated Statements of Stockholders' Equity........................ F-6
Consolidated Statements of Cash Flows.................................. F-7
Notes to Consolidated Financial Statements............................. F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
International Magnetic Imaging, Inc.
We have audited the accompanying consolidated balance sheets of
International Magnetic Imaging, Inc. and its subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 1, 1997. These consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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 International Magnetic Imaging, Inc. and its subsidiaries as of December
31, 1997 and 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 13, 1998
<PAGE>
INTERNATIONAL MAGNETIC IMAGING, INC. AND SUBSIDIARIES
______________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
______________________________________________________________________________
<TABLE>
<CAPTION>
December 31,
1997 1996
____ ____
<S> <C> <C>
Assets:
Current Assets:
Cash $1,812,925 $ 1,539,245
Accounts Receivable 9,802,686 10,074,550
Prepaid Expenses and Other 258,324 253,900
Deferred Tax Asset 584,189 363,967
__________ ____________
Total Current Assets 12,458,124 12,231,662
__________ ____________
Property and Equipment:
Property and Equipment - Net 7,405,444 9,219,684
Equipment Under Capitalized Leases - Net 2,332,600 3,340,929
__________ ____________
Property and Equipment - Net 9,738,044 12,560,613
Other Assets:
Non-Current Accounts Receivable - Net 1,270,967 1,747,400
Goodwill - Net 9,180,664 9,728,912
<PAGE>
Restrictive Covenants - Net -- 825,644
Customer List - Net 4,430,239 4,807,279
Loan Costs - Net 385,463 535,411
Deferred Offering Costs -- 322,165
Deposits and Other 349,776 346,663
Deferred Tax Asset 840,835 1,224,398
Note Receivable - Officer 324,793 308,296
__________ ____________
Total Other Assets 16,782,737 19,846,168
---------- ------------
Total Assets $38,978,905 $44,638,443
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INTERNATIONAL MAGNETIC IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Other Liabilities $2,229,574 $2,987,434
Accrue Expenses 1,135,473 1,016,419
Accrued Settlement Agreement 407,773 --
Accrued Radiology Fees 224,654 191,336
Current Income Taxes Payable 248,951 420,646
Revolve Loan 7,117,131 --
Current Portion of Long-Term Debt 3,814,996 3,486,408
Current Portion of Obligations Under Capital Leases 1,240,245 1,272,923
Current Portion of Covenants Not-to-Compete -- 200,000
Current Portion of Subordinated Debt 5,721,218 6,268,713
Subordinated Debt - Related Party 924,206 924,206
Deferred Interest - Subordinated Debt 814,366 443,082
Due to Affiliate 52,206 250,000
__________ __________
Total Current Liabilities 23,930,793 17,461,167
Noncurrent Liabilities:
Notes Payable 7,710,631 11,525,232
Revolver Loan -- 4,714,585
Obligations Under Capitalized Leases 1,701,946 2,863,752
Subordinated Debt 8,276 311,872
Deferred Interest 498,446 124,692
Due to Affiliate -- 1,175,397
__________ __________
Total Noncurrent Liabilities 9,919,299 20,715,530
___________ __________
Total Liabilities 33,850,092 38,176,697
Commitments and Contingencies -- --
__________ __________
Stockholders' Equity:
Preferred Stock - Par Value $.01, 6,000,000 Shares Authorized:
Series A Redeemable Preferred - 5,000 Shares Issued and Outstanding
[Liquidation Value - $4,984,000] at December 31, 1996 -- 50
Common Stock - Par Value $.01, 50,000,000 Shares
Authorized, 9,200,000 Shares Issued and Outstanding 92,000 92,000
Class A Common Stock - Par Value $.01, 6,000,000
Shares Authorized, 1,000,000 Shares Issued and Outstanding 10,000 10,000
Additional Paid-in Capital 2,134,537 2,148,971
Retained Earnings 2,892,276 4,210,725
__________ __________
Total Stockholders' Equity 5,128,813 6,461,746
_________ __________
Total Liabilities and Stockholders' Equity $38,978,905 $44,638,443
</TABLE>
See Notes to Consolidated Financial Statements.
INTERNATIONAL MAGNETIC IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended
December 31,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Revenue:
Net Patient Service Revenue $27,083,071 $30,015,345 $27,381,738
Other Service Revenue 1,314,299 567,602 449,773
Management Fee Income 1,002,460 526,905 212,211
___________ ___________ __________
Total Revenue 29,399,830 31,109,852 28,043,722
___________ ___________ __________
Costs and Expenses:
Radiology Fees 3,025,174 3,317,784 2,981,862
Equipment Maintenance 1,528,189 1,261,658 1,223,154
Patient Service Costs and Expenses 2,409,639 2,224,157 1,934,866
Salaries and Benefits 7,325,442 6,674,599 5,941,350
Professional Services 2,517,492 801,115 786,608
Other Management, General & Administrative 4,187,466 4,731,629 3,966,117
Provision for Bad Debts 2,394,500 2,359,500 855,053
Depreciation 2,750,978 3,163,616 2,939,841
Amortization 1,906,700 2,150,410 2,047,681
___________ __________ ___________
Total Costs and Expenses 28,045,580 26,684,468 22,676,532
___________ ___________ ___________
Operating Income Before Other Income
[Expense] and Income Taxes 1,354,250 4,425,384 5,367,190
___________ ___________ ___________
Other Income [Expense]:
Equity in Income of Joint Venture 952,748 280,752 120,450
Interest Income and Other 75,788 280,375 72,112
Interest Expense (3,283,202) (3,004,705) (2,565,215)
Settlement Agreement (407,773) -- --
Loss on Disposal of Assets -- (28,341) (24,893)
Gain [Loss] on Sale of Assets 31,078 5,000 (78,718)
___________ ____________ ___________
Other [Expense] - Net (2,631,361) (2,466,919) (2,476,264)
[Loss] Income Before Income Taxes (1,277,111) 1,958,465 2,890,926
Income Tax Expense 41,338 1,283,978 1,129,427
Net [Loss] Income $(1,318,449) $674,487 $1,761,499
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INTERNATIONAL MAGNETIC IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Class A Common
6,000,000 Shares Stock 50,000,000 Stock 6,000,000
Authorized Par Value $.01 Shares Authorized Shares Authorized
Series A Redeemable 9,200,000 Shares Issued 1,000,000 Shares Issued
5,000 Shares Issued and Outstanding and Outstanding Additional Total
and Outstanding Par Value $.01 Par Value $.01 Paid-in Retained Stockholders'
#of Shares Amount #of Shares Amount #of Shares Amount Capital Earnings Equity
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock 5,000 $50 9,200,000 $92,000 1,000,000 $10,000 $(101,050) $ -- $ 1,000
Additional Capital
Contribution -- -- -- -- -- -- 283,658 -- 283,658
Net Income for the period -- -- -- -- -- -- -- 1,774,739 1,774,739
ended December 31, 1994
________________________________________________________________________________________________
BALANCE AS OF 5,000 50 9,200,000 92,000 1,000,000 10,000 182,608 1,774,739 2,059,397
DECEMBER 31, 1994
Additional Capital -- -- -- -- -- -- 1,231,205 -- 1,231,205
Contribution
Net Income for the year -- -- -- -- -- -- -- 1,761,499 1,761,499
ended December 31, 1995
________________________________________________________________________________________________
BALANCE AS OF 5,000 50 9,200,000 92,000 1,000,000 10,000 1,413,813 3,536,238 5,052,101
DECEMBER 31, 1995
Additional Capital -- -- -- -- -- -- 735,158 -- 735,158
Contribution
Net Income, as Restated, -- -- -- -- -- -- -- 674,487 674,487
for the year ended
December 31, 1996
_________________________________________________________________________________________________
BALANCE AS OF 5,000 50 9,200,000 92,000 1,000,000 10,000 2,148,971 4,210,725 6,461,746
DECEMBER 31, 1996
Cancellation of Series A (5,000) (50) -- -- -- -- 50 -- --
Preferred Stock
Reclassification of -- -- -- -- -- -- (14,484) -- (14,484)
Contributed Capital
Net Loss for the year -- -- -- -- -- -- -- (1,318,449)(1,318,449)
ended December 31, 1997
_______________________________________________________________________________________________
BALANCE AS OF -- $ -- 9,200,000 $92,000 1,000,000 $10,000 $2,134,537 $2,892,276 $5,128,813
DECEMBER 31, 1997
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INTERNATIONAL MAGNETIC IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Y e a r s e n d e d
D e c e m b e r 3 1,
______________________
1 9 9 7 1 9 9 6 1 9 9 5
_______ _______ _______
<S> <C> <C> <C>
Operating Activities:
[Net Loss] Income $(1,318,449) $ 674,487 $1,761,499
Adjustments to Reconcile Net [Loss]
Income to Net Cash Provided by
Operating Activities:
Provision for Bad Debts 2,394,500 2,359,500 855,053
Depreciation 2,750,978 3,163,616 2,939,841
Amortization of Intangible Assets
and Loan Costs 1,906,700 2,150,410 2,047,681
Deferred tax Provision [Benefit] 163,339 555,231 (475,196)
Deferred Interest 745,038 124,962 --
Deferred Offering Costs 743,525 -- --
Settlement Agreement 407,773 -- --
Loss on Disposal of Equipment -- 28,341 24,893
[Gain] Loss on Sale of Equipment (31,078) (5,000) 78,718
Allocated Income Tax (14,484) 735,158 1,231,205
Changes in Operating Assets and Liabilities:
Accounts Receivable- Net (1,646,203) (3,675,409) (3,432,240)
Prepaid Expenses and Other (4,424) (15,956) (2,870)
Accounts Payable and Other Liabilities (87,751) 923,787 1,148,364
Accrued Radiology Fees 33,318 4,202 134,626
____________ ____________ _____________
Total Adjustments 7,361,231 6,348,842 4,550,075
____________ ____________ _____________
Net Cash - Operating Activities 6,042,782 7,023,329 6,311,574
____________ ____________ _____________
Investing Activities:
Property and Equipment Additions (584,230) (3,961,729) (141,076)
Payments to Affiliate (1,373,191) (1,243,911) (440,347)
Refunds [Payments] for Deposits (3,113) 381,281 (658,281)
Proceeds from Sale of Equipment 66,824 5,000 --
Note Receivable - Officer (16,497) (308,296) --
------------ ------------ -------------
Net Cash - Investing Activities (1,910,207) (5,127,655) (1,239,704)
------------ ------------ -------------
Financing Activities:
Proceeds from Lending Institutions 4,697,292 16,126,810 1,210,755
Payments on Notes Payable and
Long-Term Debt (6,831,850) (15,662,055) (5,190,329)
Payments on Capital Lease
Obligations (1,297,157) (1,349,836) (1,078,134)
Payments of Loan Costs (5,820) (560,673) (73,722)
Payments of Offering Costs (421,360) (322,165) --
------------ ------------ -------------
Net Cash - Financing Activities (3,858,895) (1,767,919) (5,131,430)
------------ ------------ -------------
Net Increase [Decrease] in Cash 273,680 127,755 (59,560)
Cash - Beginning of Years 1,539,245 1,411,490 1,471,050
------------ ------------ -------------
Cash - End of Years $1,812,925 $1,539,245 $1,411,490
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INTERNATIONAL MAGNETIC IMAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Nature of Operations
International Magnetic Imaging, Inc., a Delaware corporation [the "Company"]
formerly known as IMI Acquisition Corporation, was incorporated in March 1994
and commenced operations in September 1994 to engage in the acquisition,
ownership and operation of outpatient medical diagnostic centers providing
magnetic resonance imaging ["MRI"] services and other diagnostic modalities.
Operations of the centers are conducted through seven partnerships and seven
corporations and are located in various states and the Commonwealth of Puerto
Rico. Two of the corporations provide management and administrative services
to the centers. The other two corporations operate as (1) a referral network
through which patients are referred to diagnostic imaging centers, throughout
the State of Florida, including the Company's Florida centers; and (2) a
management services company to an outside provider of MRI services and other
diagnostic modalities.
The Company was organized as a wholly-owned subsidiary of SIS Capital Corp.
["SISC"], which is a wholly-owned subsidiary of Consolidated Technology Group
Ltd. ["Consolidated"], a public company.
The principal users of the Company's centers are practicing physicians
located in general proximity to the various centers. Each of the centers is
managed by International Magnetic Imaging, Inc., a Florida Corporation ["IMI
- - Florida"].
Basis of Presentation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. The seven Florida
centers operate as limited partnerships in which the Company through its
wholly-owned subsidiaries, owns 100% of the limited and general partnership
entities. Such a structure was required to consummate the acquisition under
Florida law due to the notes payable to the former limited partner -
physicians.
Operating Centers:
Pine Island Magnetic Resonance Imaging Center, Ltd.
Magnetic Resonance Institute of North Miami Beach, Ltd.
Magnetic Resonance Institute of Boca Raton, Ltd.
Magnetic Resonance Institute of South Dade, Ltd.
Oakland Magnetic Resonance Institute, Ltd.
Physician's Outpatient Diagnostic Center, Ltd. ["PODC"]
IMI Acquisition of Puerto Rico Corporation
IMI Acquisition of Arlington Corp.
IMI Acquisition of Kansas Corp.
Magnetic Resonance Institute of Orlando, Ltd.
Management and Administrative Services:
IMI - Florida
MD Acquisition Corp.
Referral and Outside Management Services:
MRI Net, Inc.
Kap, Net, Inc.
<PAGE>
[2] Summary of Significant Accounting Policies
The accounting and reporting policies of International Magnetic Imaging, Inc.
and subsidiaries [hereinafter referred to as "IMI" or the "Company"] conform
to generally accepted accounting principles. The following summarizes the
more significant of these policies.
Principles of Consolidation - The consolidated financial statements include
the accounts of International Magnetic Imaging, Inc. and its subsidiaries.
All intercompany transactions have been eliminated in consolidation.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
At December 31, 1997 and 1996, the Company had no cash equivalents.
Allowance for Doubtful Accounts - Patient accounts are reserved for when, in
management's opinion, the collectibility of a portion of, or the entire
outstanding balance, is doubtful.
Property and Equipment and Depreciation - Property and equipment are stated
at cost less accumulated depreciation. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are stated at cost less accumulated amortization.
Such improvements are amortized over the shorter of the term of the lease or
the useful life of the improvement. Medical equipment financed under capital
leases are recorded in property and equipment accounts at the lower of the
present value of the minimum lease payments or the fair value of the assets
at the inception of the lease. Amortization of assets held under capital
leases is included in depreciation expense and is computed using the
straight-line method.
Property and equipment are depreciated over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and Improvements 25
Leasehold Improvements 10 - 25
Medical Equipment 6
Furniture and Equipment 5 - 7
</TABLE>
Expenditures for maintenance, repairs, and replacement of minor items are
charged to earnings as incurred. Major additions and improvements which
extend the useful life or improve the operating performance of the related
asset are capitalized. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations for the period. Depreciation expense for the years
ended December 31, 1997, 1996 and 1995 was $2,750,978, $3,163,616 and
$2,939,841, respectively. The equipment used by the Company is
technologically sophisticated and subject to accelerated obsolescence in the
event of significant technological change.
Intangible Assets - Intangible assets consist of goodwill, customer lists
[i.e., acquired managed care and physician contracts], and restrictive
covenants arising from business acquisitions. Goodwill, representing the
excess of the purchase price over the estimated fair value of the net assets
acquired via business acquisitions, is being amortized over the period of
expected benefit of 20 years. Customer lists [i.e., acquired managed care
and physician contracts] are amortized over the period of expected benefit,
which is 15 years. The restrictive covenants are being amortized over their
contractual lives, which is 3 years. Intangible assets are being amortized
on a straight-line basis.
Joint Venture - In August 1995, the Company and Kaley Imaging, Inc.
["Kaley"], which also operated an MRI center in Orlando, Florida, entered
into a joint venture agreement pursuant to which the Company and Kaley
combined to operate an MRI center in Orlando, although the Company continues
to incur expenses with respect to the equipment formerly used in its Orlando
center which expenses are borne solely by the Company's subsidiary that
operated its Orlando center. The Company and Kaley each have a 50% interest
in the joint venture, and the Company accounts for its interest in the joint
venture on the equity method. For the years ended December 31, 1997, 1996
and 1995, the Company recognized income of $952,748, $280,752 and $120,450,
respectively, from the joint venture. The excess of distributions received
from the joint venture for payments of guaranteed obligations of the Company
over the Company's equity interest in the net income of the joint venture is
included in accounts payable and other liabilities and amounted to $24,254
and $310,806 at December 31, 1997 and 1996, respectively. Approximately,
$900,000 of distributions received from the joint venture for payment of
guaranteed obligations was recognized as income in 1997. Management believes
that based on the joint venture agreement there is minimum risk that any
deficiency required to be funded by the Company will exceed the amount of the
deficiency in joint venture reported as of December 31, 1997 of $24,254.
Loan Origination Costs - Loan origination costs of $687,090 and $681,270
which were incurred in connection with financing relating to the business
acquisitions and capital expenditures are shown net of accumulated
amortization of $301,627 and $145,859 for the years ended December 31, 1997
and 1996, respectively. The costs will be amortized over the terms of the
related financing agreements, using the straight-line method which
approximates the interest method. Amortization expense of loan origination
costs relating to business acquisitions and capital expenditures for the
years ended December 31, 1997, 1996 and 1995 was $155,768, $124,254 and
$21,605, respectively. Amortization of such costs began in January of 1995.
Deferred Offering Costs - Deferred offering costs in the amount of $743,525
which were incurred with respect to the Company's proposed initial public
offering were expensed in 1997 when said offering was terminated.
Deferred Interest - Deferred interest represents additional interest of 10.5%
incurred on certain long-term debt [See Note 8]. Such interest is not
payable until the maturity date of the related debt. The Company records the
additional interest expense over the life of the debt and the related
deferred interest is included in non-current liabilities until it becomes
currently payable.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Impairment - Certain long-lived assets of the Company including goodwill are
reviewed on a quarterly basis as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Management also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. Management has
determined that expected future cash flows [undiscounted and without interest
charges] exceed the carrying value of such long-lived assets at December 31,
1997 and believes that no impairment of these assets has occurred. It is at
least reasonably possible that management's estimate of expected future cash
flows may change in the near term.
Net Patient Service Revenue - Net patient service revenue is recognized at
the net realizable amounts from patients, third-party payors and others at
the time services are rendered. The amount recognized reflects estimated
prospective contractual adjustments, including contractual allowances based
on agreements between the Company and third-party payors.
For the years December 31, 1997, 1996 and 1995, contractual adjustments
amounted to approximately $35,000,000, $29,000,000 and $22,000,000,
respectively.
The Company is not engaged in the practice of medicine and does not employ
physicians. The Company, has the legal right to set the fees for the
services rendered, and such fees are billed at the time such services are
rendered. The patient or third-party payor is legally obligated to the
Company for the amount billed. Bills to third-party payors are based on
contractual arrangements between the Company and the third-party payors.
The Company has historically not provided any significant amount of charity
care.
Liability-Related Revenue and Accounts Receivable - A portion of the
Company's revenue is derived from diagnostic imaging services performed in
connection with a patient's injury where the patient asserts or intends to
assert a claim against a third party. Such services are referred to as
liability-related services, and do not includes services relating to workers'
compensation claims or no-fault insurance claims. During the years ended
December 31, 1997, 1996 and 1995, approximately 4%, 11% and 12%,
respectively, of the Company's revenue was derived from liability-related
services. Because the patient typically expects to pay the charges for the
diagnostic imaging services from a settlement or verdict with the party which
caused the injury, the collection period for liability-related receivables
can be significant, and can be more than one year. Since the acquisition of
the Centers, the Company has reduced the number of liability-related
procedures being performed, and has instituted a procedure whereby the
patient is required to acknowledge his or her financial responsibility for
the services performed, and obtains from the attorney an assignment of
proceeds whereby the proceeds generated from the claim are paid to the
Company. Because a portion of the liability-related receivables is not
collected during the year following the performance of the services, a
portion of such receivables is treated as a long-term asset. In the year
ended December 31, 1996, the provision for bad debts increased $1.5
million, or 176%, from 1995, and substantially all of this increase reflects
an evaluation of the collectiblity of receivables from liability-related
services which were generated prior to the Company's acquisition of the
Centers.
Income Taxes - The Company prepares its consolidated financial statements on
the accrual basis of accounting. Provision has been made for federal and
state income taxes. The Company and its subsidiaries file separate state
tax returns. Although federal income tax returns are filed on a consolidated
basis with those of the parent company, Consolidated, the Company calculates
its federal tax provision on the "separate return basis." Any tax benefit
generated by the utilization of Consolidated's federal tax net operating
losses has been recorded as a liability to Consolidated and then subsequently
forgiven, resulting in an addition to paid-in capital.
Stock Options and Similar Equity Instruments - On January 1, 1996, the
Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity instruments
[collectively, "Options"] issued to employees, however, the Company will
continue to apply the intrinsic value based method of accounting for options
issued to employees prescribed by Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" rather than the fair value
based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable.
Reclassification - Certain items have been reclassified to conform with the
current year's presentation.
[3] Acquisitions
On September 30, 1994, the Company acquired IMI-Florida and its affiliated
entities, which are identified in Note 1 - Basis of Presentation, in a
business combination accounted for as a purchase. The principal operations
of IMI - Florida are in the establishment and operation of outpatient
diagnostic imaging centers providing MRI services and other diagnostic
imaging modalities. The results of operations of the acquired entities are
included in the accompanying consolidated financial statements since the date
of acquisition. The total cost of the acquisition was $31,871,702, which
exceeded the fair value of net assets of the acquired entities by
$11,068,852. Included in the purchase price was the issuance of 3,343,000
shares of Consolidated common stock valued at approximately $.87 a share
[$2,920,000] which was the fair value at the time of acquisition. Such
shares were transferred from Consolidated to SISC, which generally holds
Consolidated's investments in common stock, and from SISC to the Company.
The Company recorded this transfer as a loan payable to SISC [See Note 11].
Pursuant to the acquisition agreement, 83,334 additional shares of
Consolidated's common stock are to be issued to the sellers due to a decline
in the market price of the Consolidated's common stock. The 83,334 shares
reflect an offset to which the Company was entitled if certain levels of net
patient service revenues were not attained. During the two years following
the closing of the acquisition, 250,000 contingent shares that were to be
issued in connection with the acquisition of IMI-Florida based on
performance, were not issued due to the failure of the Company to meet
certain net patient service revenue levels during such two-year period.
In addition, 70,000 additional shares of Consolidated's common stock are to
be issued to the sellers in connection with the acquisitions of the Kansas
City and Arlington centers due to such decline in the stock prices of
consolidated's common stock. The excess purchase price, or goodwill, is
being amortized by the straight-line method over 20 years. The other
intangibles, specifically restrictive covenants and customer lists, are being
amortized by the straight-line method over 3 years and 15 years,
respectively.
In connection with the Company's acquisition of one of the centers, 125,000
shares of Consolidated's common stock was issued to a radiologist in
connection with an amendment to the existing agreement with such radiologist.
The determined fair value at that time of $.87 per share, or $108,750, was
expensed as radiology fees during the period ended December 31, 1994.
The following summarizes the purchase price allocated to acquired assets at
fair value.
<TABLE>
<S> <C>
Cash $ 6,960,000
Subordinated Debt 19,862,915
Stock 2,920,000
Notes [Covenants] 800,000
Acquisition Costs 1,328,787
-----------
Purchase Cost $31,871,702
-----------
-----------
Cash $ 2,349,548
Other Assets 421,281
Covenants-Not-to-Compete 3,302,597
Property, Plant and Equipment 10,902,543
Accounts Receivable 7,379,015
Managed Care and Physician Contracts - Customer Lists 5,655,619
Liabilities Assumed (9,207,753)
Goodwill 11,068,852
-----------
Total $31,871,702
</TABLE>
The cash portion of the purchase price was simultaneously financed through a
major asset-based lender.
[4] Accounts Receivable
Accounts receivable, net of contractual allowances, are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
19 9 7 1 9 9 6
------ -------
<S> <C> <C>
Current:
Personal Injury Liability Related Services $ 1,687,624 $ 1,968,517
Managed Care 3,763,681 2,786,959
Commercial Insurance 1,109,649 2,429,950
Workers' Compensation 2,492,613 1,972,751
Medicare/Medicaid 628,529 825,244
Private pay 249,728 416,937
Other 681,240 232,804
----------- ------------
Totals 10,613,064 10,633,162
Less: Allowance for Doubtful Accounts (810,378) (558,612)
----------- ------------
Current Accounts Receivable - Net 9,802,686 10,074,550
----------- ------------
Non-Current:
Personal Injury Liability Related Services 1,956,304 2,219,818
Less: Allowance for Doubtful Accounts (685,337) (472,418)
----------- ------------
Non-Current Accounts Receivable - Net 1,270,967 1,747,400
Total Accounts Receivable 12,569,368 12,852,980
Less: Allowance for Doubtful Accounts (1,495,715) (1,031,030)
----------- ------------
Accounts Receivable - Net $11,073,653 $11,821,950
----------- ------------
----------- ------------
</TABLE>
Accounts receivable pledged as collateral for borrowings at December 31,
1997 and 1996 was $11,073,653 and $11,821,950, respectively. On a
consolidated basis the Company does not have a significant concentration of
receivables from any one non-governmental managed care provider. The Company
does not require collateral from its customers.
Contractual allowances amounted to approximately $900,000 and $600,000 at
December 31, 1997 and 1996, respectively.
The changes in the allowance for doubtful accounts are summarized as follows:
<TABLE>
<CAPTION>
D e c e m b e r 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Beginning Bal $1,031,030 $2,490,381 $2,351,026
Provision for Doubtful Accounts 2,394,500 2,359,500 855,053
Recoveries 588,242 195,371 255,862
Charge-offs (2,518,057) (4,014,222) (971,560)
----------- ----------- ----------
Ending Balance $1,495,715 $1,031,030 $2,490,381
</TABLE>
[5] Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
Property Class 1997 1996
- -------------- ------- -------
<S> <C> <C>
Land $ 663,830 $ 663,830
Buildings and Improvements 3,501,348 3,466,887
Leasehold Improvements 1,693,411 1,688,335
Medical equipment 15,500,522 17,489,403
Furniture and Equipment 2,412,711 2,325,783
----------- ----------
Subtotal 23,771,822 25,634,238
Less: Accumulated Depreciation (16,366,378) (16,414,554)
Property and Equipment - Net $ 7,405,444 $ 9,219,684
- ----------------------------
</TABLE>
Property and equipment pledged as collateral for borrowings had a net book
value of $7,405,444 and $9,219,684 as of December 31, 1997 and 1996,
respectively.
[6] Intangibles
The Company acquired its subsidiaries [See Note 3] during 1994. As part of
the purchase agreement, the Company acquired customer lists [i.e., acquired
managed care and physician contracts], restrictive covenants and goodwill.
The intangible assets acquired and the related amortization on the
straight-line method are summarized as follows:
<TABLE>
<CAPTION>
Accumulated Amortization Net of Amortization
Life December 31, December 31,
Years Cost 1997 1996 1997 1996
______________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Goodwill 20 $10,964,865 $1,784,201 $1,235,953 $9,180,664 $9,728,912
Customer Lists 15 $ 5,655,619 $1,225,380 $ 848,340 $4,430,239 $4,807,279
Restrictive Covenants 3 $ 3,302,597 $3,302,597 $2,476,953 $ -- $ 825,644
</TABLE>
Amortization expense on the above intangibles for the years ended December
31, 1997, 1996 and 1995 was $1,750,932, $2,026,156 and $2,026,076,
respectively.
[7] Leases
The Company leases real estate for certain of its MRI centers and its
administrative offices under noncancellable operating leases expiring through
2006. The real estate leases contain clauses which permit adjustments of
lease payments based upon changes in the "Consumer Price Index," options to
renew the leases for periods up to an additional fifteen years and additional
payments for a proportionate share of real estate taxes and common area
operating expenses.
Several of the MRI centers lease the magnetic resonance imaging equipment
under noncancellable capital leases, the last of which expires in 2003.
For certain of those leases, a balloon payment representing the buy-out of
the leased equipment is due at the end of the lease term. A summary of
leased property under capitalized leases is as follows:
<TABLE>
<CAPTION>
December 31,
Property Class 1 9 9 7 1 9 9 6
- ------------- ------- -------
<S> <C> <C>
Medical Equipment:
Boca Raton $ 415,559 $ 415,559
South Dade 387,460 387,460
San Juan 1,145,950 2,654,340
Greater Kansas City 2,556,284 2,556,284
Orlando 1,625,664 1,625,664
IMI 688,171 585,498
P.O.D.C. 437,663 437,663
----------- -----------
Subtotal 7,256,751 8,662,468
Less: Accumulated Amortization (4,924,151) (5,321,539)
----------- -----------
Equipment Under Capitalized Leases - Net $2,332,600 $3,340,929
- ---------------------------------------- ---------- ----------
---------- ----------
</TABLE>
Amortization expense of equipment under capitalized leases is included in
depreciation expense.
As of December 31, 1997, the future minimum lease payments under capitalized
leases and noncancellable operating leases are:
<TABLE>
<CAPTION>
Capital Operating
Fiscal years Leases Leases
- ----------- ------- ---------
<S> <C> <C>
1998 $ 1,493,643 $ 673,925
1999 851,162 671,914
2000 477,849 353,501
2001 309,209 143,691
2002 235,056 130,184
Thereafter 156,704 363,706
----------- ----------
Total Minimum Lease Payments 3,523,623 $2,336,921
Less Amount Representing Interest (581,432) ----------
----------- ----------
Present Value of Net Minimum Capitalized
Lease Payments 2,942,191
Less: Current Portion of Obligations Under
Capital Leases 1,240,245
-----------
Non-Current Portion of Obligations Under
Capitalized Leases $1,701,946
</TABLE>
Total rental expense for the years ended December 31, 1997, 1996 and 1995 was
$784,911, $710,630 and $628,366, respectively.
[8] Long-Term Debt
The Company maintains term loans and other notes payable which are secured by
accounts receivable and property and equipment. Loan agreements contain
various covenants, including restrictions on any mergers, consolidations,
sales of assets or issuances of stock, as well as restrictions on payments
to the parent Company or any subsidiary or affiliate and to the payment of
dividends, unless authorized by the lender. Also, certain loan agreements
expressly prohibit payment of certain subordinated debt to the former owners
of IMI-Florida. Subordinated notes payable issued in connection with the
acquisitions are unsecured. Certain subsidiaries that issued the
Subordinated Notes have not made certain payments of principal or interest
due on such notes in 1997, as a result of which the holders may have the
right to declare a default against such subsidiaries. Although no default
has been declared, no assurance can be given that some or all of the holders
of such Subordinated Notes will not seek to declare a default. At December
31, 1997, subordinated notes in the amount of $6,645,424 are recorded as
current liabilities.
In January 1996, the Company obtained financing from DVI Financial Services,
Inc. and an affiliate thereof ["DVI"], a non-related party to the Company,
consisting of a term loan of $2,000,000 and a revolver loan of $6,000,000.
The term loan, of which $1,495,298 is outstanding at December 31, 1997, is
included with equipment and leasehold improvement debt. The Company borrowed
$4.9 million under the revolver loan in January 1996 and an additional
$3,947,292 in 1997. In addition, the Company obtained a DVI revolver over
advance of $750,000 in 1997. The balance on the revolver loan at December
31, 1997 was $7,117,131. DVI has a security interest in substantially all of
the Company's assets, primarily accounts receivable and property and
equipment. The majority of the proceeds were used to pay current
subordinated debt due to certain of the parties which sold the centers to the
Company.
In September 1996, certain of the Company's subsidiaries borrowed an
aggregate of $4.0 million from DVI. The loans, which mature in September
2002, are payable in monthly installments over the term of the loans. The
September 1996 loan is separate from, and in addition to, the term loan and
revolver loan and over advance described in the preceding paragraph. The
Company pays interest currently at 11.5% per annum, the payment of additional
interest of 10.5% per annum has been deferred and is payable on the maturity
date of the loans, resulting in an effective annual interest rate of 22.0%.
DVI has a security interest in substantially all of the Company's assets,
primarily accounts receivable and property and equipment. In connection with
these loans, SISC sold to DVI, for $2,500, a warrant to purchase 250,000
shares of Class A Common Stock at $2.00 per share, which exercise price was
changed to $3.50 per share at December 31, 1996, and the Company issued to
DVI a warrant to purchase 250,000 shares of Class A Common Stock at $3.50 per
share. These warrants are exercisable for the three month period commencing
on the earliest to occur of (a) the prepayment in full of such loans, (b) an
event of default under the loan and security agreements with respect to such
loans, or (c) November 1, 2001. The Class A Common Stock is not and will not
be publicly traded, thus the minimum value method of calculating compensation
expense was used to determine financing costs. The costs calculated were not
material. In addition, the Company agreed that in the event the principal
and interest on such loans has not been paid in full prior to the November 1,
2001 maturity date, the Company will issue to DVI a warrant to purchase
1,000,000 shares of Common Stock at 80% of the market price per share of such
Common Stock on the date of exercise, exercisable from November 1, 2001 until
February 1, 2002. If such warrant is issued, the Company will recognize
financing costs in accordance with SFAS No. 123 based on the exercise price
per share at date of exercise.
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31,
1997 1996
____ ____
<S> <C> <C>
Equipment and Leasehold Improvement Debt:
Note payable in monthly installments of $12,830,
which includes interest at a rate of 9.5%;
final payment due September 1998. $ 111,031 $ 247,335
Note payable in monthly installments of $6,488,
which includes interest at 11.5% final payment
due May 2000. 153,701 210,292
Note payable in monthly installments of $6,488,
which includes interest at 11.5%, final payment
due May 2000. 153,701 210,292
Note payable in monthly installments of $7,962,
which includes interest at 11.5%,
final payment due May 2000. 188,615 258,058
Note payable in monthly installments of $26,000,
which includes interest at 11.447%,
final payment due January 2001. 1,495,298 1,890,703
Note payable in monthly installments of $17,040,
which includes interest at 11.103%,
final payment due January 2002. 658,030 781,876
Note payable in monthly installments of $39,130,
which includes interest at 11.086%,
final payment due September 2002. 1,704,756 1,969,179
Total Equipment and Leasehold Improvement Debt -
Forward 4,465,132 5,567,735
---------- ----------
Building Debt:
Mortgage note payable in monthly installments of
$8,333, plus interest at 1% above the prime rate;
balloon payment due February 1999. 316,667 416,667
Mortgage note payable in monthly installments of
$2,942, which includes interest at 9.75%,
balloon payment due November 2000. 193,512 208,845
Mortgage note payable in monthly installments of
$15,000, plus interest at 1% above the prime rate;
final payment due May 16, 2000. 431,000 611,000
-------- ----------
Total Building Debt - Forward $941,179 $1,236,512
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Total Equipment and Leasehold Improvement Debt -
Forwarded $4,465,132 $5,567,735
---------- ----------
Total Building Debt - Forwarded 941,179 1,236,512
------- ---------
Subordinated Debt:
Note payable in quarterly installments of
$110,401, plus interest at 7%; balloon payment
due September 1996. 64,525 64,525
Note payable in quarterly installments of
$78,537, plus interest at 7%; balloon payment
due September 1996. 296,081 296,081
Note payable in quarterly installments of
$92,400, plus interest at 7%; balloon payment
due September 1996. 548,236 548,236
Note payable in quarterly installments of
$17,100, plus interest at 7%; balloon payment
due September 1996. 12,375 12,375
Note payable in quarterly installments of
$29,400, plus interest at 7%; balloon payment
due September 1996. 271,651 271,651
Note payable in quarterly installments of
$11,400, plus interest at 7%; balloon payment
due September 1997. -- 288,800
Note payable in quarterly installments of
$14,400, plus interest at 7%; balloon payment
due September 1997. 8,461 365,952
Note payable in quarterly installments of
$91,500, plus interest at 7%; balloon payment
due September 1997. 2,772,619 2,848,928
Note payable in quarterly installments of
$195,925, which includes interest at 4%; balloon
payment due September 1999. 2,679,752 2,808,243
--------- ---------
Total Subordinated Debt - Forward $6,653,700 $7,504,791
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Total Equipment and Leasehold Improvement Debt -
Forwarded $4,465,132 $5,567,735
---------- ----------
Total Building Debt - Forwarded 941,179 1,236,512
---------- ----------
Total Subordinated Debt - Forwarded 6,653,700 7,504,791
Other Debt:
Note payable in monthly installments of $29,124,
which includes interest at 10.5%; final payment
due September 1999. 556,490 831,651
Note payable in monthly installments of $25,922,
which includes interest at 10.5%; final payment
due September 1999. 495,298 740,201
Note payable in monthly installments of $8,684,
which includes interest at 10.5%; final payment
due September 1999. 165,921 247,961
Note payable in monthly installments of $10,768,
which includes interest at 10.5%; final payment
due September 1999. 205,759 307,496
Note payable in monthly installments of $21,129,
which includes interest at 10.5%; final payment
due September 1999. 403,713 603,331
Note payable in monthly installments of $18,807,
which includes interest at 10.5%; final payment
due September 1999. 359,359 537,044
Note payable in monthly installments of $10,854,
which includes interest at 10.5%; final payment
due September 1999. 207,399 309,952
Note payable in monthly installments of $27,319,
which includes interest at 10.5%; final payment
due September 1999. 521,994 780,095
Notes payable in monthly installments of $15,395,
which includes interest at 11.5%, final payment
due September 2002. 2,802,949 3,368,452
Notes payable in monthly installments of $10,998,
which includes interest at 11.5%, final payment
due September 2002. 400,434 481,210
--------- ---------
Total Other Debt 6,119,316 8,207,393
--------- ---------
Revolver Loan - Due December 1998 at Prime Plus 2.75% 7,117,131 4,714,585
--------- ---------
Total Debt 25,296,458 27,231,016
Less: Current Portion (17,577,551) (10,679,327)
---------- ----------
Totals $7,718,907 $16,551,689
---------- -----------
---------- -----------
</TABLE>
The prime rate at December 31, 1997 and 1996 was 8.50% and 8.25%,
respectively.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Years ending
- ------------
December 31,
- ------------
<C> <C>
1998 $17,577,551
1999 3,761,868
2000 2,297,665
2001 1,358,958
2002 300,416
Thereafter --
-----------
Total $25,296,458
- ----- -----------
-----------
</TABLE>
Cash paid for interest for the years ended December 31, 1997, 1996 and 1995
amounted to $2,522,312, $2,399,375 and $2,175,631, respectively.
[9] Covenants Not-to-Compete
In connection with the acquisition of the imaging centers, the Company
entered into two three-year non-competition agreements with two of the
previous owners of IMI-Florida. Pursuant to such agreements, the Company is
contractually obligated to pay such individuals an aggregate of $800,000.
The monthly payments under these agreements are $22,222 with the final
payment due in September 1997. The remaining balance due pursuant to such
agreements as of December 31, 1996 of $200,000 was paid in 1997.
[10] Capital Stock
The Company is authorized to issue 6,000,000 shares of Preferred Stock, par
value $.01 per share, 50,000,000 shares of Common Stock, par value $.01 per
share, and 6,000,000 shares of Class A Common Stock, par value $.01 per
share. Holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Holders of
Class A Common Stock have no voting rights except as provided by Delaware
law.
Common Stock - There are 9,200,000 shares of Common Stock and 1,000,000
shares of Class A Common Stock outstanding.
Each share of Class A Common Stock will automatically become and be converted
into one share of Common Stock upon the first to occur of (a) the date, as
reasonably determined by the Board of Directors, that the Company ceases to
be eligible under the Internal Revenue Code of 1986, as amended, to be a
member of the consolidated group of corporations of which Consolidated is the
common parent, or (b) the date as of which the Board of Directors effects
such a conversion.
The Common Stock and the Class A Common Stock are treated as a single class
and have identical rights except that the holders of the Class A Common
Stock have no voting rights except as required by Delaware law. Holders of
Common Stock and Class A Common Stock are entitled to share in such dividends
as the Board of Directors, in its discretion, may declare from funds legally
available. In the event of liquidation, dissolution or winding up, each
outstanding share of Common Stock and Class A Common Stock entitles its
holders to participate ratably in the assets remaining after payment of
liabilities.
Series A Preferred Stock - The Series A Preferred Stock consists of 5,000
shares, all of which are issued and outstanding. Holders of shares of Series
A Preferred Stock are entitled to non-cumulative dividends of $10 per share,
or an aggregate of $50,000. The Company has no obligation to declare
dividends for any year, but, in any year, no dividends may be declared with
respect to the Common Stock and Class A Common Stock unless the dividends for
such year for the Series A Preferred Stock have been declared and paid or
provided for. Dividends, if declared, are payable on February 1st of each
year to holders of record on the previous January 15th.
The holders of the Series A Preferred Stock have no voting rights except as
required by law. The Series A Preferred Stock is not convertible into Common
Stock or any other class or series of capital stock. The Series A Preferred
Stock may be redeemed for $20 per share, on not less than ten or more than 60
days' notice at any time after the Class A Common Stock is converted into
Common Stock. At such time as the Series A Preferred Stock may be redeemed,
the Company may redeem the Series A Preferred Stock in whole at any time or
in part from time to time. The Series A Preferred Stock is redeemable at the
option of the Company.
In the event of any voluntary liquidation, dissolution or winding up of the
Company, after payment has been made on any security of the Company, if any,
which ranks senior to the Series A Preferred Stock, holders of shares of
Series A Preferred Stock will be entitled to receive from the assets of the
Company an aggregate amount equal to 80% of the Company's stockholders'
equity, including partners' capital, as of the last day of the calendar
quarter prior to the date as of which the determination is being made,
provided, that from and after the effective date of a registration statement
relating to the Company's initial public offering, the aggregate amount shall
be 80% of the Company's stockholder's equity. As of the last day of the
quarter immediately preceding such effective date, on a per share basis plus
accrued and unpaid dividends to the payment date, before any payment or
distribution is made to holders of shares of Common Stock, Class A Common
Stock or any other series or class of stock hereafter issued which ranks
junior as to liquidation rights to the Series A Preferred Stock.
At December 31, 1997, the Series A preferred stock was canceled.
Series B Preferred Stock - The Series B Preferred Stock consists of 5,000
shares. Holders of shares of Series B Preferred Stock have no preferential
dividend rights. If dividends are declared with respect to the Common Stock,
the holders of the Series B Preferred Stock shall be entitled to dividends on
an as-converted basis, such dividends to be determined as if the shares of
Series B Preferred Stock and shares of Common Stock [including Class A Common
Stock] were a single class. Based on a conversion rate of 700 shares of
Common Stock for each share of Series B Preferred Stock, each share of Series
B Preferred Stock would receive a dividend equal to 700 times the dividend
payable to the holders of the Common Stock.
Each share of Series B Preferred Stock, unless previously redeemed, is
convertible, commencing three years from the effective date of the
Registration Statement relating to the Company's Initial Public Offering or
on such earlier date, if any, as the Class A Common Stock is converted into
Common Stock, into 700 shares of Common Stock, or an aggregate of 3,500,000
shares of Common Stock. The conversion rate is subject to adjustment upon
the occurrence of certain events.
The Company has the right to redeem the shares of Series B Preferred Stock
at a redemption price of $20 per share, or an aggregate of $100,000, at any
time after the expiration of three years from the effective date of the
Registration Statement relating to the Company's initial public offering,
or earlier if the Class A Common Stock is converted into Common Stock.
The Series B Preferred Stock may be redeemed in whole or in part. Once the
Series B Preferred Stock becomes redeemable, the Company may redeem the
Series B Preferred Stock upon at least 30, but not more than 60 days' prior
written notice to the registered holders.
At December 31, 1996, the Series B Preferred Stock was canceled.
[11] Related Party Transactions
Issuance of Securities at Organization - The Company was incorporated in
March 1994 and commenced operations in September 1994. In connection with
the organization of the Company, the Company issued an aggregate of 9,200,000
shares of Common Stock, 1,000,000 shares of Class A Common Stock to SISC,
5,000 shares of Series A Preferred Stock, 5,000 shares of Series B Preferred
Stock [subsequently canceled at December 31, 1996], Series B Warrants to
purchase 1,000,000 shares of Common Stock at $2.00 per share and warrants to
purchase 1,250,000 shares of Class A Common Stock at $2.00 per share.
In October 1994, the Company issued seven-year warrants to purchase an
aggregate of 500,000 shares of Class A Common Stock at $2.00 per share to
SISC and 15 individuals, including the chief financial officer of the
Company, to whom it issued a warrant to purchase 100,000 shares, and two
directors of the Company, to each of whom the Company issued a warrant to
purchase 50,000 shares.
Due to Affiliate - In connection with the acquisitions of the centers, SISC
lent approximately $1.3 million to the Company, which was used to pay
acquisition costs, and delivered shares of Consolidated's common stock,
valued at $2.9 million, representing a portion of the purchase price. Such
loan and the value of such Consolidated common stock is treated as a non-
interest bearing loan payable by the Company to SISC with no stated maturity
date. The balance as of December 31, 1997 and 1996 amounted to approximately
$52,000 and $1,400,000, respectively. Approximately $250,000 of the 1996
liability was to be paid within the next operating cycle and was therefore
reported as a current liability.
Notes Payable - Officer - Approximately $924,000 at December 31, 1997 and
1996, of the subordinated notes payable issued in connection with the
acquisitions is payable to the President/Chief Executive Officer ["CEO"] of
the Company and his spouse. The CEO was a stockholder in the predecessor
entities. Related party interest expense was approximately $60,000 and
$60,000 for the years ended December 31, 1997 and 1996, respectively.
Note Receivable - Officer - On February 7, 1996, the Company loaned $300,000
to the CEO of the Company. The loan is due to the Company in 1998. Interest
only is payable annually from inception at a rate of 5-1/2%. Related party
interest income was approximately $16,000 and $8,000 for the years ended
December 31, 1997 and 1996, respectively.
Other - In September 1996, the Company issued warrants to purchase 250,000
shares of Class A Common Stock at $3.50 per share to SISC in consideration
for SISC's sale of 250,000 warrants to purchase Class A Common Stock at $2.00
per share to DVI. The Class A Common Stock is not and will not be publicly
traded, thus the minimum value method of calculating compensation expense was
used to determine compensation expense. The cost calculated was not
material. At December 31, 1996, the warrant issued to SISC was canceled and
the exercise price of the warrant held by DVI was increased from $2.00 per
share to $3.50 per share.
Pursuant to the agreement relating to the acquisition of IMI-Florida and
its affiliated entities, as a result of a decline in the price of the
Consolidated common stock, an additional 153,334 shares of Consolidated's
common stock are to be issued to the sellers. Approximately 35,000 of these
shares are to be issued to the Company's CEO.
[12] Income Taxes
Although the Company files its federal income tax returns as part of a
consolidated group of corporations of which Consolidated is the common
parent, it has calculated its tax provision on the "separate return basis."
The tax benefits of $735,158 and $1,231,205 for the years ended December 31,
1996 and 1995, respectively, received by the utilization of the parent
company's tax net operating losses and the subsequent reversal of $14,484
for the year ended December 31, 1997, have been recorded as a [receivable
from] liability to the parent and then subsequently forgiven, resulting in a
[decrease] increase to additional paid-in capital.
Under SFAS No. 109, "Accounting for Income Taxes," current and deferred taxes
have been calculated as if the Company were a separate taxpayer. Deferred
income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
carry forwards. The tax effects of significant items comprising the
Company's net deferred tax asset as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Deferred Tax Liabilities $ -- $ --
---------- -----------
Deferred Tax Assets:
Allowance for Doubtful Accounts
not Currently Deductible 584,189 363,967
Tax Basis of Assets in Excess of Book Basis 840,835 1,239,700
State Net Operating Loss Carry forwards -- 239,799
---------- ----------
Totals 1,425,024 1,843,466
Valuation Allowance -- 255,101
---------- ----------
Net Deferred Tax Asset 1,425,024 1,588,365
Net Deferred Tax Asset - Current Portion 584,189 363,967
---------- ----------
Net Deferred Tax Asset - Non Current $840,835 $1,224,398
- ------------------------------------ ---------- ----------
---------- ----------
</TABLE>
The Company has recorded a deferred tax asset of $1,425,024 and $1,588,365 at
December 31, 1997 and 1996, respectively. The realization of the non-current
portion of the deferred tax asset of $840,835 and $1,224,398 is dependent on
the Company generating sufficient taxable income in future years. Although
realization is not assured, management believes it is more likely than not
that all of the non-current deferred tax asset will be realized. The amount
of the non-current deferred tax asset considered realizable, however, could
be reduced in the near term if estimates of future taxable income are
reduced.
The Company's deferred tax asset valuation allowance was $255,101 as of
December 31, 1996. The valuation allowance represents the tax effects of
state operating loss carryforwards and other temporary differences which the
Company does not expect to realize. There was no valuation allowance as of
December 31, 1997, since all state operating losses were eliminated. The
[decrease] increase in the valuation allowance of $(255,101) and $98,475 for
the years ended December 31, 1997 and 1996, respectively, is comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
State Net Operating Loss Carryforwards $ (255,101) $ 145,290
Tax Basis of Assets in Excess of Book Basis of Assets -- (18,870)
Allowance for Doubtful Accounts not Currently Deductible -- (27,945)
----------- ---------
Totals $ (255,101) $ 98,475
----------- ----------
</TABLE>
The current and deferred income tax components of the provision [benefit] for
income taxes consist of the following:
<TABLE>
<CAPTION>
Years ended
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 143,783 $ 735,158 $ 1,231,205
Puerto Rico -- -- 74,309
State -- (6,411) 299,109
----------- ----------- -----------
Totals 143,783 728,747 1,604,623
Deferred:
Federal (124,811) 512,712 (438,483)
Puerto Rico 59,723 52,037 8,998
State (37,357) (9,518) (45,711)
----------- ---------- ----------
Totals (102,445) 555,231 (475,196)
----------- ---------- ----------
Totals $41,338 $1,283,978 $1,129,427
- ------ ----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The provision for income taxes varies from the amount computed by applying
the statutory rate for the reasons below:
<TABLE>
<CAPTION>
Years ended
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision Based on Statutory Rates (35.0)% 35.0% 35.0%
Benefit of Graduated Rates 1.0 (1.0) (1.0)
State and Puerto Rico Taxes
[Net of Federal Benefit] 1.8 9.0 7.7
Other 35.4 3.8 (2.6)
---- ---- ----
Totals 3.2% 46.8% 39.1%
- ------ ----- ----- -----
</TABLE>
[13] Commitments
Professional Liability Insurance - Each of the operating entities carries
professional malpractice and general liability insurance. The independent
radiology entities that provide the radiology services are covered by their
own medical malpractice insurance. The Company has procedures in place to
monitor coverage and incidents of significance.
Employment Agreements - In October 1994, the Company entered into a five-year
employment agreement with its CEO which runs through September 1999. The
agreement provides for an annual base salary of $350,000 and a bonus, not
less than $100,000 and not greater than $700,000, calculated on a percentage
of the lesser of pre-tax cash flow or pre-tax net income.
The Chief Financial Officer ["CFO"] of the Company, who is also the CFO of
Consolidated, has an employment agreement with Consolidated for a term
commencing October 1, 1994 and ending December 31, 2002, pursuant to which he
received an annual salary of $177,000 for the contract year ended September
30, 1996 with increases annually thereafter until the seventh year for which
his annual salary is $252,000. The agreement provides for two bonuses, one
of which is equal to the greater of 1% of Consolidated's net pre-tax profits
or 1% of Consolidated's net cash flow, and the other of which is equal to the
greater of 1% of the Company's net pre-tax profits or 1% of the Company's net
cash flow. Although the CFO and Consolidated are the parties to his
employment agreement, 75% of the CFO's compensation is paid by the Company
because he devotes 75% of his time to the Company and the remaining 25% is
allocated to and paid by Consolidated [exclusive of the bonuses relating to
the Company].
In March 1997, the employment agreement of the CFO, who is also the CFO of
Consolidated, was amended to include among other provisions, (a) the
extension of his term of employment to December 31, 2007 or such later date
the CFO may be required to be employed by the Company pursuant to the
Company's agreement with DVI, (b) annual salary increases until the year
ended December 31, 2007, for which his base salary will be $353,000, (c)
increases in his two bonuses from 1% to 2-1/2% of the greater of Consolidated's
net pre-tax profits or Consolidated's net cash flow and the greater of the
Company's net pre-tax profits or the Company's net cash flow.
Radiologist Agreements - The Company's employees perform the diagnostic
imaging scans and the Company engages radiologists and other specialists to
read and interpret the diagnostic imaging scans performed at the centers.
The Company has entered into several agreements for these services. Terms
and fees vary on a contract by contract basis. Fees are generally based on a
percentage of collected gross revenues, such fees generally range from 10% -
20%. One contract has annual fees of $275,000 plus a percentage of the
center's annual gross revenues in excess of $2.4 million through March 2000
and another includes an annual consulting fee of $30,000 through December
1999. Additionally, in conjunction with the Company's acquisition of one of
the centers, 125,000 shares of Consolidated's common stock were issued to a
radiologist in connection with an amendment to the existing agreement with
such radiologist. The determined fair value at that time of $.87 per share
or $108,750 was expensed during the period ended December 31, 1994. In
addition, one agreement contains a provision for the issuance by Consolidated
to the radiologist of a warrant to purchase 100,000 shares of the common
stock of Consolidated upon the consummation of an initial public offering of
the Company's common stock. The Company will incur expenses for radiology
fees in accordance with SFAS No. 123 if such warrant is issued.
In 1997, a new agreement was signed by PODC which runs through January 2002.
Fees are 16.5% of collected gross revenues plus an annual fee of $12,000.
[14] Employee Benefit Plans
On July 1, 1995, the Company adopted a Qualified Retirement Plan under the
Internal Revenue Code. The Plan requires employees to complete one year of
service and attain the age of 21. Employer contributions are discretionary
and determined on an annual basis. Employer contributions to the plan
totaled $65,550, $53,687 and $41,120 for the years ended December 31, 1997,
1996 and 1995, respectively.
The Plan will match employee contributions dollar for dollar with maximum
limitations as follows:
<TABLE>
<S> <C>
Year in Plan
- ------------
First $ 500
Second 750
Third 1,000
Fourth 1,250
Fifth 1,500
Sixth 1,750
Seventh or More 2,000
</TABLE>
[15] Long-Term Incentive Plan
In October 1994, the Company adopted, by action of the Board of Directors and
stockholders, the 1994 Long-Term Incentive Plan [the "Plan"]. The Plan does
not have an expiration date.
The Plan is authorized to grant options or other equity-based incentives for
1,200,000 shares of the Class A Common Stock or, at such time as the Class A
Common Stock is converted into Common Stock, shares of Common Stock. If
shares subject to an option under the Plan cease to be subject to such
option, or if shares awarded under the Plan are forfeited or otherwise
terminated without a payment being made to the participant in the form of
stock, such shares will again be available for future issuance under the
Plan.
Awards under the Plan may be made to key employees, including officers of and
consultants to the Company, its subsidiaries and affiliates, but may not be
granted to any director unless the director is also an employee of or
consultant to the Company or any of its subsidiaries or affiliates. The Plan
imposes no limit on the number of officers and other key employees to whom
awards may be made.
The following types of awards can be granted under the Plan: incentive or
non-qualified stock options; stock appreciation rights; restricted stock;
deferred stock, stock purchase rights and/or other stock-based awards.
Incentive stock options to purchase an aggregate of 850,000 shares of Class A
Common Stock were granted under the plan as follows: In October 1994, the
Company granted incentive stock options to purchase 765,500 shares of Class A
Common Stock at $.50 per share; in September 1995, the Company granted
incentive stock options to purchase 71,500 shares of Class A Common Stock at
$1.00 per share, and in June 1996, the Company granted incentive stock
options to purchase 13,000 shares of Class A Common Stock at $1.00 per share.
The exercise price of the options was the fair market value on the respective
dates of grant. All of the options are presently fully exercisable and have
a maximum term of seven years from the date of grant. No compensation cost
was recognized for stock-based employee awards.
A summary of the activity under the Company's long-term incentive plan is as
follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Remaining
Number of Average Contractual
Options Exercise Price Life [Years]
--------- -------------- ------------
<S> <C> <C> <C>
Options Outstanding - 765,500 $ .50 6.75 Years
December 31, 1994 -------
-------
Granted 71,500
Exercised --
Expired --
---------
Options Outstanding - 837,000 $. 54 5.83 Years
December 31, 1995 -------
-------
Granted 13,000
Exercised --
Expired --
---------
Options Outstanding - 850,000 $. 55 4.85 Years
December 31, 1996 -------
-------
Granted --
Exercised --
Expired 233,000
--------
Options Outstanding - 617,000 $. 56 3.95 Years
December 31, 1997 -------- -------
- --------------------- -------- -------
Options Exercisable - 617,000
December 31, 1997 --------
- --------------------- --------
</TABLE>
If the Company had accounted for the issuance of all options and compensation
based warrants pursuant to the minimum value method of SFAS No. 123, the
Company would have recorded compensation expense of approximately $17,000 and
$27,000 for the years ended December 31, 1996 and 1995, respectively, and the
Company's net income and net income per share would have been as follows:
<TABLE>
<CAPTION>
Years ended
-----------
December 31,
-----------
1996 1995
---- ----
<S> <C> <C>
Net Income as Reported $ 1,041,354 $ 1,761,499
Pro Forma Net Income $ 1,024,354 $ 1,734,499
Net Income Per Share as Reported $ .08 $ .13
Pro Forma Net Income Per Share $ .08 $ .13
</TABLE>
No options or compensation based warrants were issued in 1997.
The fair value of options and warrants [See Note 16] to purchase Class A
Common Stock at date of grant was estimated using the minimum value method
with the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected life [Years] 7 7
Interest Rate 6.0% 7.0%
Annual Rate of Dividends 0% 0%
Volatility 0% 0%
</TABLE>
The weighted average fair value of options at date of grant using the minimum
value method during 1996 and 1995 is estimated at $1.34 and $.38,
respectively.
[16] Warrants
Outstanding warrants as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Common Class A Exercise FMV at No. of Warrants
Date of Grant Stock Common Price Date of Grant Exercised Expiration Date
_________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
September 1996 -- 250,000 3.50 2.00 -- February 2002
October 1994 1,000,000 -- 2.00 .50 -- October 2001
October 1994 [A] -- 700,000 3.50 .50 -- October 2001
October 1994 [B] -- 500,000 3.50 .50 -- October 2001
_________ ________
TOTAL 2,000,000 1,450,000
_________ _________
_________ _________
</TABLE>
The weighted average exercise price and weighted average remaining
contractual life of outstanding warrants are as follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Average Remaining
---------------- --------------------------
Exercise Price Contractual Life [Years]
-------------- ------------------------
<S> <C> <C>
December 31,
- ------------
1997 2.89 3.87
1996 2.89 4.78
1995 2.82 5.75
</TABLE>
[A] Warrants to purchase 1,250,000 shares of Class A Common Stock at $2.00
per share were issued in October 1994. At December 31, 1996, the exercise
price was increased to $3.50 per share and warrants to purchase 550,000
shares of Class A Common Stock were canceled.
[B] At December 31, 1996, the exercise price was increased from $2.00 per
share to $3.50 per share.
In September 1996, the Company issued warrants to purchase 500,000 shares of
Class A Common Stock at $3.50 per share [250,000 to a related party [See Note
11] and 250,000 to DVI [See Note 8]]. At December 31, 1996, the warrant to
purchase 250,000 shares of Class A Common at $3.50 per share issued to a
related party was canceled. At December 31, 1996, none of the above warrants
issued were canceled, except as noted above, and all outstanding warrants are
exercisable. At December 31, 1996, there are no additional warrants subject
to grant.
[17] Litigation
The Company is subject to lawsuits arising in the ordinary course of
business. Management, after review and consultation with counsel, believes
it has meritorious defenses and considers that any potential outcome from these
matters would not materially affect the financial position and statement
operations of the Company. Nevertheless, due to uncertainties in the legal
process, it is at least reasonably possible that management's view of the
outcome may change in the near term. However, no facts have come to the
Company's attention which would result in the estimate of a loss or range of
loss except as follows:
In May 1996, the Company commenced an arbitration proceeding before the
American Arbitration Association in Los Angeles, California against Radman,
Inc. ["Radman"], a manufacturer of teleradiology systems and equipment,
entitled International Magnetic Imaging, Inc. v. Radman, Inc., alleging fraud
and breach of contract and seeking rescission of a purchase agreement between
the Company and Radman for a teleradiology system as well as an award of
money damages in an amount not less than $485,000, together with interest,
attorneys' fees and costs. Radman has asserted certain counterclaims against
the Company in such proceeding seeking an award of money damages in the sum
of at least $236,000, together with interest, exemplary and punitive damages,
reasonable attorneys' fees and other costs of the action. This matter is
presently pending. The Company believes that it has meritorious defenses to
Radman's counterclaims.
In January 1996, Drs. Ashley Kaye and James Sternberg, two of the former
stockholder-directors of IMI-Florida, and Dr. Sternberg's wife, threatened to
commence an action against two subsidiaries of the Company, Consolidated and
Mr. Lewis S. Schiller, chairman of the board of Consolidated and the Company,
for alleged violations of securities and common law in connection with the
execution in 1994 of an asset purchase agreement between MD Corp. and a
subsidiary of the Company and non-payment of the $3,375,000 Subordinated
Notes of two subsidiaries of the Company issued to MD Corp. in connection
therewith. Although the Company reflects the principal and interest on such
Subordinated Notes as liabilities on its consolidated balance sheet and no
notice of default has been given, no assurance can be given that an adverse
decision in any action based on such claims will not have a material adverse
effect upon the Company.
Vanguard Limited ["Vanguard"], on its own behalf or on behalf of other
persons who may be affiliated with Vanguard, based on a purported agreement
relating to the introduction of Consolidated and the Company to IMI-Florida
and assistance in the negotiation of the acquisition of the Centers, has
asserted a claim against the Company and/or SISC that it has the right, among
other things, to a 10% interest in the Common Stock of the Company at or
about the date of the acquisition for no cash consideration. In addition,
Vanguard has claimed that it is entitled to a $200,000 fee due at the time of
the acquisition of the Centers, consulting fees of $240,000 per year for five
years, reimbursement of nonaccountable expenses and a 5% interest in any
future medical acquisition by the Company. No assurance can be given that
any litigation which may ensue would not seek damages exceeding the claim
described above and, if decided unfavorably to the Company, would not have a
material adverse affect on the Company. If Vanguard commences an action
against the Company and prevails, it would have a material adverse effect
upon the Company, and, furthermore, if it prevails with respect to its claim
for Common Stock, the issuance of such Common Stock could result in a
non-cash charge to earnings for the value of such Common Stock, dilution to the
stockholders, including the stockholders who purchased stock in an initial
public offering, and a reduction in the net tangible book value per share.
In addition, the Company may not be able to use Consolidated's net loss or
tax loss carry forward to reduce its tax liability if a sufficient number of
shares of Common Stock were issued to Vanguard.
The Company has received a report with respect to the conduct of an
independent contractor who regularly performs professional services for one
of its Centers, which conduct may be considered sexual harassment. The
Company believes that its policies and procedures with respect to the
behavior of employees and others who regularly perform services at its
Centers are in compliance with applicable Federal and state laws concerning
sexual harassment. The Company is investigating the reported incidents and
has not made a determination as to what action, if any, should be taken. No
assurance can be given that, if the reported incidents result in a claim
against the Company and the claimant prevails, there will not be a material
adverse effect upon the Company.
Certain limited partners of Magnetic Resonance Institute of Greater Kansas
City, L.P. claim that one of the principals and the council of the seller to
IMI of the Kansas City Imaging Center, allegedly "guaranteed" that, on the
second anniversary following the closing of the 1994 acquisition by IMI of
its diagnostic imaging centers, such limited partners would receive $4 per
share for each share of the common stock of Consolidated Technology Group,
Ltd. received by them in connection with the 1994 acquisition. These limited
partners claim that IMI is also responsible for such alleged "guaranty."
Subsequent to December 31, 1997, IMI has settled such claims for $407,773.
The settlement cost has been accrued as of December 31, 1997.
[18] Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk are cash and cash equivalents and accounts receivable arising
from its normal business activities. The Company routinely assesses the
financial strength of it customers and based upon factors surrounding the
credit risk of its customers establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited [See Note 3]. The Company
places its cash and cash equivalents with high quality financial
institutions. The amount on deposit in any one institution that exceeds
federally insured limits is subject to credit risk. The Company had cash
balances in excess of federally insured limits of approximately $1,207,791
and $784,000 as of December 31, 1997 and 1996, respectively. The Company
does not require collateral or other security to support financial
instruments subject to credit risk.
The Company derived approximately 73% of its net patient service revenues
from operations in the State of Florida in 1997 and 1996. In 1997 and 1996,
the Company derived approximately 10% and 14%, respectively, of its net
patient revenues from government sponsored health care programs, principally
Medicare and Medicaid. There were no customers who accounted for 10% or more
of revenues in 1995.
The Company's operating facilities grant credit without collateral to its
patients, most of whom are residents of the operating facilities respective
area and are insured under third-party payor agreements. The mix of accounts
receivable net of contractual allowances from third-party payors and patients
are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Personal Injury Liability Related Services 29% 33%
Managed Care 30% 22%
Commercial Insurance 9% 19%
Workers' Compensation 20% 15%
Medicare/Medicaid 5% 6%
Private Pay 2% 3%
Other 5% 2%
---- ----
100% 100%
---- ----
----- ----
[19] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments", which requires disclosing fair value to the extent practicable
for financial instruments which are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled,
nor does the fair value amount consider the tax consequences of realization
or settlement.
</TABLE>
<TABLE>
<CAPTION>
Carrying Amount Fair Value
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Subordinated Debt - Short-Term $ 6,645,424 $ 7,192,919 $ 6,013,537 $6,583,170
Notes Payable - Long-Term 7,710,631 16,239,817 7,635,953 16,096,742
Subordinated Debt - Long-Term 8,276 311,872 8,276 266,130
----------- ----------- ----------- -----------
Totals $14,364,331 $23,744,608 $13,657,766 $22,946,042
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
In assessing the fair value of these financial instruments, the Company used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments,
including cash, accounts receivables, accounts payables and short-term debt,
the carrying amount approximated fair value for these instruments because of
their short maturities. The fair value of long-term debt is estimated based
on discounting expected future cash flows at the rates currently offered to
the Company for debt of the same or similar remaining maturities. Due to the
non-interest bearing nature and unspecified payment terms, it was not
practicable to estimate the fair value of the debt due to affiliate, however,
the use of discounted cash flow techniques to estimate fair value could
result in an estimated fair value substantially lower than the carrying
amount.
[20] Supplemental Disclosures of Cash Flow Information
Cash paid for interest and income taxes amounted to $2,522,313 and $83,450 in
1997, $2,399,375 and $48,029 in 1996 and $2,175,631 and $53,764 in 1995.
During the years ended December 31, 1997, 1996 and 1995, $(14,484), $735,158
and $1,231,205, respectively, of debt due from/to an affiliate related to
allocated income taxes was forgiven and included in paid-in capital.
During the years ended December 31, 1997, 1996 and 1995, the Company acquired
equipment under capitalized leases in the amounts of $102,673, $2,288,836 and
$762,465, respectively.
During 1995, $103,984 of expenses paid on behalf of an affiliate were applied
against the amount due to affiliate.
During 1997, the Company reduced equipment and related account payable by
$722,750 per a settlement agreement with the equipment provider.
[21] Prior Period Adjustments
The accompanying financial statements for 1996 have been restated to correct
an error in the calculation of income tax expense in 1996. The effect of the
restatement was to increase income tax expense and decrease net income by
$366,867 in 1996.
[22] Subsequent Events
On January 28, 1998, the Company and certain of its subsidiaries entered into
an asset purchase agreement with Comprehensive Medical Imaging, Inc. ["CMI"],
a subsidiary of Syncor International Corporation, pursuant to which CMI
agreed to purchase substantially all of the assets of the Company and such
subsidiaries for $20.5 million in cash and the assumptions of $21 million in
debt.
<PAGE>
CONSENT OF MOORE STEPHENS, P.C.
As independent certified public accountants for International Magnetic
Imaging, Inc., we hereby consent to the use of our report dated February 13,
1998, included in this Form 8-K being filed by Syncor International Corporation.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
April 16, 1998
<PAGE>
SYNCOR INTERNATIONAL CORPORATION
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial statements
give effect to the acquisition as if it had occurred as of December 31, 1997
for purposes of the unaudited pro forma condensed consolidated statement of
operations.
For accounting purposes, the acquisition was treated as a purchase.
Accordingly, for purpose of these unaudited pro forma condensed consolidated
financial statements, the excess of the purchase price over the fair market
value of the acquired assets is amortized over 20 years.
The unaudited pro forma condensed consolidated financial statements do
not purport to present the financial position or results of operations of
Syncor had the acquisition assumed therein occurred on the dates specified,
nor are they necessarily indicative of the results of operations that may be
achieved in the future.
The unaudited pro forma condensed consolidated financial statements are
based on certain assumptions and adjustments, which are described in the
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements,
that the Company believes to be reasonable and should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Consolidated Financial Statements of Company and the
related Notes thereto and the Consolidated Financial Statements of IMI and
the related Notes thereto included herein.
SYNCOR INTERNATIONAL
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
___________________________________________________________________
Syncor International Pro Forma Pro Forma
International Corp Magnetic Imaging Adjustments Consolidated
____________________________________________________________________________________________
(audited) (audited) (unaudited)
<S> <C> <C> <C>
Net sales 380,563 29,400 409,963
Cost of Sales 290,398 6,963 297,361
_______________________________________________________________
Gross Profit 90,165 22,437 112,602
Operating, Selling, and 67,214 16,832 (977) (d) 83,069
Administrative
Depreciation and Amortization 9,939 4,659 1,174 (c) 15,772
_______________________________________________________________
Operating Income 13,012 946 (197) 13,761
Other Income (Expense)
Interest Income 1,324 76 1,400
Interest Expense (1,207) (3,283) (314) (g) (4,804)
Other, net 3,826 983 4,809
_______________________________________________________________
Other income, net 3,943 (2,224) (314) 1,405
Income from Continuing Operations 16,955 (1,278) (511) 15,166
before income taxes
Provision for Income Taxes 6,923 41 6,964
_______________________________________________________________
Income from continuing Operations 10,032 (1,319) (511) 8,202
Discontinued Operations, 1,063 0 1,603
net of taxes _______________________________________________________________
Net Income (loss) 11,095 (1,319) (511) 8,202
_______________________________________________________________
_______________________________________________________________
Net income (loss) per share-Basic
Income from continuing $ 1.00 $ 0.82
Operations
Discontinued Operations, $ 0.11 $ 0.11
Net of taxes
Net income per share $ 1.11 $ 0.93
Weighted Average Shares 9,998 9,998
Outstanding
Net income (loss per share-Diluted
Income from continuing $ 0.98 $ 0.80
Operations
Discontinued Operations, $ 0.10 $ 0.10
net of taxes
Net income per share $ 1.08 $ 0.90
Weighted Average Share 10,282 10,282
Outstanding
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
<PAGE>
Syncor International Corporation
Unaudited Pro Forms Condensed Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
___________________________________________________________________
Syncor International Pro Forma Pro Forma
International Corp Magnetic Imaging Adjustments Consolidated
____________________________________________________________________________________________
(audited) (audited) (unaudited)
<S> <C> <C> <C> <C>
Current Assets:
Cash & Cash Equivalents 25,538 1,813 (1,813) (a) 25,538
Short-Term Investments 2,583 - 2,583
Trade Receivables 54,972 9,803 64,775
Inventory 5,574 - 5,574
Other Current Assets 3,913 842 (584) (b) 4,171
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TOTAL CURRENT ASSETS 92,580 12,458 (2,397) 102,641
Marketable Securities 1,180 - 1,180
Property & Equipment, net 28,870 9,738 38,608
Goodwill 14,319 9,181 (9,181) (b) 14,319
23,470 (c) 23,470
Other 27,614 7,602 (6,252) (b) 28,964
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TOTAL ASSETS 164,563 38,979 5,640 209,182
Current Liabilities:
Accounts Payable 34,755 2,230 36,985
Accrued Liabilities 4,250 2,364 (52) (b) 6,562
Accrued Wages & Related Costs 13,783 270 14,053
Federal & State Taxes Payable 1,129 249 (249) (b) 1,129
-
Current Maturities of 3,978 18,818 (7,459) (b) 15,337
Long Term Debt
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TOTAL CURRENT LIABILITIES 57,895 23,931 (7,760) 74,066
Long Term Debt 17,332 9,919 18,529 (e) 45,780
Deferred Compensation 1,969 0 1,969
Stockholders' Equity
Common Stock 572 92 (92) (f) 572
Common Stock-Class A 10 (10) (f) -
Additional Paid-In Capital 55,061 2,135 (2,135) (f) 55,061
ESSOP Loan Guarantee (6,741) (6,741)
Unrealized Gain (Loss) - (17) (17)
Investments
Translation Adjustment (313) (313)
Treasury Stock (12,524) (12,524)
Retained Earnings 51,329 2,892 (2,892) (f) 51,329
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TOTAL STOCKHOLDERS' EQUITY 87,367 5,129 (5,129) 87,367
TOTAL LIABILITIES & EQUITY 164,563 38,979 5,640 209,182
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See notes to unaudited pro forma condensed consolidated financial statements.
SYNCOR INTERNATIONAL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The adjustments to arrive at the Unaudited Pro Forma Condensed Consolidated
Financial Statements are as follows:
(a) To record the estimated cash used to purchase the imaging business of
International Magnetic Imaging, Inc. and Subsidiaries (IMI).
(b) To record the adjustment for IMI assets not acquired and liabilities not
assumed.
(c) To record the excess of purchase price over net assets acquired assuming a
useful life of 20 years and relate amortization for twelve months.
(d) To record the adjustment for salaried employees whose positions were
eliminated at the effective date of the acquisition, net of incremental
new positions.
(e) To record the estimated line of credit used to purchase IMI and immediate
payoff of certain debt.
(f) To record the adjustment to eliminate net stockholders' equity of IMI.
(g) To record the adjustment for new incremental interest expense (payable) as
a result of credit line used to purchase IMI and benefit derived from
refinancing.
(h) To record the tax effect of proforma adjustments.
