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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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Commission File No. 0-20440
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MEDICAL RESOURCES, INC.
(Exact Name of registrant as specified in its charter)
Delaware 13-3584552
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(State of Incorporation) (IRS Employer
Identification No.)
155 State Street, Hackensack, NJ 07601
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (201) 488-6230
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Title of Each Class
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Common Stock (Par value $.01 per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 26, 1997 19,331,236 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding and the aggregate market value of the
Common Stock (based upon the NASDAQ closing price of these shares on that date)
held by non-affiliates was $185,960,045.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Form 10-K is incorporated by
reference from the registrant's definitive Proxy Statement to be filed not later
than 120 days after December 31, 1996.
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PART I
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Item 1 BUSINESS
General
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Medical Resources, Inc. ("Medical Resources" and collectively, with its
subsidiaries, affiliated partnerships and joint ventures, the "Company")
specializes in the operation, management and acquisition of diagnostic imaging
centers. The Company currently operates 53 diagnostic imaging centers
located in the Northeast (29), Florida (15), California (3) and the
Chicago area (6) and provides network management services to managed care
organizations. The Company is rapidly growing and has increased the number of
diagnostic imaging centers it operates from 11 at December 31, 1995 to 53
at March 26, 1997. In addition, through the Per Diem and Travel Nursing
divisions of its wholly owned subsidiary, StarMed Staffing, Inc. ("StarMed"),
the Company provides temporary healthcare staffing to acute and sub-acute care
facilities nationwide.
The Company's diagnostic imaging centers provide diagnostic imaging
services to patients referred by physicians in a comfortable, service-oriented
outpatient environment. At each of its centers, the Company provides
management, administrative, marketing and technical services, as well as
equipment and facilities, to physicians who interpret scans performed on
patients. Medical services are provided by board certified interpreting
physicians, generally radiologists, with whom the Company enters into contracts.
Fifty-two of the Company's 53 centers provide magnetic resonance
imaging ("MR"), which accounts for a majority of the Company's imaging revenues.
Many of the Company's centers also provide some or all of the following
services: computerized tomography ("CT"), ultrasound, nuclear medicine, general
radiology, fluoroscopy and mammography.
The number of outpatient diagnostic imaging centers in the United States
has grown from approximately 700 in 1984 to an estimated 2,200 in
1996. Ownership of outpatient diagnostic imaging centers is highly
fragmented, with no dominant national provider. The Company believes that the
environment faced by diagnostic imaging center operators is characterized by
rising business complexity, growing control over patient flows by payors and
reimbursement pressures that require center owners to seek operational
efficiencies. In addition, the Company believes that public and private reforms
in the healthcare industry emphasizing cost containment and accountability will
continue to shift the delivery of imaging services from highly fragmented,
individual or small center operators to companies operating larger multi-
modality networks of centers.
The Company's goal is to become the leading operator of diagnostic imaging
centers in the country. The Company now has implemented a strategy for growth
which includes acquisitions as well as internal development of its existing
operations. The Company intends to capitalize on the fragmented nature of the
diagnostic imaging center industry through the acquisition of additional
centers. The Company's strategy is to expand the scope and efficiency of its
operations at its existing and acquired facilities by: (i) leveraging the
geographic concentration of its centers; (ii) expanding the imaging services
offered by its centers by upgrading existing technology and adding new
modalities; (iii) applying sophisticated operating, financial and information
systems and procedures; (iv) utilizing targeted local marketing
programs; and (v) developing its network management services to address more
fully the needs of managed care providers.
The Company has a successful record of acquiring imaging centers and
integrating and improving their operations. Since the beginning of 1996, the
Company has acquired 44 imaging centers through 13 acquisitions, including 18
imaging centers resulting from the Company's acquisition (the "NMR Acquisition")
on August 30, 1996 of NMR of America, Inc. ("NMR"). The Company has also entered
into definition documentation to acquire a company owning interests in and
managing eleven centers in the Northeast and has an option to acquire an
additional center in the Northeast. The Company believes that it will
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be able to continue to be a leader in the consolidation of the diagnostic
imaging services industry because of its: (i) experience in identifying,
structuring and completing acquisitions; (ii) ability to integrate effectively
these acquisitions; (iii) size and financial resources; and (iv) existing
presence in key geographic areas.
The Company's temporary staffing business, StarMed, was founded in 1978 and
acquired by the Company in August 1994. StarMed's Per Diem staffing division
provides registered nurses, licensed practical nurses, nursing assistants,
therapists and medical transcriptionists on a daily basis to healthcare
facilities through 21 offices located in 10 states at March 26, 1997. StarMed's
Travel Nursing division is operated from a central office in Clearwater, Florida
and provides registered nurses and operating room technicians for periods
usually ranging from 8 to 26 weeks. StarMed commenced its per diem operations in
March 1995 and, since such time, it has opened 18 offices, acquired three
staffing companies operating five additional offices and consolidated the
operations of two other offices in 10 states. In January 1996,
StarMed acquired a per diem healthcare staffing business in California; in June
1996, StarMed acquired a per diem healthcare staffing business in Florida and in
January 1997 StarMed acquired a per diem healthcare staffing business in
Michigan. The Company's growth strategy for its temporary staffing business
includes offering new services to clients, expanding the number of markets
served by StarMed's Per Diem division and acquiring other companies in the
temporary healthcare staffing industry in selected markets.
Medical Resources was incorporated in Delaware in August 1990 and has its
principal executive office at 155 State Street, Hackensack, New Jersey 07601,
telephone number (201)488-6230. Prior to the Company's incorporation, the
Company's operations, which commenced in 1979, were conducted by corporations
which are now among its subsidiaries.
Diagnostic Imaging Services Industry
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Overview
Imaging centers have played a vital role in the healthcare delivery system
by offering diagnostic services such as MR, CT, ultrasound, nuclear medicine,
mammography and x-ray in an outpatient setting. Diagnostic imaging procedures
are used to diagnose diseases and physical injuries through the use of various
imaging modalities. The use of non-invasive diagnostic imaging has grown
rapidly in recent years because it allows physicians to diagnose quickly and
accurately a wide variety of diseases and injuries without exploratory surgery
or other invasive procedures, which are usually more expensive, risky and
potentially dibilitating for patients. In addition, diagnostic imaging is
increasingly used as a screening tool for preventive care. While conventional
x-ray continues to be the primary imaging modality based on the number of
procedures performed, the use of MR and CT procedures has increased due to their
more sophisticated diagnostic capabilities. The Company believes that
utilization will continue to increase because of the growth in demand for
diagnostic imaging services as well as the introduction of new diagnostic
imaging procedures using new or existing modalities.
Equipment and Modalities
Diagnostic imaging systems are based on the ability of energy waves to
penetrate human tissue and generate images of the body which can be displayed
either on film or on a video monitor. Imaging systems have evolved from
conventional x-rays to the advanced technologies of MR, CT, ultrasound, nuclear
medicine and mammography. The principal diagnostic imaging modalities used by
the Company include the following:
Magnetic Resonance Imaging. MR is a sophisticated diagnostic imaging system
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that utilizes a strong magnetic field in conjunction with low energy
electromagnetic waves which are processed by a computer to produce high
resolution images of body tissue. A principal element of MR imaging is
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that the atoms in various kinds of body tissue behave differently in
response to a magnetic field, enabling the differentiation of internal organs
and normal and diseased tissue. Unlike CT and x-rays, MR does not utilize
ionizing radiation which can cause tissue damage in high doses. As with other
diagnostic imaging technologies, MR is generally non-invasive.
Computerized Tomography. CT is used to detect tumors and other conditions
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affecting bones and internal organs. CT provides higher resolution images than
conventional x-rays, but generally not as well defined as those produced by MR.
In a CT, a computer directs the movement of an x-ray tube to produce multi-cross
sectional images of a particular organ or area of the body.
Ultrasound. Ultrasound has widespread application, particularly for
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procedures in obstetrics, gynocology and cardiology. Ultrasound imaging relies
on the computer-assisted processing of sound waves to develop images of internal
organs and the vascular system. A computer processes sound waves as they are
reflected by body tissue, providing an image that may be viewed immediately on a
computer screen or recorded continuously or in single images for further
interpretation.
Nuclear Medicine. Nuclear medicine is used primarily to study anatomic and
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metabolic functions. During a nuclear medicine procedure, short lived
radioactive isotopes are administered to the patient by ingestion or injection.
The isotopes release small amounts of radioactivity that can be recorded by a
gamma camera and processed by a computer to produce an image of various
anatomical structures.
General Radiology and Fluoroscopy (X-ray). The most frequently used type
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of imaging equipment, radiology uses "x-rays" or ionizing radiation to penetrate
the body and record images on film. Fluoroscopy uses a video viewing system for
real time monitoring of the organs being visualized.
Mammography. Mammography is a specialized form of radiology equipment
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using low dosage x-rays to visualize breast tissue. It is the primary screening
tool for breast cancer.
Growth Strategy
The Company's goal is to become the leading operator of diagnostic imaging
centers in the country. The Company has implemented a strategy for growth which
includes acquisitions as well as internal development of its existing
operations. The Company intends to capitalize on the fragmented nature of the
diagnostic imaging center industry through the acquisition of additional
centers. The Company's strategy is to expand the scope and efficiency of its
operations at its existing and acquired facilities by: (i) leveraging the
geographic concentration of its centers; (ii) expanding the imaging services
offered by its centers by upgrading existing technology and adding new
modalities; (iii) applying sophisticated operating, financial and
information systems and procedures; (iv) utilizing targeted local marketing
programs; and (v) developing its network management services to address more
fully the needs of managed care providers. The Company's growth strategy for its
temporary staffing business includes offering new services to clients, expanding
the number of markets serviced by its Per Diem division and acquiring other
companies in the temporary healthcare staffing industry in selected markets.
Acquisition Strategy
The Company has a successful record of acquiring imaging centers and
integrating and improving their operations. Since the beginning of 1996, the
Company has acquired 44 imaging centers through 13 acquisitions. The Company
believes that it will be able to continue to be a leader in the consolidation of
the diagnostic imaging services industry because of its: (i) experience in
identifying, structuring and
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completing acquisitions; (ii) ability to integrate effectively these
acquisitions: (iii) size and financial resources; and (iv) existing presence
in key geographic areas.
Through the Company's full time acquisition staff, the Company identifies
suitable acquisition candidates based on various factors, including market
demographics; physician referral patterns; reimbursement profiles; local
competition; location in relation to other Company centers and urban areas;
quality and reputation of interpreting physicians; imaging equipment present;
and ability to improve the center's operations and profitability.
The Company's acquisitions have included individual centers, multi-center
groups and two imaging management companies. The Company views each of these
types of acquisitions as attractive due to the operational improvements, cost
savings and strategic synergies which may benefit the Company. After the
acquisition of a center, the Company applies its operating and financial
expertise and procedures and utilizes its sales and marketing programs to manage
the center effectively and to improve the center's utilization. In
addition, the Company seeks to reduce the operating expenses of its acquired
centers through various means, including capitalizing upon the Company's
established relationships with vendors and its ability to take advantage of
group purchasing discounts. In certain instances where the Company has
acquired multiple centers from a single seller, it has closed a limited number
of centers upon determining that such acquired centers will not meet its
operating and financial objectives. Of the 44 centers acquired since the
beginning of 1996, the Company has closed three centers through March 31, 1997.
Growth Strategy at Existing and Acquired Centers
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Leveraging Geographic Concentration
The Company has developed clusters of imaging centers in certain geographic
areas which enable it to improve the utilization of its centers by attracting
business from larger referral sources, such as managed care providers due to the
Company's ability to meet the quality, volume and geographical coverage
requirements of these payers. The Company intends to increase its center
concentration in existing markets to attract additional referrals of this type
and to expand into new geographic areas, through acquisitions, in order to
attract additional managed care contracts.
Expanding Imaging Services Offered
The Company expands the imaging services it offers by upgrading existing
technology and adding new modalities at selected centers. The Company's imaging
centers utilize state of the art imaging equipment for which new applications
are continually being developed. New developments and system upgrades
frequently have the ancilliary benefit of reducing imaging time and thus
increasing capacity of the centers' imaging equipment.
Apply Sophisticated Operating, Financial and Information Systems and
Procedures
The Company provides management expertise, financial and operating
controls, and capital resources to its centers in order to optimize their
performance. Generally, each of the centers or groups of centers acquired have
had different operating and financial systems and operating procedures. The
Company evaluates the effectiveness of each and develops a transition plan to
integrate each center, over time, to the Company's targeted operating and
financial systems environment. In addition, the Company is able to achieve
economies of scale and provide cost savings in developing managed care contracts
and negotiating group purchasing of goods and services.
Utilize Targeted Localized Marketing
The Company develops and coordinates marketing programs which center
managers, sales representatives, and affiliated interpreting physicians utilize
to establish referral relationships and to maximize facility usage and
reimbursement yield. The Company's marketing programs emphasize the
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capabilities of its imaging equipment, the quality and timeliness of the
imaging results and reports, and the high level of patient and referring
physician service.
Develop Network Management Services
The Company plans to develop and expand further its network
management services business. As a network manager, the Company enters into
contracts with managed care organizations to coordinate the demand for imaging
services and to provide certain administrative functions related to the delivery
of such services. The Company includes certain of its centers in these networks
and believes that the inclusion of these centers in the networks will increase
their utilization. In addition, the Company believes that its network
management services enhance its relationships with managed care organizations
and its ability to enter into additional contracts with such entities.
Temporary Healthcare Staffing Industry
The demand for supplemental per diem staffing services in the healthcare
market is being driven by a variety of factors in the acute and sub-acute care
segments. The increasing presence of managed care and the rapid evolution of
technology has dramatically reduced the average length of stay in acute care
hospitals. The dynamics of this reduction in length of stay has made the task
of staffing a facility difficult. Many hospitals are reducing the number of
full time staff and and managing the peak periods by utilizing per diem nursing
services. The attractiveness of utilizing per diem services is the ability to
monitor and regulate expenses more closely. When a hospital adds full time
staff, it makes a committment in salary and benefits which it can avoid with per
diem services. With the emphasis on outpatient care, the needs of the
hospital's admitted patients have increased which subsequently requires a high
level of critical care nursing skills. Due to the intense environment of
critical care units, turnover is a significant challenge for a hospital. The
ability to utilize per diem services to address the needs of these units is
becoming increasingly advantageous to hospitals. In addition, the number of
nursing home beds continues to increase each year in an attempt to meet the
needs of the country's aging population. The ability of nursing services to
recruit and place qualified nursing assistants and licensed practical nurses in
these facilities who are available on a day by day or part time basis is a great
benefit to this client base. Nursing homes, like hospitals, are regulated on a
state by state basis and are required to maintain a specific patient to
caregiver ratio. Per diem servies provide experienced employees who are
productive on their first assignment, compared to new graduates who may require
extensive orientation.
The demand for travel nursing is being driven by dynamics similar to that
of the per diem market. In most cases, the client utilizes travel nurses when
they require additional personnel for an extended period of time. Examples of
this would be the opening of a new satellite facility, an information system
conversion that might divert existing hospital employees from other duties and,
in many cases, a severe local market shortage for a specific nursing speciality.
Additionally, in areas of the country that have significant population changes
tied to seasonality, such as Florida during the winter months, the utilization
of travel nurses is an economic alternative.
Diagnostic Imaging Business
The following table sets forth certain information concerning the imaging
centers operated by the Company. Imaging centers that are not 100% owned by
the Company, through a wholly owned subsidiary, are typically owned by limited
partnership or other business entities in which a subsidiary of the Company is
the sole general partner or manager. The equity ownership interest shown
includes general and limited partnership interests or other equity interests
owned by the Company. For the centers not wholly owned by the Company, the
Company is generally paid a management fee based on patient cash collections
and/or patient volume under management agreements with certain of the
partnerships.
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<TABLE>
<CAPTION>
Operated
Location Name Since(1) Ownership(2) Modalities(3)
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<S> <C> <C> <C> <C>
Northeast Region
Englewood, NJ............ Englewood Imaging Center December 1979 100% MR,CT,US,R,F,M
Marlton, NJ(5)........... MRImaging of South Jersey July 1984 91.0% MR
Union, NJ(5)............. OPEN MRI of Union August 1984 79.7% MR
Morristown, NJ(5)........ MRImaging of Morristown December 1984 94.2% MR
Philadelphia, PA(5)...... Academy Imaging Center January 1986 97.7% MR,CT,US,NM,R,F,M
Allentown, PA(5)......... MRImaging of Lehigh Valley May 1986 95.9% MR
Clifton, NJ.............. Clifton Medical Imaging Center June 1987 100% MR,CT,US,NM,R,F,M
Yonkers, NY.............. Inter-County Imaging September 1987 65.0% MR,CT,US,NM,R,F,M
West Orange, NJ(4)....... Northfield Imaging January 1991 100% MR,CT,US,NM,R,F,M
Bel Air, MD(5)........... Colonnade Imaging Center November 1991 62.9% MR,CT,US,NM,R,R,M
Jersey City, NJ.......... The MR Institute at Midtown July 1992 100% MR
Brooklyn, NY............. Advanced MRA Imaging Associates January 1993 51.0% MR,CT,US,NM,R,R,M
Seabrook, MD(5).......... Seabrook Radiological Center April 1995 87.1% MR,CT
Hackensack, NJ........... Hackensack Diagnostic Imaging June 1995 100% MR,CT,US,R,F,M
Bronx, NY................ Westchester Square Imaging January 1996 100% MR,CT
New York, NY............. MRI-CT Scanning of Manhattan January 1996 100% MR,CT,US,R,M
Centerreach, NY.......... Open MRI of Centerreach July 1996 100% MR
Garden City, NY.......... Open MRI at Garden City November 1996 100% MR
East Setauket, NY........ Open MRI at Smith Haven November 1996 100% MR
Newark, NJ............... Imaging Center of the Ironbound December 1996 100% MR
North Bergen, NJ......... Advanced Magnetic Imaging March 1997 9.0% MR
Kearny, NJ............... West Hudson MRI Associates March 1997 25.0% MR
Cranford, NJ............. Cranford Diagnostic Imaging March 1997 75.0% MR,CT,US,M
Montvale, NJ............. Montvale Medical Imaging March 1997 13.8% MR,CT,US,M,R,F
Randolph, NJ............. Morris-Sussex MRI March 1997 20.0% MR
Totowa, NJ............... Advantage Imaging March 1997 15.0% MR
Dedham, MA............... MRI of Dedham March 1997 35.0% MR
Seekonk, MA.............. Rhode Island-Massachusetts MRI March 1997 5.0% MR
Chelmsford, MA........... MRI of Chelmsford March 1997 65.0% MR
Florida
St. Petersburg, FL........ Magnetic Resonance Associates July 1984 80.2% MR
Naples, FL................ Gulf Coast MRI June 1993 100% MR
Ft. Myers, FL............. Ft. Myers MRI-Central May 1995 100% MR,CT
Ft. Myers, FL............. Ft. Myers MRI-South May 1995 100% MR
Cape Coral, FL(5)......... Cape Coral MRI September 1995 100% MR
Naples, FL(5)............. Naples MRI September 1995 100% MR
Titusville, FL(5)......... MRI of North Brevard September 1995 100% MR
Sarasota, FL(5)........... Sarasota Outpatient MRI & Diag. Ctr. September 1995 100% MR, CT
Tampa, FL................. Americare MRI May 1996 100% MR
Tampa, FL................. Americare Imaging May 1996 100% CT,US,NM,R,M
Tarpon Springs, FL........ Tarpon Springs MRI May 1996 100% MR
Clearwater, FL............ Access Imaging May 1996 100% MR
Melbourne, FL............. South Brevard MRI January 1997 100% MR
Jacksonville, FL.......... MRI Center of Jacksonville February 1997 100% MR
West Palm, FL............. The Magnet of Palm Beach March 1997 100% MR,CT,US,R,M
Chicago Area
Chicago, IL(5)............ MRImaging of Chicago April 1987 87.2% MR
Chicago, IL(5)............ OPEN MRI of Chicago June 1992 79.6% MR
Oak Lawn, IL(5)........... Oak Lawn Imaging Center January 1994 100% MR,CT,US,R,F,M
Des Plaines, IL(5)........ Golf MRI & Diagnostic Imaging Ctr. January 1995 75.0% MR,CT,US,NM,R,F,M
Libertyville, IL(5)....... Libertyville Imaging Center January 1995 100% MR,R,F
Chicago, IL(5)............ Central Diveresy, IL January 1996 100% MR
California
Long Beach, CA............ Long Beach Radiology January 1997 100% MR
San Clemente, CA.......... Oceanview Diagnostic Imaging January 1997 100% MR,CT,US,R,F,M
Rancho Cucamonga, CA...... Grove Diagnostic Imaging March 1997 100% MR,CT,NM,US,R,F,M
</TABLE>
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(1) Operated by the Company or NMR since such date.
(2) Represents the Company's interest in, losses and distributions of the
respective centers.
(3) Modalities are magnetic resonance imaging (MR), computerized tomography
(CT), ultrasound (US), nuclear medicine (NM), radiology (R),
fluoroscopy (F) and mammography (M).
(4) Includes the operation of the Livingston Breast Care mammography unit
which is located at the Northfield Imaging Center.
(5) Acquired from NMR.
The Company may further increase its ownership of its non-wholly owned
centers. There can be no assurance that the Company will be successful
in completing such acquisitions. The Company has also increased its revenues
and by adding new imaging equipment modalities to certain centers and
plans to continue this strategy in those situations where the Company
believes that such additions are economically justified.
Each center consists of a waiting /reception area and one room per modality,
dressing rooms, billing/administration rooms and radiologist interpreting
rooms. The size of the Company's centers generally range from 1,500 to 11,400
square feet.
Operations of Center and Services Provided by the Company
General. The Company's centers provide diagnostic imaging services to
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patients referred by physicians who are either in private practice or affiliated
with managed care providers or other payer groups. The Company's centers are
operated in a manner which eliminates the admission and other administrative
inconvienence of in-hospital diagnostic imaging services. The Company's
imaging services are performed in an outpatient setting by trained medical
technologists under the direction of interpreting physicians. Following the
diagnostic procedures, the images are reviewed by the interpreting physicians
who prepare a report of these tests and their findings. These reports are
transcribed by Company personnel and then delivered to the referring physician.
The interpreting physicians are board certified specialists in radiology,
nuclear medicine, nuclear cardiology or neuroradiology, as appropriate. Such
interpreting physicians are independent contractors, located at the center on a
full time basis, and are not employees of the Company. All medical
aspects of each center are under the direct control and are the sole
responsibility of the interpreting physician. The Company is not engaged in the
practice of medicine.
Financial and Operational Programs. Each center implements a total quality
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management program which emphasizes fully upgradable imaging equipment, on site
board certified radiologists, the participation of technical employees in
rigorous ongoing quality assurance programs and patient and physician
satisfaction surveys. The Company also utilizes group purchasing of certain
goods and services to reduce the operating expenses of its centers. The
compensation of the centers' managers and certain other personnel is tied
directly to the centers' profitability.
Management Information Systems. The Company has developed sophisticated
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management information systems designed to, among other objectives, enhance the
efficiency and productivity of its centers, lower operating costs, facilitate
financial controls, increase reimbursement and assist in the analysis of sales,
marketing and referral data. The management information systems provide
information and assistance to managers with respect to, among other matters,
billing, patient scheduling, marketing, sales, accounts receivable, referrals
and collections. These systems, which provide highly detailed or customized
management reports, enable management to coordinate and enhance many aspects of
the centers' operations and allow for the development of working plans for
improving profit margins by reviewing results and trends in center operations.
Generally each of the centers or groups of centers
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acquired have had different operating and financial systems and operating
procedures. The Company evaluates the effectiveness of each and develops a
transition plan to integrate each center, over time, to the Company's targeted
operating and financial systems environment.
Sales and Marketing
The Company develops and coordinates marketing programs which center managers,
sales representatives, affiliated interpreting physicians and corporate managers
utilize in an effort to establish and maintain profitable referring physician
relationships and to maximize reimbursement yields. These marketing programs
identify and target selected market segments consisting of area physicians with
certain desirable medical specialities and reimbursement yields. Corporate and
center managers determine these market segments based upon an analysis of
competition, imaging demand, medical specialty and or payer mix of each referral
from the local market. The Company also directs marketing efforts at managed
care providers.
Managed care providers are becoming an increasingly important factor in the
diagnostic imaging industry, and, consequently, the Company places major
emphasis on cultivating and developing relationships with such organizations.
The Company employs industry professionals who have significant experience in
dealing with managed care and other providers. The Company believes that the
geographic concentration of its centers, the presence of multi-modality centers
in all of its regions, its ability to offer cost efffective services and its
experience in developing relationships with various managed care organizations
will constitute a competitive advantage with managed care providers.
Reimbursement, Billing and Collection
Each center charges patients a fee per imaging study performed, which is
generally billed on behalf of and in the name of an independent physician group.
The Company's centers maintain a competitive billing strategy based upon
evaluation of available pricing data with respect to each location.
Third party payers, including Medicare, Medicaid, managed care/HMO
providers and certain commercial payers have taken extensive steps to contain or
reduce the costs of healthcare services. In certain areas, such payers are
subject to regulations as to payments. Current discussions within the Federal
government regarding national healthcare reform are emphasizing the containment
of healthcare costs as well as the expansion of the number of eligible parties.
Although such actions have resulted in the general decline in reimbursement
rates for the types of services provided at the Company's centers, the Company
has sought to offset the decline in reimbursement rates by establishing
contractual relationships with managed care organizations and other commercial
payers in order to increase the utilization of its centers
In addition, during 1996 and 1995 approximately 19.5% and 21.8%,
respectively, of the Company's net service revenues from imaging centers were
derived through physicians providing imaging services to patients involved in
personal injury claims. The Company believes that such services are an
attractive revenue source and will continue to seek such business because the
reimbursement rates for services provided to patients involved in personal
injury claims are typically significantly greater than the reimbursement rates
of Medicare, Medicaid and managed care providers. Nevertheless, personal injury
claims require more extensive documentation than other procedures, in addition,
patients with personal injury claims who do not have insurance coverage tend to
delay payment until legal matters are resolved, which may result in significant
collection delays.
Interpreting Physicians Agreements
In accordance with terms of management agreements with interpreting
physicians at each center, all medical aspects of the center are under the
general supervision of the interpreting physicians. Such medical aspects
include supervision of medical technicians, establishment of professional fees,
analysis of
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diagnostic information, preparation of reports to referring physicians, care of
patients while at the center and communications with referring physicians. The
Company's obligations include the administrative, marketing and financial
management of the centers as well as providing necessary medical equipment and
leasehold improvements to the interpreting physicians. The agreements
generally have terms ranging between one and ten years. For certain centers
that the Company acquired through its acquisition of NMR, which were developed
by NMR (as opposed to acquired by NMR) agreements have been entered into with
physicians engaging in business as professional associations ("Physicians")
pursuant to which the Company maintains and operates imaging systems in offices
operated by Physicians. Under the terms of the agreements, Physicians have
agreed to be obligated to contract for radiological services at the centers and
to sublease each facility. The Company is obligated to make necessary
leasehold improvements, provide furniture and fixtures and perform certain
administrative functions relating to the provision of technical aspects of the
centers operations for which Physicians pays a quarterly fee composed of a
fixed sum based on the cost of the respective imaging system installed,
including related financing costs, a charge per invoice processed and a charge
based upon system usage for each NMR installed imaging system in operation.
These agreements generally have terms of up to six years and are renewable at
the option of the Company.
The Company's Temporary Staffing Business
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Services Provided by StarMed
Through its Per Diem and Travel Nursing divisions, StarMed provides
temporary staffing to acute and sub-acute care facilities nationwide. StarMed's
Per Diem staffing division provides registered nurses, licensed practical
nurses, nursing assistants, therapists and medical transcriptionists on a daily
basis to healthcare facilities currently through 21 offices located in 10
states. StarMed's Travel Nursing division operates from a central office in
Clearwater, Florida and provides registered nurses and operating room
technicians nationwide for periods ranging from eight to twenty six weeks.
StarMed's travel nursing personnel are relocated from their place of residence
to the hospital location for the period of an assignment. Star Med employs the
travel nursing staff under short-term employment agreements, provides
accommodations, travel reimbursements and other benefits central to employees
and bills the client on an hourly basis.
In fiscal 1995, the Company expanded its temporary healthcare staffing
segment by opening six per diem staffing offices; four in Florida and one each
in Missouri and Ohio. During 1996 and 1997, StarMed opened twelve per diem
offices in seven states. In addition, StarMed completed the acquisitions of
three per diem healthcare staffing companies operating an aggregate of five
offices in southern California during January 1996, in Florida during June 1996
and in Michigan during January 1997.
Clients and Marketing
StarMed has entered into agreements with client hospitals nationwide to
provide temporary staffing of healthcare personnel. These hospitals, which are
both for-profit and not-for-profit, range from small rural hospitals to major
teaching and trauma centers.
StarMed's Per Diem division markets its services primarily through its own
direct sales force. StarMed's marketing approach targets hospitals in major
metropolitan areas or other areas which are attractive from a patient census
perspective as well as to nurses and other professional medical personnel.
Marketing for the Travel Nursing division is conducted primarily by
telemarketing and also by attendance at national and regional conventions,
seminars and direct solicitations. In certain geographic markets, the Company
has contracted with a health services marketing and per diem placement firm to
market its services.
9
<PAGE>
Upon receiving an order from a client for a travel nursing position,
StarMed utilizes a sophisticated software application program to match available
candidates to the client's order. The application program considers a services
number of unique hiring criteria established by the client and also certain
general criteria established by StarMed. Suitable candidates are then presented
to the client for temporary staffing assignments.
Recruitment
Temporary staff are recruited through advertising in industry publications,
job fairs, referrals and other methods. All applicants for employment are
screened to ensure they have the required practical current experience and
skills, valid license and positive references. StarMed believes that temporary
assignments are attractive for nurses and other medical personnel
because they provide competitive compensation, the ability to work in various
clinical environments during the course of the year and flexible work schedules.
Competition
The outpatient diagnostic imaging industry is highly competitive.
Competition focuses primarily on attracting physician referrals at the local
market level and, increasingly, referrals through relationships with managed
care organizations. The Company believes that principal competitors in each of
the Company's markets are hospitals, independent or management company-owned
imaging centers, some of which are owned with physician investors and mobile MR
units. Some of these competitors have greater financial and other resources
than the Company. Principal competitive factors include quality and timeliness
of test results, ability to develop and maintain relationships with managed care
organizations and referring physicians, type and quality of equipment, facility
location, convenience of scheduling and availability of patient appointment
times. Competition for referrals can also be affected by the ownership or
affiliation of competing centers or hospitals. Certain of the Company's
competitors have historically derived a significant portion of their revenues
from referrals by physicians who are also investors and have a financial
interest in, or are otherwise affiliated with, the competing center or hospital.
The Company may benefit to the extent current or future regulations will reduce
self-referrals from physician investors and make their referrals part of the
market for which other centers may more effectively compete.
The temporary healthcare staffing industy is also highly competitive.
StarMed competes for client's business with other providers of temporary
staffing. StarMed also competes for the limited number of available qualified
staff. Within the temporary staffing industry, StarMed competes with several
companies which are larger and may possess greater financial resources than
starMed. Competition for hospital clients is generally based upon the ability
to provide qualified nurses and medical personnel on a timely basis at
competitive prices. Location of assignment, nature of clinical
responsibilities, compensation and beneits are generally the principal factors
considered by nurses and medical personnel in deciding whether to accept a
temporary assignment.
Government Regulation
- ----------------------
The healthcare industry is highly regulated at the Federal, state and local
levels. The following factors affect the Company's operation and development
activities:
Certificates of Need, Licensing and Certification
All states in which the Company currently operates or may operate have
laws that may require a certificate of need ("CON") in certain circumstances to
establish, construct, acquire or expand healthcare facilities and services or
for the purchase, expansion or replacement of major moveable equipment,
including outpatient diagnostic imaging centers utilizing MR or other major
medical equipment. At the
10
<PAGE>
present time, the CON laws of New Jersey, New York, Illinois, Florida,
Maryland, California and Pennsylvania pertain to the Company's activities. In
states with CON programs, regulatory approvals are frequently required for
capital expenditures exceeding certain amounts, if such expenditures relate to
certain types of medical services or equipment.
State CON statutes generally provide that prior to construction of new
facilities or the introduction of new services, a state health planning agency
("a Planning Agency") must determine that a need exists for those facilities or
services. The CON process is intended to promote comprehensive healthcare
planning, assist in providing high quality health care at the lowest possible
cost and avoid unneccessary duplication by ensuring that only those healthcare
facilities that are needed will be built.
Typically, the provider submits an application to the appropriate Planning
Agency with information concerning the geographic area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan, if applicable, and the cost per patient for the type of care contemplated.
Whether the CON is granted is based upon a finding of need by the
Planning Agency in accordance with criteria set forth in CON statutes,
applicable regulations and applicable state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be an appropriate provider, the Planning Agency will issue a CON
containing a maximum amount of expenditure and a specific time period for the
holder of the CON to implement the approved project.
The necessity for these CON approvals serves as a barrier to entry in certain
markets which the Company wishes to service and has the potential to increase
the costs and delay the Company's acquisition or addition of centers. A CON
program or similar requirement has the potential to curtail the Company's
expansion which could have a material adverse effect on the Company's future
growth.
The Company may also have to comply with Federal certification requirements.
For example, the Company's centers which provide mammography examinations must
be certified by the Federal government. Further, additional certification
requirements may affect the Company's centers, but such certification generally
will follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements often is monitored
by annual on site inspections by representatives of various government agencies.
The Company believes that it currently has obtained all necessary
certifications, but the failure to obtain a necessary certification could have a
material adverse effect on the Company's imaging business.
In addition to the CON programs and Federal certification described above,
the operations of outpatient imaging centers are subject to Federal and
state regulations relating to licensure, standards of testing, accredation of
certain personnel and compliance with government reimbursement programs. The
operation of these centers requires a number of Federal and state licenses,
including licenses for personnel and certain equipment. Although the Company
believes that currently it has obtained or is in the process of obtaining all
such necessary CON approvals and licenses, the failure to obtain a required
approval could have a material adverse effect on the Company's diagnostic
imaging business. The Company believes that diagnostic testing will continue to
be subject to intense regulation at the Federal and state levels and cannot
predict the scope and effect of such regulation nor the cost to the Company of
such compliance.
Medicare Anti-Kickback Provisions
The Anti-Kickback Act prohibits the offering, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare or
Medicaid patients or patient care opportunities, or in return for the purchase,
lease or order or provision of any item or service that is covered by Medicare
or Medicaid. Violation of the Anti-Kickback Act is punishable by substantial
fines, imprisonment for up to five years, or both. In addition, the Medicare
and Medicaid Patient and Program Protection Act of 1987
11
<PAGE>
(the "Protection Act") provides that persons guilty of violating the Anti-
Kickback Act may be excluded from the Medicare or Medicaid programs.
Investigations leading to prosecutions and/or program exclusion may be conducted
by the Office of Inspector General ("OIG") of the Department of Health and Human
Services ("HHS").
Under the Anti-Kickback Act law enforcement authorities, HHS and the
Federal courts are increasingly scrutinizing arrangements between health care
providers and referrals sources (such as physicians) in order to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient referrals. This scrutiny is not limited to financial arrangements that
involve a direct payment for patient referrals, but extends to indirect payment
mechanisms that carry the potential for inducing Medicare and Medicaid
referrals, including situations where physicians hold investment interests in a
healthcare entity to which such physicians refer patients. The Anti-Kickback
Act would cover, for example, situations in which physicians hold investment
interests in a billing company which profits from Medicare referrals. The
Company does not believe that it is operating in violation of the Anti-Kickback
Act.
Safe Harbor Regulations
On July 29, 1991, the OIG published safe harbor regulations that specify
the conditions under which certain kinds of financial arrangements, including
(i) investment interests in public companies, (ii) investment interests in
small entities, (iii) management and personal services contracts, and (iv)
leases of space and equipment, will be protected from criminal prosecution or
civil sanctions under the Anti-Kickback Act if the standards set forth in the
regulation are strictly followed. Additional regulations were proposed on July
21, 1994 to amend portions of the original Safe Harbor Regulations and to
reaffirm and clarify the OIG's original intent under the Safe Harbor
Regulations. However, these regulations are not yet in effect. Although the
Company believes its operations generally qualify for protection under the
applicable safe harbor regulations, these regulations have thus far been
relatively untested in practice, and there can be no assurance that the Company
would prevail in its position. The OIG has stated that failure to satisfy the
conditions of an applicable "safe harbor" does not necessarily indicate that the
arrangement in question violates the Anti-Kickback Act, but means that the
arrangements are not among those that the "safe harbor" regulations protect from
criminal or civil sanctions under that law.
While the Company believes that it is in compliance with the current
requirements of the Anti-Kickback Act under the applicable safe harbor
regulations, these regulations have so far been relatively untested in
practice. Furthermore, no assurances can be given that a Federal or state
agency charged with enforcement of the Anti-Kickback Act and similar laws might
not assert a contrary position or that new Federal or state laws or new
interpretations of existing laws might not adversely affect relationships
established by the Company with healthcare providers, including physicians, or
result in the imposition of penalties on the Company or certain of its centers.
The assertion of a violation, even if successfully defended by the
Company, could have a material adverse effect upon the Company.
Stark Law Prohibition on Physician Referrals
The Federal "Stark Law" as amended in 1993 provides that where a physician
has a "financial relationship" with a provider of "designated health services"
(including, among other activities, the provision of MR and other radiology
services which are services provided by the Company), the physician will be
prohibited from making a referral of Medicaid or Medicare patients to the
healthcare provider, and the provider will be prohibited from billing Medicare
or Medicaid, for the designated health service. In August 1995, regulations
were issued pursuant to the Stark Law as it existed prior to its amendment
in 1993. The preamble to these regulations indicates that the Health
Care Financing Administration ("HCFA") intends to rely on the language and
interpretations in the regulations when reviewing compliance under the Stark
Law, as amended. Submission of a claim that a provider knows, or should know,
is for
12
<PAGE>
services for which payment is prohibited under the amended Stark Law, could
result in refunds of any amounts billed, civil money penalties of not more than
$15,000 for each service billed, and possible exclusion from the Medicare and
Medicaid programs.
The Stark Law provides exceptions from its prohibition for referrals
which include certain types of employment, personal services arrangements and
contractual relationships. The Company continues to review all aspects of its
operations and believes that it complies in all material respects with
applicable provisions of the Stark Law, although because of the broad and
sometimes vague nature of this law and the related regulations, there can be no
assurance that an enforcement action will not be brought against the Company or
that the Company will not be found to be in violation of the Stark Law.
False Claims Act
A number of Federal laws impose civil and criminal liability for knowingly
presenting or causing to be presented a false or fraudulent claim, or knowingly
makes a false statement to get a false claim paid or approved by the
government. Under one such law, the False Claims Act, civil damages may include
an amount that is three times the government's loss plus $5,000 to $10,000 per
claim. Actions to enforce the False Claims Act may be commenced by a private
citizen on behalf of the Federal government, and such private citizens receive
between 15 and 30 percent of the recovery. Efforts have been made to assert
that any claim resulting from a relationship in violation of the Anti-Kickback
Act or the Stark Law is false and fraudulent under the False Claims Act. The
Company carefully monitors its submissions to HCFA and all other claims for
reimbursement to assure that they are not false or fraudulent, and as noted
above, believes that it is not in violation of the Anti-Kickback Act or the
Stark Law.
State Laws
Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting payments for patient referrals and
other types of financial arrangements with healthcare providers, which, while
similar in certain respects to the Federal legislation, vary from state to
state. Some states expressly prohibit referrals by physicians to facilities in
which such physicians have a financial interest. Sanctions for violating these
state restrictions may include loss of licensure and civil and criminal
penalties assessed against either the referral source or the recipient provider.
Certain states also have begun requiring healthcare practitioners to disclose to
patients any financial relationship with other providers, including advising
patients of the availability of alternative providers.
The Company continues to review all aspects of its operations and believes
that it complies in all material respects with applicable provisions of the
Anti-Kickback Act, the Stark Law and applicable state laws governing fraud and
abuse as well as licensing and certification, although because of the broad and
sometimes vague nature of these laws and requirements, there can be no
assurance that an enforceable action will not be brought against the Company or
that the Company will not be found to be in violation of one or more of these
regulatory provisions. Further, there can be no assurance that new laws or
regulations will not be enacted, or existing laws or regulations interpreted or
applied in the future in such a way as to have a material adverse impact on the
Company, or that Federal or state governments will not impose additional
restrictions upon all or a portion of the Company's activities, which might
adversely affect the Company's business.
Regulations Affecting StarMed
StarMed has obtained all necessary licenses to conduct business in the
states where required. Temporary staff are also subject to various occupational
and professional licensing laws that apply to
13
<PAGE>
medical professionals. Many states have temporary staff laws requiring
training, monitoring and regulating of medical professionals.
Because the services of StarMed's temporary staff are paid for directly
by the client hospitals, StarMed is not subject to the reimbursement, billing
and collection procedures required by the existence of government and private
third party payers as is the case with respect to the Company's diagnostic
imaging centers.
Insurance Coverage
- ------------------
The nature of the services provided by StarMed potentially exposes StarMed
to greater risks of liability than are posed by other non-medical personnel
staffing businesses. The Company maintains public and professional liability
insurance in amounts which it deems adequate to cover all potential risk. There
can be no assurance that the amount of such insurance will be adequate to cover
all potential liabilities.
Employees
- ---------
As of December 31, 1996, the Company had approximately 460 full time and 163
part time employees, including two executive officers, 356 administrative
personnel, 54 sales and marketing personnel and 211 technical personnel. These
numbers do not include the healthcare personnel contracted by StarMed for its
Per Diem and Travel Nursing divisions. The Company is not a party to any
collective bargaining agreements and considers its relationship with its
employees to be good.
Insurance
- ---------
The Company carries workmen's compensation insurance, comprehensive and
general liability coverage, fire, allied perils coverage and professional
liability insurance in amounts deemed adequate by management. There is no
assurance that potential claims will not exceed the coverage amounts, that the
cost of coverage will not substantially increase or require the Company to
insure itself or that certain coverage will not be reduced or become
unavailable.
Item 2 PROPERTIES
- ------ ----------
The Company leases its principal and executive office pursuant to an
eight and a half year lease with a term commencing January 1995 and expiring
August 2003, subject to one five year renewal term. The building also houses
the Company's Hackensack imaging center. The Company also leases a 14,000
square foot storage facility located in Passaic, New Jersey with a lease term of
two years. The Company's imaging centers range in size from approximately 1,500
to 11,400 square feet. Each center consists of a waiting/reception area and one
room per modality, dressing rooms, billing/administration rooms and radiologist
interpreting rooms. Center leases expire between December 1996 and October
2002 and, in certain instances, contain options to renew. StarMed's 21
per diem staffing offices lease approximately 14,000 square feet of office
space in the aggregate under various lease terms expiring through
December 1999.
Item 3 LITIGATION
- ------ ----------
From time to time, the Company encounters litigation in the ordinary course of
its business (see Note 9 to the Consolidated Financial Statements). In 1996, an
individual and his spouse brought an action in the Supreme Court of the State of
New York, King's County against MRA Imaging Associates in Brooklyn, New York, a
wholly owned subsidiary of the Company ("MRA Imaging"), for damages aggregating
$12.5 million. The plaintiff alleges negligent operations, improper supervision
and hiring practices and the failure to operate the premises in a safe manner,
as a result of which the individual suffered physical injury. The Company's
general liability and professional negligence insurance carriers have been
notified, and it has been agreed that the general liability insurance will
pursue the defense of this matter, however such insurers have reserved the right
to claim that the scope of the matter falls outside the Company's coverage. The
parties to this matter are engaged in discovery. The Company's legal counsel
believes that it is more probable than not that the plaintiffs will not recover
the damages sought. The Company has made no provision in its financial
statements for this matter. In the event the plaintiffs prevail, this matter may
have a material adverse effect on the Company's financial condition, results of
operations and cash flow.
14
<PAGE>
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during the last
quarter for the year ended December 31, 1996.
15
<PAGE>
PART II
Item 5 FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ------ -------------------------------------------------------------
Market Information and Stock Price
The Company's common stock had been traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market, under
the symbol MRII, since November 3, 1995, and on the NASDAQ SmallCap Market prior
thereto. The following table sets forth for the periods indicated below the
high and low bid prices per share of the Common Stock as reported by NASDAQ:
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
1995
First Quarter $ 4 $2 7/8
Second Quarter $ 3 3/4 $3 1/8
Third Quarter $ 6 1/2 $3 1/2
Fourth Quarter $ 8 $4 1/2
1996
First Quarter $ 6 3/8 $4 5/8
Second Quarter $10 1/4 $6
Third Quarter $ 9 1/4 $6 1/4
Fourth Quarter $11 3/4 $7
</TABLE>
As of the close of business on March 24, 1997, the last reported sales
price per share of the Company's common stock was $11 1/8.
There were 469 holders of record of the Company's Common Stock at the close
of business on March 24, 1996. Such number does not include persons, who's
shares are held by a bank, brokerage house or clearing company, but does
include such banks, brokerage houses and clearing companies.
No cash dividends have been paid on the Company's common stock since
the organization of the Company and the Company does not anticipate paying
dividends in the foreseeable future. The payment by the Company of cash
dividends is limited by the terms of the agreement related to its Senior Notes.
The Company currently intends to retain earnings for future growth and expansion
opportunities.
The following is a list of securities sold by the Company during the period
covered by this Report on Form 10-K which, pursuant to the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), were not registered under the Securities Act:
On January 9, 1996, the Company issued to MRI-CT, Inc. 194,113 shares of
the Company's Common Stock as partial consideration for the acquisition of four
diagnostic imaging centers.
On April 30, 1996, the Company issued to Access Imaging Centers, Inc.
192,063 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center located in Florida.
On May 1, 1996, the Company issued to Americare Imaging Centers,
Inc. and MRI Associates of Tarpon Springs, Inc. 228,571 shares of the Company's
Common Stock as partial consideration for the acquisition of four diagnostic
imaging centers located in Florida.
16
<PAGE>
On November 25, 1996, the Company issued to Belle Meade MRI Imaging Corp.
and related entities 573,175 shares of the Company's Common Stock as partial
consideration for the acquisition of two diagnostic imaging centers located in
New York.
On December 16, 1996, the Company issued to TME, Inc. 18,868
shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center located in New Jersey.
In addition, on March 1, 1996, the Company issued to a financial advisory
and brokerage firm, five-year warrants to purchase 75,000 shares of the
Company's Common Stock consisting of 37,500 warrants with an exercise price of
$8.00 per share and 37,500 warrants with an exercise price of $12.00 per share,
for financial advisory services rendered to the Company; on May 20, 1996, the
Company issued to 712 Advisory Services, Inc., a financial advisory firm and
affiliate of the Company's Chairman of the Board, five year warrants to purchase
120,000 shares of the Company's Common Stock at an exercise price of $9.00 per
share, for financial advisory services rendered to the Company in connection
with the NMR Acquisition; and on November 1, 1996, the Company issued to a
finacial consultant, five year warrants to purchase 5,000 shares of the
Company's Common Stock at an exercise price of $9.00 per share, for financial
advisory services rendered to the Company. In all cases, the exercise prices of
the warrants referred to above were no less than, and in some cases exceeded,
the fair market value of the Company's Common Stock on the date of grant.
Item 6 SELECTED FINANCIAL DATA
- ------ -----------------------
The following selected consolidated historical financial data of the
Company is derived from the Company's consolidated financial statements for the
periods indicated. The information in the table and the notes thereto
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes thereto, which are included elsewhere in this
report.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------- ------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Net service revenues $93,785 $51,994 $ 45,178 $ 45,242 $41,143
Operating income 14,693 7,507 1,036 287 3,288
Income (loss) from continuing
operations before extraordinary item: 7,254 4,143 ( 1,093) ( 2,055) 610
Income (loss) per share from
continuing operations before
extraordinary items:
Primary $ 0.62 $ 0.53 ($0.15) ($0.32) $ 0.11
Fully diluted $ 0.59 $ 0.53 ($0.15) ($0.32) $ 0.11
Supplemental Data:
- ------------------
Number of consolidating
imaging centers at end of period 39 11 8 8 7
Total procedures at consolidated
imaging centers 209,970 124,302 101,460 86,686 63,246
Total Assets $164,514 $ 44,136 $ 40,372 $ 40,881 $ 33,993
Long term debt and
capital lease obligations
(excluding current portion) $ 21,012 $ 11,157 $ 13,415 $ 19,034 $ 12,765
Convertible Debentures $ 6,988 $ 4,350
</TABLE>
17
<PAGE>
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ --------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
For the year ended December 31, 1996, net service revenues amounted to
$93,785,000 versus $51,994,000 for the year ended December 31, 1995, an increase
of $41,791,000 or 80.4%. The increase in revenues is primarily attributable to
an increase of $ 1,942,000 (representing a 5.9% increase) at centers which were
included in revenues for all of 1996 and 1995; a $5,422,000 increase in revenues
(representing a 175.5% increase) at three imaging centers acquired during 1995;
$21,212,000 of revenues contributed by centers acquired during 1996 and a
$12,925,000 increase (representing an 80.3% increase) in revenues generated by
the staffing segment, primarily due to internal growth and acquisitions.
Operating costs for the year ended December 31, 1996 were $59,064,000 compared
to $31,564,000 for the year ended December 31, 1995, an increase of $27,500,000
or 87.1%. Of this increase, $15,245,000 or 55.43% of the increase is
attributable to costs incurred at imaging centers acquired during 1995 and 1996,
and $5,845,000 or 21.3% of the increase is primarily attributable to staffing
offices opened and acquisitions during the year ended December 31, 1996.
Operating costs for centers opened all of 1996 and 1995 increased $1,564,000 or
9.5%.
Provision for uncollectible accounts receivable increased $1,405,000 or 41.6%
from $3,378,000 from the year ended December 31, 1995 to $4,783,000 for the year
ended December 31, 1996. This increase is primarily due to the significant
increase in imaging revenues which have higher bad debt experience. The 1996
imaging segment provision for uncollectible accounts consists of $4,704,000 or
7.3% of revenue as compared to $3,374,000 or 9.4% of revenue in 1995. The
decrease inthe provision for uncollectible account receivable as a percentage of
imaging revenues is due to acquired companies having a more favorable collection
experience due to differences in payor mix. The Company's staffing report
provision for uncollectibles for both 1996 and 1995 was not material.
Corporate general and administrative expense increased by $2,775,000
or 55.7% from $4,978,000 for the year ended December 31, 1995 to $7,753,000 for
the current year. This increase is primarily due to the expanded business
development activities and the resulting growth experienced during the year in
the imaging and staffing segments, particularly following the NMR Acquisition.
Depreciation and amortization expense was $7,465,000 for the year ended
December 31, 1996 compared to $4,567,000 for the year ended December 31, 1995 or
an increase of $2,898,000 (63.5%). The imaging segment accounted for $2,690,000
or 92.8% of this increase in aggregate depreciation and amortization expense due
primarily to depreciation expense relating to acquired assets and increased
goodwill amortization incurred in connection with such acquisitions. Equipment
depreciation and amortization expense increased from $3,844,000 in 1995 to
$5,463,000 in 1996 while goodwill and other amortization increased from
$1,134,000 to $2,002,000 primarily due to the NMR Acquisition.
Interest expense for the year ended December 31, 1996 was $2,968,000 as
compared to $1,829,000 for the prior year, an increase of $1,139,000 or 62.3%.
This increase is primarily attributable to an increase in interest on
convertible debentures and lines of credit outstanding during 1996 of $646,000
and increases in interest on debt assumed in acquisitions during 1996 totaling
$764,000 offset by decreases in interest expense relating to conversion of
convertible debentures and scheduled reductions in outstanding principal
balances.
18
<PAGE>
Minority interest amounted to $308,000 for the year ended December 31, 1996 as
compared to ($124,000) for the year ended December 31, 1995. The increase of
$432,000 or 348.5% is attributable to increased profitability at the Company's
St. Petersburg, Florida and Yonkers, New York facilities ($383,000) and the
acquisition of the NMR facilities ($49,000).
Income taxes increased $2,503,000 or 152.5 % for the year ended December 31,
1996 from $1,659,000 to $4,162,000. This increase is attributable to the
increased profitability of the Company's existing and acquired businesses during
1996 and due to the Company's effective income tax rate which increased. The
Company's provision for income taxes resulted in effective tax rates of 36.6% in
1996 and 28.6% in 1995, respectively. The 1996 provision was higher than the
statutory rate due primarily to state and local income taxes, net of the Federal
tax effect (6.1%), the impact on non-deductible goodwill (2.3%) and meals and
entertainment, offset by other items amounting to (6.6%). In 1995, the effective
tax rate was lower than the statutory rate primarily to a reduction in the
deferred tax asset valuation allowance (26.2%) offset by other items amounting
to 10.7%.
For the reasons described above, the Company's net income for the year ended
December 31, 1996 increased $ 5,564,000 or 329.2% from $1,690,000 for the period
ended December 31, 1995 to $7,254,000. The year ended December 31, 1995 net
income includes two non-recurring items relating to losses incurred upon the
sale of the Company's maternity apparel subsidiary.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company's net service revenues in 1995 and 1994 were $51,994,000 and
$45,179,000, respectively, representing an increase of $6,815,000, or 15%, in
1995. This increase was primarily due to an increase in the revenues of the
Company's imaging business of $5,253,000. The increase in same center revenues
was $2,272,000. In addition, revenues from the Company's staffing business
increased in 1995 by $1,562,000.
Operating costs, excluding interest expense, depreciation and amortization in
1995 and 1994 were $31,564,000 and $29,307,000, respectively, representing an
increase of $2,257,000, or 8%, in 1995. This increase is primarily due to an
increase in variable costs associated with the increased operating costs at the
Company's existing centers resulting from increased procedures and the
acquisition of three new centers. Additionally, there was increased operating
costs in the Company's staffing business associated with the increased revenues.
Provision for uncollectible accounts receivable in 1995 and 1994 was
$3,378,000 and $2,495,000, respectively, representing an increase of $883,000,
or 35%, in 1995. As a percentage of total revenues, provision for uncollectible
accounts receivable increased to 6.5% in 1995, compared to 5.5% in 1994. The
increase is primarily attributable to a change in estimate for receivables
derived from revenues with a higher risk of bad debts (see Note to the
Consolidated Financial Statements ).
Corporate general and administrative expenses in 1995 and 1994 were $4,978,000
and $4,438,000, representing an increase of $540,000, or 12%, in 1995. This
increase is attributable to an increase in corporate staff associated with the
Company's increased business and acquisitions and new business development
activity during 1995.
Depreciation and amortization, including the amortization of value of venture
contracts, in 1995 and 1994 was $4,567,000 and $4,844,000, respectively,
representing a decrease of $277,000, or 6%, in 1995. The decrease in
depreciation and amortization was primarily due to the write down of intangible
assets in 1994 of $2,176,000 relating to the value of venture contracts
recognized in connection with the acquisition of the Company in September, 1990
and goodwill associated with the Company's purchase of
19
<PAGE>
the Livingston Breast Care Center in July, 1992. The decrease in
depreciation and amortization expense was partially offset by the depreciation
and amortization expense related to the three centers acquired by the Company
during fiscal 1995.
The provision for minority interest in losses of joint venture of $532,000 in
1994 relates to the Company's Brooklyn facility. Executive severance of $328,000
in 1994 is reflective of the separation agreements entered into with two former
senior executives of the Company during that year. write-down of medical
diagnostic equipment of $40,000 arose from an adjustment to the Clifton center's
ultrasound unit to its fair market value in February, 1994. The gain on the
disposal of $17,500 resulted from the sale of a MR unit at the Company's Naples
facility in February, 1994 for $100,000. There were no such charges or gains in
1995.
As a result of the foregoing, operating income in 1995 and 1994 was $7,507,000
and $1,036,000, respectively, representing an increase of $6,471,000 in 1995.
Interest expense in 1995 and 1994 was $1,829,000 and $1,693,000, respectively,
representing an increase of $136,000, or 8%, in 1995. The increase in interest
expense is primarily due to the interest on the convertible debentures (see Note
to the Consolidated Financial Statements) which accounted for
$279,000 of interest partially offset by a reduction of notes payable and
renegotiation of some capital leases in the fourth quarter of 1994.
Minority interest in losses of joint ventures and limited partnerships in 1995
and 1994 was $124,000 and $46,000, respectively, an increase of $78,000. This
increase was due primarily to the Company's Brooklyn and St. Petersburg
facilities operating at a combined loss in 1994 of $543,000 compared with net
operating income of $268,000 in 1995 before adjustment for minority partner
capital contributions. The minority interest in losses of joint ventures and
limited partnerships in 1994 was reduced as a result of the Company taking a
charge for the majority of operating losses at the Brooklyn facility in the
amount of $532,000.
The provision for income taxes in 1995 and 1994 was $1,659,000 and $481,000,
respectively, representing an increase of $1,178,000 in 1995. The 1995
provision for income taxes represents federal and state income taxes resulting
from separate company state tax filing requirements is net of reductions in the
deferred tax asset valuation allowance of $1,508,000, in recognition of
profitable operations. The increase is attributable to the increase in current
taxable income during 1995. StarMed operated as a partnership prior to the
combination with the Company in August, 1994; therefore, StarMed had not
recorded any income tax expense or benefits. The pro forma income tax expense
(benefit), assuming StarMed was taxed as a C Corporation, was $660,000 for 1994,
excluding the $297,000 income tax effect for the extraordinary item in 1994.
The extraordinary item, gain on debt restructuring of $762,000 relates to the
restructuring of a note payable in January, 1994.
Loss from discontinued operations of $2,453,000 in 1995 was $790,000 higher
than losses of $1,663,000. The increase is due primarily to approximately
$1,376,000 of losses incurred upon the sale of Maternity partially offset by
reduced operating losses in 1995.
As a result of the foregoing, net income/(loss) in 1995 and 1994 was
$1,690,000 and ($1,994,000), respectively, representing an increase of
$3,684,000 in net income in 1995.
20
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's cash balances at December 31, 1996 and 1995 were $15,346,000
and $3,935,000, respectively, representing an increase of $11,411,000 or 290%,
in 1996. The Company's working capital position at December 31, 1996 was
$42,776,000 compared to a December 31, 1995 balance of $10,738,000, an increase
of $32,038,000 or 298% during 1996. The increase in working capital resulted
primarily from (i) the net proceeds of $25,164,000 from the Company's common
stock offering, (ii) the net proceeds of $6,533,000 from the issuance of
convertible subordinated debentures and (iii) the merger with NMR offset by cash
paid as consideration for 1996 acquisitions and the assumption of certain
liabilities of acquired companies. Delays in reimbursements of claims from third
party payers, including Medicare, Medicaid, Managed Care/HMO providers and
certain commercial payers, negatively affect the Company's liquidity.
Net cash provided by operating activities for the years ended 1996 and
1995 was $1,150,000 and $2,335,000, respectively, representing a decrease of
$885,000 in 1996. The decrease was primarily due to a large increase in
accounts receivable and certain other assets which relate primarily to the
Company's expansion activities offset by increases in net income, non-cash
charges and other liabilities.
In 1996, net cash used in investing activities totaled $16,703,000 which
includes (i) $6,412,000 expended for the purchase of diagnostic imaging centers,
offset by $2,157,000 of cash acquired in the NMR Acquisition, (ii) $2,314,000
for the purchase of per diem staffing businesses and (iii) $184,000 for the
purchase of limited partnership interests. During 1996, the Company purchased
$6,137,000 of investments, $4,500,000 of these investments were subsequently set
aside (restricted) pursuant to the terms of a letter of credit issued in
connection with an acquisition. An additional $600,000 in cash was set aside
(restricted) pursuant to a letter of credit issued in conjunction with a
consulting agreement to which the Company is a party. The Company expended
$1,070,000 in 1996 for medical diagnostic and office equipment.
Financing activities provided $27,110,000 in cash during the year ended
December 31, 1996, which consisted of net proceeds of $25,164,000 received
through a public offering of its Common Stock, $6,533,000, net proceeds from the
issuance of subordinated debentures in May 1996, $1,229,000 proceeds from
borrrowings during the year (used to purchase equipment for the imaging
centers), $2,022,000 realized from the exercise of stock options and warrants,
offset by $7,773,000 utilized for the repayment of debt and capital lease
obligations and $64,000 used to purchase shares of the Company's Common Stock.
The Company currently has a capital lease equipment line of credit of
$7,000,000 of which none was used at December 31, 1996. Medical equipment
purchases, capital improvements, acquisitions and new center development have
been funded primarily through third party capital lease and debt obligations and
internally generated cash flow. The debt is generally collaterized by the
equipment, and usually other assets, of the center. In addition, the Company has
three $4,000,000 in collaterized working capital lines of credit which are
unused at December 31, 1996. The Company has agreed that in order to draw on
such lines it must pledge adequate collateral.
As of December 31, 1996, $6,988,000 aggregate principal amount of convertible
subordinated debentures were outstanding. Of such amount, $1,370,000 aggregate
principal amount of such convertible subordinated debentures bear interest at
11%, are due 2000 and are convertible into common stock at anytime by the
debenture holder at $4.00 per share. The debentures automatically convert into
common stock at $4.00 per share when, after June 1, 1997, the market price of
the stock exceeds $6.00 per share for any 15 day period. Additionally,
$4,800,000 aggregate principal amount of the outstanding convertible debentures
bear interest at 10.5%. Subsequent to year end, the Company called for a
redemption of such debentures at the conversion price of $6.00 per share on or
before March 27, 1997. Also, $818,089 aggregate principal amount of the
outstanding convertible debentures bear interest at 8.0%. Subsequent to year
end, the Company called for a redemption of such debentures at the conversion
price of $6.54 per share on or before March 27, 1997.
21
<PAGE>
Subsequent to year end, in February 1997, the Company raised $52,000,000
through the private placement of senior uncollateralized notes which bear
interest at 7.77% and require sinking fund payments commencing in February 2001
with a final maturity in 2005. The proceeds of the senior notes were used to
retire approximately $14,230,000 of existing debt. The Company expects to
utilize the balance of the proceeds to fund future acquisitions.
The Company believes that funds available from these capital raising
activities together with the existing cash and cash equivalents, short-term
investments and cash generated from operating activities will be sufficient to
meet the needs of its current operations, any acquisitions of additional limited
partnership interests in the Company's centers, anticipated capital
expenditures and scheduled debt repayments.
Management believes and continues to believe that there are and will continue
to be opportunities to acquire additional diagnostic imaging centers, as well as
companies which own multiple centers. Management reviews proposals to acquire
additional centers and evaluates these opportunities on the basis of the price
at which it believes the centers can be acquired, relevant demographic
characteristics, competitive centers, physician referral patterns, location and
other factors. The Company is committed to a substantial acquisition strategy
based upon its assessment of strategic markets and opportunities resulting in
the acquisition of twenty six imaging centers, including the acquisition of ATI
Centers, Inc. in seven separate transactions subsequent to December 31, 1996.
Management intends to pursue the acquisition of additional centers if its
analysis of these factors indicate the Company would receive a favorable rate of
return from investing in these centers. Any centers that are acquired can be
expected to involve the payment of the purchase price in either cash, notes or
shares of common stock or a combination thereof. No assurances can be given that
additional centers will be acquired or as to the terms thereof. In the event
that the Company engages in the acquisition of additional centers, it may be
required to raise additional long-term capital through the issuance of debt or
equity securities. No assurance can be given that such capital will be available
on terms acceptable to the Company. The unavailability of capital for this
purpose would adversely affect the Company's ability to acquire additional
centers.
Other
- -----
The Company believes that its business is generally unaffected by seasonality.
However, the Company usually experiences lower revenues during the third quarter
of the fiscal year due to reduced activity during the summer months.
The impact of inflation and changing prices on the Company has been primarily
limited to salary, medical and film supplies and rent increases and has not been
material to date to the Company's operations. Management is aware of
inflationary expectations and growing health care costs, and believes that the
Company may not be able to raise the prices for its diagnostic imaging
procedures by an amount sufficient to offset cost inflation. The Company has
responded to these concerns in the past by increasing the volume of its
business. In addition, current discussions within the Federal government
regarding
22
<PAGE>
national health care reform are emphasizing containment of health care costs
as well as expansion of the number of eligible parties. The implementation of
this reform could have a material effect on the financial results of the
Company.
In the first quarter of 1996, the Company adopted Financial
Accounting Standards ("FAS") 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement No. 121"),
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. No adjustments were required
pursuant to adoption of Statement No. 121 by the Company.
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", was issued which established standards for computing
and presenting earnings per share. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. The Company is currently evaluating the effect of this standard on
earnings per share.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation"
("Statement 123") which encourages but does not require companies to recognize
stock awards based on their fair value at the date of grant. The Company
currently follows, and expects to continue to follow, the provision of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Although the Company is
permitted to continue to follow the provisions of APB 25 under Statement 123,
certain pro forma disclosure has been made in the notes as if the Company
had accounted for its stock options under the Statement 123 fair value method.
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company, from
time to time, makes forward-looking public statements concerning its expected
future operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting the Company's best judgement
based upon current information and involve a number of risks and uncertainties,
and there can be no assurance that other factors will not affect the accuracy of
such forward-looking statements. While it is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by the Company include, but are not limited to, risks associated
with the acquisition of existing imaging centers, management of growth,
government regulation, limitations and delays in reimbursement, the Company's
ability to obtain and retain favorable arrangements with third party payers, as
well as operating risks, general conditions in the economy and capital markets,
and other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
Registrant's response to this item is incorporated herein by reference to the
consolidated financial statements and consolidated financial statement schedules
and the report thereon of independent accountants, listed in Item 14(a)1 and (2)
and appearing after the signature page to this Annual Report on Form 10-K.
23
<PAGE>
Item 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------ ---------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
On February 5, 1997, the Company dismissed Ernst & Young LLP and engaged
Coopers & Lybrand L.L.P. as its independent accountant to audit the Company's
consolidated financial statements. The decision to change the Company's
independent accountant was approved by the Board of Directors of the Company at
the recommendation of the Company's audit committee.
In neither of the past two fiscal years of the Company have the reports of
Ernst & Young LLP on the consolidated financial statements of the Company
contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope or accounting principles. In neither of
the past two fiscal years of the Company nor in the subsequent interim period
preceding the dismissal of Ernst & Young LLP were there any disagreements with
Ernst & Young, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make a reference thereto in their report.
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS
- ------- --------------------------------
The directors, executive officers and certain key employees of the Company are
as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Gary N. Siegler.................... 35 Chairman of the Board
William D. Farrell................. 34 President, Chief Operating Officer and Director
John P. O'Malley III............... 35 Senior Vice-President-Finance and Chief Financial Officer
Gregory Mikkelsen.................. 50 President and Chief Operating Officer of StarMed
Gerald H. Allen.................... 50 Senior Vice-President-New York and Chicago Operations
Carl Larson........................ 43 Senior Vice-President-New Jersey Operations
Daniel F. Bafia.................... 38 Senior Vice-President-Southeast Operations
Robert L. Farrell.................. 32 Vice-President-Business Development
Michael J. Drumgoole.............. 50 Vice-President-Sales and Marketing
Stephen M. Davis................... 42 Director and Secretary
Gary L. Furhman.................... 35 Director
John H. Josephson.................. 35 Director
Neil H. Koffler.................... 30 Director
</TABLE>
Gary N. Siegler has served as Chairman of the Board of Directors of the
Company since 1990. Mr. Siegler is a co-founder and, since January 1989, has
been President of Siegler, Collery & Co. , a New York-based investment firm
("Siegler Collery"). Mr. Siegler is an executive officer of the general partner
of The SC Fundamental Value Fund, L.P. ("Fundamental Value Fund"), a fund
investing in marketable securities, and an executive officer of SC Fundamental
Value BVI, Inc. ("Fundamental Value BVI"), the investment advisor to an off-
shore fund investing in marketable securities. Mr. Siegler serves as the
Chairman of the Board of Directors of National R.V. Holdings, Inc., a
manufacturer of motorhomes and other recreational vehicles.
24
<PAGE>
William D. Farrell has been a director of the Company since November 1995
and has been the Company's President since September 1996 and served as Co-
President since August 1994 and Chief Operating Officer from April 1994. From
May 1986 to April 1994, Mr. Farrell served in various executive capacities with
the Company. Mr. Farrell is a Certified Public Accountant.
John P. O'Malley III was appointed Senior Vice President-Finance and
Chief Financial Officer in September 1996. Prior thereto, Mr. O'Malley was
Executive Vice President-Finance and Chief Financial Officer of NMR since
December 1992 and was initially employed by NMR in May 1992. From August 1984
to May 1992, Mr. O'Malley was employed by Ernst & Young,LLP, a public
accounting firm, and its predecessors. Mr. O'Malley is a Certified Public
Accountant.
Gregory Mikkelsen joined StarMed as President and Chief Operating Officer in
August 1996. Prior thereto, Mr. Mikkelsen was President and Chief Executive
Officer of Medical Recruiters of America, Inc. Mr. Mikkelsen has held senior
executive positions with Baxter Health Care and the Norrell Corporation.
Gerald H. Allen is Senior Vice President-New York and Chicago Area Operations
of the Company and since April 1995 has also held the positions of Executive
Vice President-Regional Operations and Senior Vice President-Development. Mr.
Allen was also employed by the Company in several executive capacities from 1984
to 1993. From 1993 through 1995, Mr. Allen was the Executive Vice President and
Chief Financial Officer of Prime Capital Corporation, a merchant banking
company.
Carl Larson is Senior Vice President-New Jersey Operations of the Company.
Prior to Mr. Larson's employment by the Company, Mr. Larson managed a 13 site
privately operated radiology practice in New York. Mr. Larson is a licensed
radiological technologist and, in prior positions, spent eight years in
hospital-based radiological administration and five years as a staff member at
the American College of Radiology.
Daniel F. Bafia is Senior Vice President-Southeast Operations of the Company.
Mr. Bafia joined the Company in 1992 and prior thereto had over 10 years
experience developing and managing radiation therapy and diagnostic imaging
centers for public and private companies and hospitals.
Robert L. Farrell is Vice President-Business Development of the Company and
over the past decade has held a number of executive positions with the Company,
including Manager of Corporate Accounting, Controller and Director of National
Operations. Mr. Farrell is the brother of William Farrell.
Michael J. Drumgoole is Vice President-Sales and Marketing of the Company and
has held such position since 1993. Mr. Drumgoole has over 20 years in medical
sales and has held various sales, sales training and sales management positions
within the healthcare industry.
Stephen M. Davis has been a director and Secretary of the Company since 1992
and is a member of the Company's Audit Committee. For more than the past five
years, Mr. Davis has been a partner of the law firm Werbel & Carnelutti, A
Professional Corporation. Mr. Davis is a director of National R.V. Holdings,
Inc.
Gary L. Fuhrman has been a director of the Company since 1992 and is a member
of the Company's Audit Committee. Mr. Fuhrman has been a director and Senior
Vice President of Arnhold and S. Bleichroeder, Inc., an investment banking firm,
since March 1995 and January 1993, respectively, and a vice president of such
firm for more than five years prior therto. Mr. Fuhrman is a director of
National R.V. Holdings, Inc.
John H. Josephson has been a director of the Company since July 1995.
Mr. Josephson is a Vice President and Director of Allen & Company Incorporated,
an investment banking firm, and has been with such firm since 1987. Mr.
Josephson is also a director of Norwood Promotional Products, Inc.
25
<PAGE>
Neil H. Koffler has been a director of the Company since November 1995 and
is a member of the Company's Audit Committee. Mr. Koffler has been employed by
Siegler Collery since 1989. Mr. Koffler is an executive officer of Fundamental
Value Fund and Fundamental Value BVI. Mr. Koffler is a director of National
R.V. Holdings, Inc.
Item 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The information required for this Item will be set forth in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 1996, and which information is incorporated herein by
reference.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
----------
The information required for this Item will be set forth in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 1996, and which information is incorporated herein by
reference.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The information required for this Item will be set forth in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 1996, and which information is incorporated herein by
reference.
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
- ------- ---------------------------------------------------
ON FORM 8-K
-----------
(a) Exhibits and Financial Statements:
1. Financial Statements:
The following consolidated financial statements and consolidated financial
statement schedule of Medical Resources, Inc. and the report thereon of
independent certified public accountants are filed as part of this Annual
Report on Form 10-K and are incorporated by reference in Item 8:
(i) Reports of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 1996 and 1995.
(iii) Consolidated Statements of Operations for the years ended December
31, 1996, 1995 and 1994.
(iv) Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994.
26
<PAGE>
(v) Consolidated Statements of Changes in Stockholder's Equity for the
years ended December 31, 1996, 1995 and 1994.
(vi) Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following consolidated financial statement schedule of Medical
Resources, Inc. and subsidiaries is submitted herewith in response to Item
14(d)2:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted
3. Exhibits
See the accompanying Exhibit Index which precedes the Exhibits filed with
this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On December 6, 1996, the Company filed a current Report on Form 8-K
reporting, under Item 5 hereof, that the Company, through an indirect wholly-
owned subsidiary, consummated the acquisition of the business assets of
two entities, consisting primarily of two diagnostic imaging centers located
in Long Island, New York.
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
<C> <S>
2.1 Agreement and Plan of Merger dated May 20, 1996, by and among NMR of America,
Inc., MRI Sub, Inc. and the Company*
3.1 Company's Certificate of Incorporation, as amended to date.**
3.2 Company's By-Laws, as amended.**
4.1 Common Stock Specimen Certificate.**
4.2 Shareholder Rights Plan of the Company, dated
September 15, 1996.*
10.1 Note Purchase Agreement ($52,000,000 7.77% Senior Notes) between the Company and
the Purchasers listed therein, dated as of February 20, 1997.***
10.2 Form of 1992 Stock Option Plan.**
10.3 1995 Stock Option Plan of the Company.****
10.4 1996 Stock Option Plan of the Company.
10.5 1996 Stock Option Plan B of the Company.
10.6 Employment Agreement, dated September 30, 1994 between Medical Resources, Inc. and
William D. Farrell.****
10.7 Amendment, dated August 1, 1995, to Employment Agreement between Medical
Resources, Inc. and William D. Farrell.****
10.8 Amended and restated Employment Agreement, dated January 1, 1997 between the
Company and William D. Farrell.
10.9 Non-Competition and Consulting Agreement, dated May 20, 1996, between the Company
and John P. O'Malley III.*****
11 Computation of Earnings per Share
16 Letter re: Change in Certifying Accountants.******
21.1 List of Subsidiaries.
27.1 Financial Data Schedule
99.1 Important Factors Regarding Forward-Looking Statements.
* Incorporated herein by reference from the Company's Current Report on Form 8-K dated,
September 13, 1996
** Incorporated herein by reference from the Company's Registration Statement on Form S-1
(Registration No. 33-48848).
*** Incorporated herein by reference from the Company's Current Report on Form 8-K dated,
</TABLE>
28
<PAGE>
<TABLE>
<C> <S>
March 4, 1997.
**** Incorporated herein by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
***** Incorporated herein by reference from the Company's Registration Statement on Form S-4
(Registration No. 333-09155).
****** Incorporated herein by reference from the Company's Current Report on Form 8-K dated,
February 5, 1997.
</TABLE>
29
<PAGE>
SIGNATURES
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.
MEDICAL RESOURCES, INC.
BY: /s/ William D. Farrell
----------------------
William D. Farrell
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on March 31, 1997.
Signature Capacity in
--------- Which Signed
------------
/s/ Gary N. Siegler Chairman of the
- ------------------- Board of Directors
Gary N. Siegler
/s/ William D. Farrell President and
- ---------------------- Chief Operating
William D. Farrell Officer (Principal
Executive Officer) and Director
/s/ John P. O'Malley, III Senior Vice-President- Finance and
- ------------------------- Chief Financial Officer (Principal
John P. O'Malley, III Accounting Officer)
/s/ Stephen M. Davis Director
- --------------------
Stephen M. Davis
/s/ Gary L. Fuhrman Director
- -------------------
Gary L. Fuhrman
/s/ John H. Josephson Director
- ---------------------
John H. Josephson
/s/ Neil H. Koffler Director
- -------------------
Neil H. Koffler
30
<PAGE>
To the Board of Directors and Stockholders of Medical Resources, Inc.
We have audited the accompanying consolidated balance sheet of Medical
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and the
related consolidated statement of operations, stockholders' equity, and cash
flows and the financial statement schedule listed in the index at Item 14(a) for
the year ended December 31, 1996. These financial statements and the schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Medical Resources, Inc. and Subsidiaries at December 31, 1996 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
March 28, 1997
31
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of Medical Resources, Inc.
We have audited the acompanying consolidated balance sheet of Medical Resources,
Inc. (the "Company") as of December 31, 1995 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
two years then ended. Our audits also included the financial statement schedule
for 1995 listed in the Index at Item 14(a). These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Maternity Resources, Inc. and its two predecessor partnerships, a wholly-owned
subsidiary, which statements reflect a loss from operations of discontinued
business of $1,633,000 in 1994. Those statements were audited by other auditors
whose reports have been furnished to us, and in our opinion, insofar as it
relates to the data included for Maternity Resources, Inc. and its two
predecessor partnerships, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 signifcant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Medical Resources,
Inc., at December 31, 1995, and the consolidated results of its operations and
its cash flows for the two years then ended in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
February 29, 1996
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Maternity
Retail Partners, L.P.:
We have audited the accompanying consolidated balance sheet of Maternity Retail
Partners, L.P. as of January 29, 1995 and the related consolidated statements of
operations, changes in partners' capital (deficit) and cash flows for the two
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provides a reasonable basis for our
opinion.
As discussed in Note 1, on February 24, 1995, the partners of the Partnership
sold their partnership interests to an affiliate of the Partnership. On November
14, 1995 the affiliate sold the Partnership to an unaffiliated third party. On
November 22, 1995 the Partnership filed a Voluntary Chapter 11 Bankruptcy
Petition in Federal Court and is currently in liquidation.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Maternity Retail Partners, L.P. as of January 29, 1995 and the
results of its operations and its cash flows for the two years then ended
in conformity with generally accepted accounting principles.
33
<PAGE>
Page 2
The accompanying financial statements for January 29, 1995 have been prepared
assuming that the Partnership would continue as a going concern. The financial
statements do not include any adjustments that might result from the
liquidation of the Partnership.
As discussed in Note 2, effective January 31, 1994, the Partnership changed its
method of accounting for lease acquisition costs.
/s/ Kempisty & Company
Certified Public Accountants, P.C.
New York, New York
February 9, 1996
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Kik Kin, L.P.
New York, New York
We have audited the accompanying consolidated balance sheets of Kik Kin L.P. as
of December 31, and January 1, 1994 and the related statements of operations,
changes in partners' capital and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kik Kin, L.P. as
of December 31 and January 1, 1994 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
February 21, 1995
/s/ Dixon, Odom & Co., LLP
35
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1995
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $15,346,254 $ 3,934,677
Short-term investments 1,662,600
Restricted short-term investments 4,500,000
Accounts receivable, net 39,878,380 13,837,637
Other receivables 2,290,825 477,062
Prepaid expenses 3,715,092 1,074,459
Deferred tax assets, net 3,354,000 1,871,397
------------- ------------
Total current assets 70,747,151 21,195,232
Medical diagnostic and office equipment, net 24,397,077 11,530,159
Goodwill, net 62,638,656 9,122,663
Other assets 3,170,684 1,497,207
Deferred tax assets, net 2,351,089 533,301
Restricted cash 1,045,000
Value of venture contracts 164,155 257,261
------------- ------------
Total assets $164,513,812 $44,135,823
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes and mortgage payable $ 6,728,668 $ 957,884
Current portion of obligations under capital leases 5,991,626 3,244,652
Accounts payable and accrued expenses 13,070,370 4,602,926
Other current liabilities 116,847 1,405,875
Income taxes payable 2,063,860 245,899
------------- ------------
Total current liabilities 27,971,371 10,457,236
Notes and mortgage payable 12,637,926 4,448,974
Obligations under capital leases 8,373,681 6,707,650
Convertible debentures 6,988,089 4,350,000
Other long-term liabilities 2,158,771 1,205,627
------------- ------------
Total liabilities 58,129,838 27,169,487
------------- ------------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized 18,593,900 issued and 18,326,400
outstanding at December 31, 1996 and 7,697,500
issued and 7,442,500 outstanding at
December 31, 1995 185,939 76,975
Common stock to be issued; 600,000 shares of
common stock 1,721,250 1,721,250
Additional paid-in capital 102,927,874 20,834,922
Unrealized appreciation of investments 25,889
Retained earnings/(deficit) 2,955,530 (4,298,678)
Less 267,500 and 255,000 common shares in treasury,
at cost at December 31, 1996 and 1995 (1,432,508) (1,368,133)
------------- ------------
Total stockholders' equity 106,383,974 16,966,336
------------- ------------
Total liabilities and stockholders' equity $164,513,812 $44,135,823
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Net service revenues $ 93,785,117 $ 51,993,758 $ 45,178,945
-------------- -------------- --------------
Operating costs,
excluding interest, depreciation and amortization 59,064,156 31,563,796 29,307,450
Provision for uncollectible accounts receivable 4,783,306 3,377,862 2,495,413
Corporate general and administrative 7,779,385 4,978,045 4,438,348
Depreciation and amortization 7,465,475 4,567,144 4,844,265
Write-down of value contracts and intangible assets 2,176,118
Provision for minority interest in losses of joint venture 531,543
Executive severance 327,679
Write-down of medical diagnostic equipment 40,000
Gain on disposal of medical diagnostic equipment (17,500)
-------------- -------------- --------------
Operating income 14,692,795 7,506,911 1,035,629
Interest expense 2,968,206 1,829,017 1,692,931
-------------- -------------- --------------
Income (loss) from continuing operations before minority
interest and income taxes and extraordinary items 11,724,589 5,677,894 (657,302)
Minority interest 308,381 (124,085) (46,134)
-------------- -------------- --------------
Income (loss) from continuing operations before
income taxes and extraordinary items 11,416,208 5,801,979 (611,168)
Income taxes 4,162,000 1,659,111 481,436
-------------- -------------- --------------
Income (loss) from continuing operations
before extraordinary items 7,254,208 4,142,868 (1,092,604)
-------------- -------------- --------------
Discontinued operations, net of tax:
Loss from operations of discontinued operations (1,076,644) (1,663,426)
Loss on sale of discontinued business (1,376,000)
-------------- -------------- --------------
Loss from discontinued operations 7,254,208 (2,452,644) (1,663,426)
Income (loss) before extraordinary item 1,690,224 (2,756,030)
Extraordinary item:
Debt extinguishment 761,683
-------------- -------------- --------------
Net income (loss) $ 7,254,208 $ 1,690,224 $ (1,994,347)
============== ============== ==============
Income (loss) per common share:
Primary income (loss) per share:
Income (loss) from continuing operations
before extraordinary item $ 0.62 $ 0.53 $ (0.15)
Discontinued operations (0.31) (0.23)
Extraordinary item 0.10
-------------- -------------- --------------
Net income (loss) per share $ 0.62 $ 0.22 $ (0.28)
============== ============== ==============
Weighted average number of shares 11,670,000 7,785,000 7,097,500
============== ============== ==============
Fully diluted income (loss) per share:
Income (loss) from continuing operations
before extraordinary item $ 0.59 $ 0.53 $ (0.15)
Discontinued operations (0.31) (0.23)
Extraordinary item 0.10
-------------- -------------- --------------
Net income (loss) per share $ 0.59 $ 0.22 $ (0.23)
============== ============== ==============
Weighted average number of shares 12,903,000 7,785,000 7,097,500
============== ============== ==============
Unaudited pro forma data:
Income (loss from continuing operations before income taxes and
extraordinary items ($611,168)
Income taxes 660,061
----------
Income (loss) from continuing operations before extraordinary items (1,271,229)
Discontinued operations, net of taxes (1,014,690)
----------
Income (loss) before extraordinary items (2,285,919)
Extraordinary items, net of taxes 464,627
----------
Net income (loss) ($1,821,292)
==========
Pro forma earnings (loss) per common share:
Income (loss) from continuing operations before extraordinary items ($0.18)
Discontinued operations (0.14)
Extraordinary items 0.07
----------
Net income (loss) ($0.25)
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
---------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $7,254,208 $1,690,224 $(1,994,347)
---------------- -------------- ---------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Loss on sale of discontinued business 1,376,000
Deferred income tax provision (841,000) (2,160,698) (244,000)
Extraordinary gain on debt extinguishment (761,683)
Depreciation and amortization 7,465,475 4,567,144 4,844,265
Provision for uncollectible accounts receivable 4,783,306 3,377,862 2,495,413
Write-down of medical diagnostic equipment 40,000
Write-down of value of venture contracts and
intangible assets 2,176,118
Gain on disposal of medical equipment (3,933) (17,500)
Equity in earnings of joint venture 5,120
Minority interest in losses of joint venture and limited
partnerships, net of distributions 98,475 122,114 (46,134)
Provision for minority interest in losses of joint venture 531,543
Changes in operating assets and liabilities:
Accounts receivable (14,386,434) (6,308,829) (2,607,927)
Due from joint ventures and limited partnerships 27,426 18,113
Other receivables (1,813,763) (170,755) (698,991)
Prepaid expenses (1,501,981) (613,913) (20,445)
Other assets (1,494,826) (27,117) 376,317
Accounts payable and accrued expenses 2,081,400 3,818 (115,512)
Other current liabilities (1,509,758) 567,760 268,195
Income taxes payable 2,185,961 (322,730) 568,629
Other long-term liabilities (867,575) 206,342 (27,771)
---------------- -------------- ---------------
Total adjustments (5,804,653) 644,424 6,783,750
---------------- -------------- ---------------
Net cash provided by operating activities 1,449,555 2,334,648 4,789,403
---------------- -------------- ---------------
Cash flows from investing activities:
(Purchase) sale of short term investments 599,736 (599,736)
Proceeds from sale of equipment 12,600
Change in net assets of discontinued business 1,396,250 1,663,426
Purchase of PCC, Inc. (1,763,832)
Purchase of NurseCare Plus (1,263,991)
Purchase of MRI-CT, Inc. (553,245)
Purchase of Centereach Resources, Inc. (3,100,000)
Purchase of Americare Imaging Centers, Inc. (1,500,000)
Purchase of Access Imaging Center, Inc. (1,300,000)
Purchase of WeCare - Allied Health Care, Inc. (1,049,618)
Purchase of NMR of America, Inc., net of cash acquired 2,157,379
Purchase of Newark center (215,675)
Purchase of Long Island centers (1,900,000)
Purchase of limited partnership interests (184,000)
Purchase of short-term investments (1,636,711)
Purchase of restricted short-term investments (4,500,000)
Restricted cash (600,000)
Proceeds from sale of medical equipment 100,000
Purchase of medical diagnostic and office equipment (1,069,870) (877,018) (563,074)
---------------- -------------- ---------------
Net cash (used in) provided by investing activities (16,703,131) (644,864) 600,616
---------------- -------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
---------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of stock 25,944,000
Stock issuance cost (779,800)
Principal payments under capital lease obligations (4,805,393) (3,043,061) (3,466,647)
Principal payments on notes payable (2,967,903) (1,118,859) (1,006,722)
Capital distributions (41,886)
Proceeds from borrowings 1,229,096
Proceeds from convertible debentures 6,532,965 4,102,500
Purchase of treasury stock (64,375) (1,368,133)
Purchase of Maternity preferred stock (268,674)
Proceeds from exercises of options 2,021,563
---------------- -------------- ---------------
Net cash provided by (used in) financing activities 27,110,153 (1,696,227) (4,515,255)
---------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 11,856,577 (6,443) 874,764
Cash and cash equivalents at beginning of year 3,934,677 3,941,120 3,066,356
Reclassification of prior year restricted cash (445,000)
---------------- -------------- ---------------
Cash and cash equivalents at end of year $15,346,254 $3,934,677 $3,941,120
=============== ============= ==============
Cash paid during the year:
Income taxes $ 3,440,299 $1,982,000 $ 159,000
Interest $ 2,638,545 $1,894,000 $ 1,695,000
Supplemental Schedule of Non-cash Activities:
Capital lease obligation incurred for the
use of equipment $ 2,469,100 $1,159,000 $ 892,000
Capital lease obligations assumed in
connection with acquisitions $ 6,749,298
Notes payable obligations assumed in
connection with acquisitions $13,850,341
Notes payable issued in connection
with acquisitions $ 1,848,202
Conversion of subordinated
debentures to common stock $ 5,735,000
Reclassification of debt to equity $1,022,000 $ 469,000
Refinancing of assets under capital
lease $1,079,000
Purchase of minority interest in limited
partnership for common stock 45,000
Issuances of common stock
in connection with acquisitions $48,325,000 $3,443,000
Issuance of Warrants in connection with acquisitions 974,879
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
December 31,
<TABLE>
<CAPTION>
Common Additional Retained Treasury
Common Stock to Preferred Paid-In Earnings Shares
Total Stock Be Issued Stock Capital (Deficit) at Cost
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 12,939,234 $ 70,975 $ 25 $ 17,390,888 $(4,522,654)
Distributions (41,886) (41,886)
Capital contributions including debt
conversions of $469,249 969,249 969,249
Net loss (1,994,347) (1,994,347)
-----------------------------------------------------------------------------------
Balance at December 31, 1994 11,872,250 70,975 25 18,360,137 (6,558,887)
Maternity debt forgiveness treated as
a capital contribution 1,022,184 1,022,184
Maternity short period
(1/1/95-1/31/95) 569,985 569,985
Redemption by Maternity
of its preferred stock (268,650) (268,650)
Purchase of Ft. Myers centers in
exchange for 1,200,000 shares of
common stock 3,448,500 6,000 1,721,250 1,721,250
Preferred stock payout (24) (25) 1
Purchase of treasury shares (1,368,133) (1,368,133)
Net income 1,690,224 1,690,224 -
-----------------------------------------------------------------------------------
Balance at December 31, 1995 16,966,336 76,975 1,721,250 20,834,922 (4,298,678) (1,368,133)
Purchase of New York centers in
exchange for 194,113 shares of
common stock 913,750 1,941 911,809
Purchase of Tampa centers in
exchange for 228,571 shares of
common stock 1,275,000 2,286 1,272,714
Purchase of Clearwater center in
exchange for 192,063 shares of
common stock 1,445,000 1,921 1,443,079
Purchase of NMR of America, Inc.
centers in exchange for 4,456,500
shares of common stock 39,604,820 44,565 39,560,255
Warrants issued in connection with
NMR Acquisition 974,879 974,879
Purchase of Long Island centers in
exchange for 573,175 shares of
common stock 4,500,000 5,732 4,494,268
Purchase of Newark center in
exchange for 18,868 shares of
unregistered common stock 200,000 189 199,811
Net proceeds from public offering of
offering of 3,680,000 shares of
common stock 25,944,000 36,800 25,907,200
Public offering issuance costs (779,800) (779,800)
Conversion of subordinated
debentures into common stock 5,735,000 11,899 5,723,101
Exercise of stock options 2,021,563 3,631 2,017,932
Tax benefit from exercise of
stock options $367,704 $367,704
Unrealized appreciation of investment 25,889
Purchase of treasury shares (64,375) (64,375)
Net income 7,254,208 7,254,208
-----------------------------------------------------------------------------------
Balance at December 31, 1996 $106,383,974 $185,939 $1,721,250 $ - $102,927,874 $ 2,955,530 $(1,432,508)
===================================================================================
<CAPTION>
Unrealized
Appreciation of
Investments
---------------
<S> <C>
Balance at December 31, 1993
Distributions
Capital contributions including debt
conversions of $469,249
Net loss
---------------
Balance at December 31, 1994
Maternity debt forgiveness treated as
a capital contribution
Maternity short period
(1/1/95-1/31/95)
Redemption by Maternity
of its preferred stock
Purchase of Ft. Myers centers in
exchange for 1,200,000 shares of
common stock
Preferred stock payout
Purchase of treasury shares
Net income
---------------
Balance at December 31, 1995
Purchase of New York centers in
exchange for 194,113 shares of
common stock
Purchase of Tampa centers in
exchange for 228,571 shares of
common stock
Purchase of Clearwater center in
exchange for 192,063 shares of
common stock
Purchase of NMR of America, Inc.
centers in exchange for 4,456,500
shares of common stock
Purchase of Long Island centers in
exchange for 573,175 shares of
common stock
Purchase of Newark center in
exchange for 18,868 shares of
unregistered common stock
Net proceeds from public offering of
offering of 3,680,000 shares of
common stock
Public offering issuance costs
Conversion into common stock
debentures into common stock
Exercise of stock options
Tax benefit from exercise of stock
options
Unrealized appreciation of investment 25,889
Purchase of treasury shares
Net income
---------------
Balance at December 31, 1996 $25,889
===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1. The Company and Its Significant Accounting Policies
The Company - Medical Resources, Inc., (herein referred to as "MRI" and
- -----------
collectively with its subsidiaries, affiliated partnerships and joint ventures,
referred to herein as the "Company"), is engaged in two segments of the
healthcare industry. The Company operates and manages primarily free standing,
outpatient diagnostic imaging centers (herein referred to as "centers"), and
provides diagnostic imaging network management services to managed care
providers. The Company provides services in a second segment of the healthcare
industry through its wholly owned subsidiary, StarMed Staffing, Inc. (herein
referred to as "StarMed"). StarMed provides temporary staffing of registered
nurses and other professional medical personnel to acute and sub-acute care
facilities nationwide.
Consolidation - The accompanying consolidated financial statements include the
- -------------
accounts of MRI, its wholly-owned subsidiaries, majority-owned joint ventures
and limited partnerships in which the Company is a general partner. All material
intercompany balances and transactions have been eliminated. As general partner,
the Company is subject to all the liabilities of a general partner and as of
December 31, 1996, is entitled to share in partnership profits, losses and
distributable cash as follows:
<TABLE>
<CAPTION>
Company Share of
Profits, Losses
and
Partnership Distributions
----------- ----------------
<S> <C>
NMR Associates I (Union, New Jersey) 80%
MR Associates I (Philadelphia, Pennsylvania) 98%
MR Associates of Allentown (Allentown, Pennsylvania) 96%
MR Associates of Morristown (Morristown, New Jersey) 94%
MR Partners of Greenbelt (Seabrook, Maryland) 87%
MR Associates of Chicago (Chicago, Illinois) 87%
Garden State Imaging Partners (Marlton, New Jersey) 91%
Harford County Imaging Partners (Bel Air, Maryland) 63%
Accessible MRI (Chicago, Illinois) 80%
Golf MRI Center (Des Plaines, Illinois) 75%
Diagnostic Imaging Center (Des Plaines, Illinois) 75%
North Bronx Services Group (Yonkers, New York) 65%
South Umberton Asset Mgmt Assoc (St. Petersburg, Florida) 84%
</TABLE>
The Company owns a 100% interest in imaging centers located in Englewood,
Clifton, Newark, West Orange, Jersey City, and Hackensack, New Jersey; Brooklyn
Bronx, Centereach, East Setauket, Garden City and New York, New York;
Chicago, Libertyville, and Oak Lawn, Illinois as well as Cape Coral, Clearwater,
Naples (2), Fort Myers (2), Sarasota, Tampa (2), Tarpon Springs and Titusville,
Florida. The Company is also paid a monthly management fee based on patient cash
collections and/or patient volume under management agreements with certain of
the partnerships.
Accumulated losses, from inception, of the Company's Harford County, Maryland
limited partnership fully offset the capital contributed by its limited
partners. Accordingly, losses incurred in excess of such limited partnership
capital have been charged, in full, to the Company as general partner. Future
profits, if any, in the Harford County
F-6
<PAGE>
1. The Company and Its Significant Accounting Policies (continued)
partnership will be allocated, in full, to the Company as general partner until
such profits equal the Company's excess share of allocable losses. Thereafter,
future profits and losses will be allocated in accordance with the parties
respective ownership interests.
Reclassification - Certain prior year items have been reclassified to conform to
- ----------------
the current year presentation.
Use of Estimates - The preparation of the consolidated 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 in the
consolidated financial statements and accompanying notes. The most significant
estimates relate to contractual and other allowances, income taxes,
contingencies and the useful lives of equipment. In addition, healthcare
industry reforms and reimbursement practices will continue to impact the
Company's operations and the determination of contractual and other allowance
estimates. Actual results could differ from those estimates.
Cash and Cash Equivalents - For financial statement purposes cash equivalents
- -------------------------
include short-term investments with an original maturity of ninety days or less.
Restricted cash consists of amounts held pursuant to the terms of letters of
credit and is classified based upon the expiration of the restriction. The
Company has committed $445,000 of cash as collateral for the letters of credit
which serve as collateral on certain of the Company's leases, with terms
consistent with the remaining terms of the leases. The remaining $600,000 of
restricted cash underlies a letter of credit is held pursuant to the terms of a
consulting agreement to which the Company is a party.
Short-term Investments - The Company adopted Statement of Financial Accounting
- ----------------------
Standards No. 115, ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities". Debt securities for which the Company does not have the
intent or the ability to hold to maturity are classified as available-for-sale.
Securities available for sale are carried at fair value with unrealized gains
and losses, net of tax, reported as a separate component of shareholders'
equity. Any realized gains and losses are determined on the specific
identification method.
At December 31, 1996 the Company's short-term investments, all of which are
classified as available-for-sale as defined by SFAS no. 115, consist of
certificates of deposits and treasury bills with maturities between three and
twelve months.
Restricted short-term investments consist of $4,500,000 of United States
government obligations held pursuant to a letter of credit issued in connection
with one of the Company's acquisitions. The letter of credit served to reserve
consideration for the acquisition in the event that the shares of the Company's
common stock to be issued to the Seller were not registered within 60 days of
the closing of the sale. Subsequent to December 31, 1996, the shares were
registered within the specified timeframe of the agreement, and as such, the
restriction of the investment was removed.
F-7
<PAGE>
1. The Company and Its Significant Accounting Policies (continued)
Investments in Joint Ventures and Limited Partnerships - The minority interests
- ------------------------------------------------------
in the equity of consolidated joint ventures and limited partnerships, which are
not material, are reflected in the accompanying consolidated financial
statements. Investments by the Company in joint ventures and limited
partnerships over which the Company can exercise significant influence but does
not control are accounted for using the equity method.
The Company suspends recognition of its share of joint ventures losses in
entities in which it holds a minority interest when its investment is reduced to
zero. The Company does not provide for additional losses unless, as a partner
or joint venturer, the Company has guaranteed obligations of the joint ventures
or limited partnerships.
Property and Equipment - Property and equipment procured in the normal course of
- ----------------------
business is stated at cost. Property and equipment purchased in connection with
an acquisition is stated at its estimated fair value, generally based on an
appraisal. Property and equipment is being depreciated for financial accounting
purposes using the straight-line method over the shorter of their estimated
useful lives, generally five to seven years, or the term of a capital lease, if
applicable. Leasehold improvements are being amortized over the shorter of the
useful life or the remaining lease term. Upon retirement or other disposition
of these assets, the cost and related accumulated depreciation are removed from
the accounts and the resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized.
Organizational Costs and Capitalized Lease Costs - The Company recorded
- ------------------------------------------------
organization costs and lease costs as part of a purchase price allocation. The
organization costs represent a portion of the costs associated with the original
purchase of the acquired company in 1990. The lease costs represent the
estimated value of favorable leases in the acquisition of the acquired company.
The unamortized organization costs and capitalized lease costs were
approximately $101,000 and $82,000 at December 31, 1996, respectively and
approximately $128,000 and $104,000 as of December 31, 1995, respectively. Such
costs are amortized on a straight-line basis over a five to ten year period. At
December 31, 1996 accumulated amortization for organization
F-8
<PAGE>
1. The Company and Its Significant Accounting Policies (continued)
costs and capitalized lease costs amounted to approximately $168,000 and
$137,000, respectively.
Value of Venture Contracts - Value of venture contracts, which represent the
- --------------------------
value associated with management contracts with radiologist groups and the
Company's ownership interest in various joint ventures and
limited partnerships, which was recognized in connection with the acquisition of
the Company in September 1990, is being amortized on a straight line basis over
the shorter of the lives of the facilities or the terms of the management
contracts, as appropriate, generally from five to ten years. Accumulated
amortization as of December 31, 1996 and 1995 was approximately $328,000 and
$231,000 (after the write down discussed below), respectively. Amortization of
value of joint venture contracts was approximately $97,000, $122,000 and
$250,000 in 1996, 1995 and 1994, respectively.
The implementation of the Stark II anti-referral legislation, effective January
1, 1995, restricting physicians from making referrals for services to be
rendered to Medicare and Medicaid patients to facilities in which they have an
ownership interest and the lower than expected level of cash flows generated
from the venture contracts, materially impacted the fair value of the value of
venture contracts. Due to these changes in the regulatory and economic
environment, during the second quarter of 1994, the Company assessed the
recoverability of the value of venture contracts and determined that its current
estimate of the fair value of the assets was significantly less than the current
unamortized cost of the assets. As a result, during the second quarter of 1994,
the Company reduced the carrying amount of its value of venture contracts by
approximately $1,950,000. At December 31, 1996, the remaining unamortized
balance amounted to approximately $164,000 and represents the estimated value
associated with non-compete agreements with certain radiologists and the Company
believes is recoverable through profitable operations of the related imaging
centers.
Goodwill - The excess of the purchase price over the fair market value of net
- --------
assets acquired is being amortized using the straight-line method over periods
ranging from 20 to 25 years. As of December 31, 1996 and 1995, accumulated
amortization amounted to approximately $3,027,000 and $1,530,000, respectively.
Amortization expense of goodwill was approximately $1,497,000, $386,000 nd
$413,000 in 1996, 1995 and 1994, respectively.
The Company periodically reviews goodwill to assess recoverability based upon
expectations of undiscounted cash flows and operating income of each
consolidated entity having a material goodwill balance. An impairment would be
recognized in operating results, based upon the difference between each
consolidated entities' respective undiscounted cash flows and the carrying value
of the related costs in excess of net assets acquired, if a permanent diminution
in value were to occur.
F-9
<PAGE>
1. The Company and Its Significant Accounting Policies (continued)
401(k) Plan - The Company maintains a 401(k) savings plan under which the
- -----------
Company matches one-half of employee contributions up to 4% of qualified
earnings and subject to Internal Revenue Service limitations.
From August 31, 1996 to November 30, 1996, the Company elected to continue the
401(k) plan of NMR of America for employees of this acquired company. Under the
NMR of America plan, the Company matched one-half of employee contributions up
to 6% of qualified earnings and subject to Internal Revenue Service limitations.
On November 30, 1996, the NMR of America 401(k) plan was merged into the
Company's 401(k) plan.
Plan expense, including Company contributions to the NMR of America plan for
1996, amounted to $90,232, $80,000 and $55,000 in 1996, 1995 and 1994,
respectively.
Earnings Per Share - Earnings per share is computed on the basis of the weighted
- ------------------
average number of common shares outstanding and dilutive common stock
equivalents. Common stock equivalents consist of stock options and warrants and
600,000 shares to be issued over a period of 24 months in accordance with Fort
Myers center Asset Purchase Agreement. 525,000 of such shares were issued in the
first quarter of 1997 and the remaining 75,000 shares will be issued in April
1997. The shares issued by the Company in connection with the purchases of
various centers were considered outstanding from the date of acquisition.
The Company's Convertible Subordinated Debentures are not considered common
stock equivalents until shares are issued and become outstanding upon conversion
and, as such, are not included in the calculation of primary earnings per share.
For purposes of fully diluted earnings per share, the calculation assumes the
conversion of the Company's convertible subordinated debentures for the period
they were outstanding.
The number of common shares used to compute primary and fully diluted net income
per share are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Primary 11,670,000 7,785,000 7,097,500
Fully Diluted 12,903,000 7,785,000 7,097,500
</TABLE>
New Accounting Standards - Statement of Financial Accounting Standards No. 121
- ------------------------
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amount. SFAS 121 also addresses the accounting
for long-lived assets to be disposed of. The Company adopted SFAS 121 in the
first quarter of 1996. No adjustments were required.
In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share", was issued which establishes standards for
F-10
<PAGE>
1. The Company and Its Significant Accounting Policies (continued)
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company is currently evaluating the impact of
implementing this standard on earnings per share.
Revenue Recognition - For the Company's centers and those centers that
- -------------------
the Company acquired through its acquisition (the "NMR Acquisition") of NMR of
America, Inc. ("NMR")(see Note 14) which were previously acquired by NMR (as
opposed to developed, see next paragraph), revenues are recognized on an accrual
basis as earned and consist of patient service revenues adjusted for contractual
adjustments (net patient service revenue) allocated to the Company under the
terms of management agreements. This revenue is derived from charges for patient
services rendered in diagnostic imaging centers under the terms of certain
payment arrangements with various third party payors.
For centers which NMR developed, agreements have been entered into with
physicians engaging in business as professional associations ("Physicians")
pursuant to which the Company maintains and operates imaging systems in offices
operated by the Physicians. The agreements have terms of up to six years and are
renewable at the option of the Company. Under the agreements, Physicians have
agreed to be obligated to contract for radiological services at the centers and
to sublease each facility. The Company is obligated to make necessary leasehold
improvements, provide furniture and fixtures and perform certain administrative
functions relating to the provision of technical aspects of the centers
operations for which Physicians pays a quarterly fee composed of a fixed sum
based on the cost of the respective imaging system installed, including the
related financing costs, a charge per invoice processed and a charge based upon
system usage for each NMR-installed imaging system in operation. These fees, net
of a contractual allowance, based upon Physicians ability to pay, after
Physicians have fulfilled their obligations under facility subleases and
radiological service contracts as set forth above, constitute the Company's
revenue, net for sites developed by NMR.
Certain revenues are subject to audit and retroactive adjustment by third party
payers. The Company is aware of no pending audits or proposed adjustments and
no provisions for estimated retroactive adjustments have been provided.
The Company also recognizes revenue from temporary nurse staffing. Revenues are
recognized on an accrual basis as earned.
F-11
<PAGE>
2. Accounts Receivable, Net
Accounts receivable, net is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------- -------------
<S> <C> <C>
Due from affiliated physicians $ 8,694,441 --
Patient accounts receivable 41,552,241 $19,669,154
Less: Allowance for doubtful
accounts and contractual
allowances (10,368,302) (5,831,517)
------------ -----------
$ 39,878,380 $13,837,637
============ ===========
</TABLE>
A significant financial instrument is accounts receivable, which is concentrated
among third party medical reimbursement organizations, principally insurance
companies. Approximately 19.5% and 21.8% of the Company's 1996 and 1995 imaging
revenue was derived from the delivery of services of which the timing of payment
is substantially contingent upon the timing of settlement of pending litigation
involving the recipient of services and third parties (Letter of Protection or
LOP-type accounts receivable). By its nature, the realization of a substantial
portion of these receivables is expected to extend beyond one year from the date
the service was rendered. The Company anticipates that a material amount of its
accounts receivable will be outstanding for periods in excess of twelve months
in the future. The Company considers the aging of its accounts receivable in
determining the amount of allowance for doubtful accounts. Credit losses
associated with the receivables are provided for in the consolidated financial
statements and have historically been within management's expectations. For LOP-
type receivables, the Company provides for uncollectible accounts at
substantially higher rates than any other revenue source. During 1995, the
Company changed its estimate of the level of bad debts within the LOP balance to
a higher overall factor, based upon continuously updated levels of internal
write off experience. The effect on the consolidated financial statements of
this change in estimate in 1995 was a decrease in income from continuing
operations before extraordinary items of $595,000, net of income taxes of
$239,000, and a decrease in net income per common share of $0.08.
3. Short-term Investments
The following is a summary of the investments in debt securities classified as
current assets, and which are available for sale:
<TABLE>
<CAPTION>
Gross
unrealized Fair
Cost gains Value
----------- ---------- ----------
<S> <C> <C> <C>
December 31, 1996
Available-for-sale:
US Government obligations $ 5,360,694 $25,889 $5,386,583
Certificates of deposit 776,017 -- 776,017
----------- ------- ----------
Total 6,136,711 25,889 6,162,600
Less: Restricted Investments (4,500,000) -- (4,500,000)
----------- ------- ----------
$ 1,636,711 $25,889 $1,662,600
=========== ======= ==========
</TABLE>
As of December 31, 1995, there were no short-term investments available-
for-sale.
F-12
<PAGE>
4. Property and Equipment
Property and equipment stated at cost are set forth below:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------
1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Diagnostic equipment $33,938,043 $20,184,995
Leasehold improvements 9,351,983 6,449,980
Furniture and fixtures 2,996,673 2,421,621
Land and buildings 632,240 ---
Construction in progress 270,000 ---
- ---------------------------------------------------------
47,188,939 29,056,596
Less, accumulated depreciation 22,791,862 17,526,437
- ---------------------------------------------------------
$24,397,077 $11,530,159
=========================================================
</TABLE>
Depreciation expense amounted to $5,463,078, $3,844,225 and $4,077,669 for the
years ended December 31, 1996, 1995 and 1994, respectively.
5. Account Payable and Accrued Expenses
Accounts payable and accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------- ----------
<S> <C> <C>
Trade accounts payable $10,902,789 $1,936,775
Accrued professional fees 195,531
Accrued payroll and bonuses 792,038 975,643
Accrued interest 322,648
Other accrued expenses 1,052,895 1,494,977
----------- ----------
$13,070,370 $4,602,926
=========== ==========
</TABLE>
6. Convertible Subordinated Debentures and Line of Credit
On May 30, 1995 the Company issued at par $4,350,000 aggregate principal amount
of 11% Convertible Subordinated Debentures due 2000 (the "Debentures"). The
Debentures are convertible into Common Stock of the Company at any time by the
holder at a conversion price of $4.00 per share. The Debentures automatically
convert to stock when, after June 1, 1997 the market price of the stock exceeds
$6.00 per share for any 15 consecutive day period. Interest is payable on May 31
and November 30 in each year. Related debt issuance costs of $248,000 are
included as a component of other assets in the accompanying consolidated balance
sheet and are being amortized on a straight line basis over five years. As of
December 31, 1996 $2,980,000, aggregate principal amount of the Debentures were
converted into 745,000 shares of the Company's common stock. No conversions were
made prior to 1996.
On February 7, 1996, the Company issued at par $6,533,000 aggregate principal
amount of 10.5% Convertible Subordinated Debentures due 2001 (the "1996
Debentures"). The 1996 Debentures are convertible into Common Stock of the
Company at a conversion price of $6.00 per share. Related debt issuance costs
of $435,000 are included as a component of other assets in the accompanying
consolidated balance sheet and are being amortized on a straight line basis over
five years. Interest is
F-13
<PAGE>
6. Convertible Subordinated Debentures and Line of Credit (continued)
payable on February 1 and August 1 in each year. As of December 31, 1996,
$1,733,000 aggregate principal amount of the 1996 Debentures were converted into
288,831 shares of the Company's common stock. Subsequent to year end, the
Company called for redemption of the 1996 Debentures at the conversion price of
$6.00 per share on or before March 27, 1997.
Under the terms of the merger agreement with NMR, the Company assumed the
obligations of NMR under NMR's 8% Convertible Subordinated Debentures due 2001
including payment of principal and interest (the "NMR Debentures"). At December
31, 1996, $859,000 aggregate principal amount of NMR Debentures were
outstanding. Interest is payable on January 1 and July 1 in each year. The NMR
Debentures are redeemable at a declining premium after July 1988, contain a
mandatory sinking fund provision calculated to retire 90% of the NMR Debentures
before maturity at a rate of 10% per year commencing in July 1992, and are
convertible into the MRI's common stock at any time prior to maturity at $6.55
per share. As of December 31, 1996 $3,141,000 aggregate principal amount of the
NMR Debentures had been converted into the Company's common stock. Subsequent
to year end, the Company called for redemption of the NMR Debentures at the
conversion price of $6.54 per share on or before March 27, 1997.
The Company has two revolving lines of credit from a third party financing
corporation. In May 1996, the Company obtained an $8 million line and in
October 1996 a $4 million line. Both lines bear interest at prime plus 1.5%
(10% at December 31, 1996); and have a two year term. As of December 31, 1996,
no amounts were outstanding under these lines of credit.
In 1996, the Company obtained a two year $7 million capital lease line of
credit, which bears interest at the 30-day T-bill rate plus 398 basis points.
As of December 31, 1996, no amounts were outstanding under this line of credit.
7. Notes and Mortgage Payable
Notes and mortgage payable consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Mortgage payable to bank from NMR
acquisition (A) $ 512,754 $ ---
Notes payable issued in connection with
acquisitions(B) 1,376,919 ---
Notes payable assumed in NMR acquisition (C) 11,858,164 ---
Note payable requiring monthly payments
beginning January 1995; remaining balance of
$2,498,216 is due January 2000 (D) 3,397,589 3,776,417
Other notes payable for equipment, equipment
upgrades and leasehold improvements (E) 2,221,168 1,630,441
- --------------------------------------------------------------------------
Total 19,366,594 5,406,858
Less, current installments 6,728,668 957,884
- --------------------------------------------------------------------------
Notes and mortgage payable, less current
installments $12,637,926 $4,448,974
=========================================================================
</TABLE>
F-14
<PAGE>
7. Notes and Mortgage Payable (continued)
(A) The Company has a thirty-year mortgage collateralized by the Union, New
Jersey imaging center land and building. The mortgage bears interest at a
variable rate, adjusted annually based on the one-year Treasury bill rate
plus 2.75% (8.5% at December 31, 1996) and matures October 2019. The
current monthly payments are $4,310, including interest. This mortgage was
assumed in connection with the NMR acquisition.
(B) In January 1996 as part of the purchase price for the acquisition of the
business assets of MRI-CT, Inc., the Company issued a $88,000 note payable
bearing interest at prime (8.25% at December 31, 1996) due January 9, 2001.
Also in January 1996, as part of the purchase price for the acquisition of
the common stock of NurseCare Plus,Inc. the Company issued a note payable
for $1,250,000 bearing interest at prime plus one percent (9.25% at
December 31, 1996) due January 12, 1999. In June 1996 the Company issued a
$510,000 note payable as part of the purchase price of WeCare Allied Health
Care, Inc. The note bears interest at prime plus one percent (9.25% at
December 31, 1996) and is due August 1998.
(C) In August 1996, in connection with the NMR Acquisition the Company assumed
NMR's existing equipment debt obligations, aggregating $13,235,700. These
notes bear interest at rates ranging from 7.0% to 11.5% and require monthly
payments ranging from $623 to $86,335, including interest (an aggregate of
$453,596 per month). The notes are payable over varying terms with the last
note due in December 2000. One of the notes restricts the Company's ability
to pay dividends. The foregoing notes are collateralized by the respective
centers' imaging equipment.
(D) Effective January 31, 1994, StarMed and the creditor renegotiated the note
payable. Under the revised terms, the creditor forgave approximately
$2,500,000 of principal and accrued interest and received a 16% ownership
interest in the predecessor entity, which was ultimately exchanged for the
common stock of the Company pursuant to the merger. The levels of
undiscounted future cash payments under the renegotiated terms resulted in
the recognition of a gain of $761,683, treated as extraordinary for
reporting purposes in 1994. At the time of the restructuring, the note
balance was adjusted to the amount of the projected undiscounted future
cash payments based upon the prevailing interest rate and, accordingly, no
interest expense has been recorded subsequent to the effective date of the
renegotiation other than the amounts attributed to a change in the variable
rate.
(E) Represents various notes payable relating to the purchase of equipment,
equipment upgrades and leasehold improvements. These notes bear interest at
rates ranging from 3.0% to 11.7% and require monthly payments ranging from
$4,875 to $16,382, including interest. The notes are payable over varying
terms of four and five years with the last note due August 2000. The notes
are primarily collateralized by the related imaging equipment.
F-15
<PAGE>
7. Notes and Mortgage Payable (continued)
As of December 31, 1996, the Company has $7,880,975 outstanding obligations with
certain financial institutions under agreements which include a material adverse
change in financial condition or other similar subjective acceleration clauses.
Aggregate maturities of the Company's notes and mortgage payable for years 1997
through 2001 and thereafter are as follows: 1997 - $6,728,668; 1998 -$5,039,896;
1999 - $2,380,013; 2000 -$4,736,300; 2001- $19,450; thereafter $462,267.
8. Shareholders' Equity
Authorized Stock
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 100,000 shares of Preferred Stock,
par value $.01 par share ("Preferred Stock"). The Company has a Shareholders'
Rights Plan (described below) which may require the issuance of Series C Junior
Participating Preferred Stock, in connection with the exercise of certain stock
purchase rights. At December 31, 1996, there were no shares of preferred stock
issued or outstanding.
Shareholders' Rights Plan
Pursuant to the Shareholders' Rights Plan, holders of the Common Stock received
a distribution of one right (the "Rights") to purchase one ten thousandth of a
share of Series C Junior Participating Preferred Stock for each share of Common
Stock owned. The Rights will generally become exercisable ten days after a
person or group acquires 15% of the Company's outstanding voting securities or
ten business days after a person or group commences or announces an intention to
commence a tender or exchange offer that could result in the acquisition of 15%
of any such securities. Ten days after a person acquires 15% or more of the
Company's outstanding voting securities (unless this time period is extended by
the Board of Directors) each Right would, subject to certain adjustments and
alternatives, entitle the rightholder to purchase Common Stock of the Company or
stock of the acquiring company having a market value of twice the $24.00
exercise price of the Right (except that the acquiring person or group and other
related holders would not be able to purchase common stock of the Company on
these terms). The Rights are nonvoting, expire in 2006 and may be redeemed by
the Company at a price of $.001 per Right at any time prior to the tenth day
after an individual or group acquired 15% of the Company's voting stock, unless
extended. The purpose of the Rights is to encourage potential acquirers to
negotiate with the Company's Board of Directors prior to attempting a takeover
and to give the Board leverage in negotiating on behalf of the shareholder the
terms of any proposed takeover.
F-16
<PAGE>
8. Shareholders' Equity (continued)
Preferred Stock
The Company's Certificate of Incorporation provides that the Company may,
without further action by the Company's stockholders, issue shares of Preferred
Stock in one or more series. The Board of Directors is authorized to establish
from time to time the number of shares to be included in any such series and to
fix the relative rights and preferences of the shares of any such series,
including without limitation dividend rights, dividend rate, voting rights,
redemption rights and terms, liquidation preferences and sinking fund
provisions. The Board of Directors may authorize and issue Preferred Stock with
voting or conversion rights that could adversely affect the voting power or
other rights of Common Stock. In addition, the issuance of Preferred Stock could
have the effect of delaying or preventing a change in control of the Company.
Stock Options and Employee Stock Grants
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued in October 1995, establishing a fair
value-based method of accounting for stock-based compensation plans, including
stock options and stock purchase plans. SFAS 123 allows companies to adopt a
fair-value-based method of accounting for stock-based compensation plans or, at
their option, to retain the intrinsic-value based method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), and supplement it with pro forma disclosures of net earnings and
earnings per share data as if the fair value method had been applied. The
Company has elected to continue to account for stock-based compensation plans
under APB No. 25 and, as such, the adoption of this standard has not impacted
the consolidated results of earnings or financial condition.
The Company's five stock option plans provide for the awarding of incentive and
non qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant.
In addition to these plans, the Company has issued 342,000 non-qualified options
at exercise prices ranging from $4.00 to $9.00 per share to certain directors
and executive officers of the Company. Such prices were not less than the fair
market value on the dates of the grant.
Under the terms of the merger agreement with NMR, all outstanding NMR employee
stock options (the "NMR Employee Options") were deemed to be exercisable for
that number of shares of the Company's Common Stock the option holder would have
received in the NMR Acquisition, had the holder exercised the NMR Employee
Options prior to the NMR Acquisition. At December 31, 1996, 78,627 stock option,
related to the NMR Acquisition, to purchase the Company's Common Stock at prices
ranging from $3.27 to $6.55 per share
F-17
<PAGE>
8. Shareholders' Equity (continued)
were outstanding.
Had the fair-value based method of accounting been adopted to recognize
compensation expense for the above plans, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts for the
years ended December 31, 1996 and 1995 as indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income:
As reported $7,254,208 $1,690,224
Pro forma 6,732,000 1,651,700
Primary earnings per share:
As reported .62 .22
Pro forma .58 .21
Fully diluted earnings per share:
As reported .59 .22
Pro forma .52 .21
</TABLE>
The fair value of each option grant under all plans is estimated on the date of
grant using the Black-Scholes option-pricing model based on the following
assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
All Plans:
Dividend yield 0% 0%
Expected volatility 52% 52%
Expected life (years) 2 2
</TABLE>
The risk-free interest rates for 1996 and 1995 were based upon a rate with
maturity equal to expected term. U.S. Treasury instruments were utilized. The
weighted average interest rate in 1996 and 1995 amounted to 5.93% and 6.41%,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1996 and 1995 amounted to $2.34 and $1.15,
respectively.
F-18
<PAGE>
8. Shareholders' Equity (continued)
Stock option share activity and exercise price ranges under these plans and
grants for the years ended December 31, 1996, 1995 and 1994, were as follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding, December 31, 1993 122,675 $5.00
Granted 271,000 4.89
Exercised -- --
Forfeited -- --
---------
Outstanding, December 31, 1994 393,675 4.92
Granted 472,500 5.32
Exercised (12,916) 4.00
Forfeited (63,584) 4.50
---------
Outstanding, December 31, 1995 789,675 5.21
Granted 1,073,140 7.94
Granted as transfer of
NMR Options 132,687 5.05
Exercised (243,197) 5.42
Forfeited (120,587) 6.58
---------
Outstanding, December 31, 1996 1,631,718 6.76
=========
Exercisable at:
December 31, 1994 122,625 $5.00
December 31, 1995 301,209 $5.31
December 31, 1996 909,710 $6.40
The exercise prices for options outstanding as of
December 31, 1996 ranged from $3.27 to $12.00.
F-19
<PAGE>
8. Shareholders' Equity (continued)
Stock Purchase Warrants
As of December 31, 1996, the Company had granted warrants, which are currently
outstanding, to purchase its Common Stock with the following terms:
<TABLE>
<CAPTION>
Number
of Exercise Expiration
shares price date
------- -------- ------------------
<S> <C> <C>
68,750 $11.64 February 6, 1997
4,813 $ 7.27 March 30, 1997
17,188 $ 4.50 February 23, 1999
2,750 $ 5.70 May 18, 1999
17,188 $ 7.27 September 30, 1999
37,500 $ 8.00 February 28, 2001
37,500 $12.00 February 28, 2001
110,000 $ 4.73 April 16, 2001
27,500 $ 3.36 August 31, 2001
10,313 $ 4.00 August 31, 2001
110,000 $ 4.18 August 31, 2001
68,750 $ 4.73 August 31, 2001
90,000 $ 8.00 August 31, 2001
34,375 $ 9.27 August 31, 2001
120,000 $ 9.00 August 31, 2001
5,000 $ 9.00 November 1, 2001
130,625 $ 9.27 December 18, 2001
200,000 $ 9.50 August 31, 2002
51,563 $ 4.36 November 5, 2003
20,625 $ 5.70 May 18, 2004
---------
1,164,440
=========
</TABLE>
In March 1996 a financial consulting firm doing business with the Company was
granted warrants to purchase 75,000 shares of the Company's Common Stock
consisting of 37,500 warrants with an exercise price of $8.00 per share and
37,500 warrants with an exercise price of $12.00 per share. These warrants have
a term of five years and are exercisable from date of grant.
Under the terms of the merger agreement with NMR, all outstanding NMR warrants
were deemed to be exercisable for that number of shares of the Company's Common
Stock the warrant holder would have received in the NMR Acquisition, had the
holder exercised the NMR warrant prior to the NMR Acquisition. As such, the
Company now has:
Warrants issued to purchase 17,188 shares of the Company's Common Stock at
an exercise price of $7.27 per share to a radiology group providing
services to one of its centers. These warrants have a term of five years
and are exercisable from the date of grant.
Warrants issued to purchase 4,813 shares of the Company's Common Stock at
an exercise price of $7.27 per share in connection with the execution of a
ground lease for one of its facilities. The warrants have a term of five
years and are exercisable from the date of grant.
F-20
<PAGE>
7. Shareholders' Equity (continued)
Warrants issued to acquire 68,750 shares of the Company's Common Stock at
$11.64 per share to a financial consulting firm. The warrants have a term of
five years and are exercisable from date of grant.
Warrants granted to non-employee directors of NMR to purchase 13,750 shares
(an aggregate of 130,625 shares) of the Company's Common Stock at $9.27 per
share. These warrants have a term of ten years and are exercisable from date
of the grant.
Warrants granted to a non-employee director of NMR to purchase 2,750 shares
of the Company's Common Stock at an exercise price of $5.70 per share. These
warrants have a term of ten years and are exercisable from the date of
grant.
Warrants issued to purchase 17,188 shares of the Company's Common Stock at
an exercise price of $4.50 per share to a professional corporation providing
legal services to NMR. These warrants have a term of ten years and are
exercisable from the date of grant.
Warrants granted and officer and director of NMR to acquire 51,563 shares of
the Company's Common Stock at an exercise price of $4.36, and 20,625 share
of common stock at an exercise price of $5.70. These warrants have a term of
ten years and are exercisable from the date of grant.
For services rendered by a financial advisory company owned by the Chairman of
the Board of Directors of the Company in connection with the NMR Acquisition,
the Company issued warrants to purchase 120,000 shares of the Company's Common
Stock at an exercise price of $9.00 per share. These warrants have a term of
five years and are exercisable from date of grant.
As required by the merger agreement with NMR, the President of NMR was granted
(i) five year warrants to purchase 40,000 shares of the Company's Common Stock
at an exercise price of $8.00 per share and (ii) six year warrants to purchase
200,000 shares of the Company's Common Stock at an exercise price of $9.50 per
share, and (iii) in exchange for his NMR employee stock options, three separate
five year warrants to purchase 34,375, 68,750 and 34,375 shares of the Company's
Common Stock at exercise prices of $9.27, $4.18 and $4.73, respectively.
As required by the merger agreement with NMR, the Executive Vice President -
Finance of NMR was granted (i) five year warrants to purchase 50,000 shares of
the Company's Common Stock at an exercise price of $8.00 per share and (ii) in
exchange for his NMR employee stock options, four separate five year warrants to
purchase 10,313, 27,500, 41,250 and 34,375 shares of the Company's Common Stock
at exercise prices of $4.00, $3.36, $4.18 and $4.73, respectively.
F-21
<PAGE>
8. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, ("SFAS No. 109") "Accounting for Income Taxes.",
which requires an asset and liability approach. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
reporting basis and tax basis of the Company's assets and liabilities.
As of December 31, 1996, the Company for Federal income tax purposes, has net
operating loss carryforwards which begin to expire in the year 1999, of
approximately $8,028,613, all of which represent net operating losses of
acquired companies. Under Section 382 of the Internal Revenue Code, the
Company's acquired operating losses are subject to an annual utilization
limitation of approximately $2,282,068. Any unutilized annual limitation may be
carried forward to available future carryforward years.
For Federal income tax purposes, the Company has investment tax credits of
$385,638 all of which represent investment tax credits of an acquired company.
The Company's investment tax credits begin to expire in the year 1999 and are
accounted for under the flow through method.
Significant components, tax effected, of the Company's deferred tax
assets and (liabilities) at December 31, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets $( 857) $ 52
Deferred rent ( 59) ( 89)
Cash to accrual basis ( 362) --
------- ------
Deferred tax liabilities (1,278) ( 37)
------- ------
Deferred tax assets:
Net operating losses 2,956 --
Tax credits 385 --
Accounts receivable 3,354 1,871
Capital leases 135 153
Intangibles 220 544
Capital loss carryforwards 133 74
------- ------
Deferred tax assets 7,183 2,642
Valuation allowance ( 200) ( 200)
------- ------
Net deferred tax asset $ 5,705 $2,405
======= ======
</TABLE>
F-22
<PAGE>
9. Income Taxes (continued)
Components of the provision for (benefit from) income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Current:
Federal $3,764,000 $ 3,051,000 $ 575,000
State 1,239,000 769,000 150,000
---------- ----------- ---------
5,003,000 3,820,000 725,000
---------- ----------- ---------
Deferred:
Federal (704,000) (1,789,000) (244,000)
State (137,000) (372,000) ---
---------- ----------- ---------
(841,000) (2,161,000) (244,000)
---------- ----------- ---------
$4,162,000 $ 1,659,000 $ 481,000
========== =========== =========
</TABLE>
A reconciliation of the Federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Taxes at Federal statutory rate 34.0% 34.0% (34.0%)
Effect of partnership status and amounts
taxed to parties other than the Company (1.1%) 2.0% (1.5%)
State and local income taxes, net 6.1% 4.5% 6.0%
Net operating loss carryforwards -- -- (31.4%)
Meals and entertainment 1.9% 3.6% 19.5
Change in valuation allowance -- (26.2%) 93.2%
Goodwill 2.3% -- --
Other (6.6%) 10.7% 27.0%
----- ------ ------
Effective income tax rate 36.6% 28.6% 78.8%
===== ====== ======
</TABLE>
Prior to the merger, the taxable income (loss) of StarMed was included in the
individual income tax returns of the partners. Accordingly, for periods prior to
the merger, no provision for income tax has been recorded in the accompanying
consolidated financial statements. The unaudited pro forma information
accompanying the consolidated statement of operations reflects the income tax
affects as if StarMed had been a taxable entity for all periods presented. The
income taxes are calculated at 39% of income before income taxes, adjusted for
nondeductible amortization of intangibles and other nondeductible items.
The provision for state income taxes for 1994 includes certain adjustments
related to payments of prior year state income taxes. All operating loss
carryforwards have been used at December 31, 1994.
Discontinued operations in 1995 is net of a benefit for federal income taxes of
$750,000 and a benefit for state income taxes of $218,000. These tax benefits
are allocated $312,000 to loss from operations of discontinued business and
$656,000 to loss on sale of discontinued business. In periods before the merger,
the discontinued business operated under the form of partnerships and,
accordingly, no taxes are provided.
10. Commitments and Contingencies
The Company has entered into noncancelable leases for certain medical diagnostic
equipment and furniture and fixtures, and has capitalized the assets relating to
these leases. In most cases, the leases are collateralized by the related
equipment. Certain leases included renewal options for additional periods.
Additionally, at certain centers, the Company is liable for additional
rent payments based upon predetermined annual activity levels where the medical
diagnostic equipment is located. These additional rent payments amounted to
approximately $111,000 and $83,000 for the years ended December 31, 1995 and
1994, respectively.
The following is a summary of assets under capital leases:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Medical diagnostic and office
equipment $ 23,036,069 $ 15,819,882
Less: Accumulated depreciation (12,095,671) (7,745,386)
------------ ------------
$ 10,940,398 $ 8,074,496
============ ============
</TABLE>
F-23
<PAGE>
10. Commitments and Contingencies (continued)
Amortization expense relating to property and equipment under capital leases at
December 31, 1996, 1995 and 1994 was $3,377,470, $2,045,000 and $3,389,000,
respectively.
The following is a schedule by fiscal year of the minimum future lease payments
under capital leases as of December 31, 1996:
<TABLE>
<S> <C>
Year ending December 31,
1997 $ 7,167,189
1998 4,642,623
1999 3,090,601
2000 1,495,485
2001 303,112
thereafter ---
- -------------------------------------------------- -----------
Total minimum lease payments 16,699,010
Less: amount representing
interest (imputed at an average
rate of 9.8%) 2,333,703
- -------------------------------------------------- -----------
Present value of
minimum lease payments 14,365,307
Less current installments 5,991,626
- -------------------------------------------------- -----------
Obligations under capital leases,
less current installments $ 8,373,681
================================================== ===========
</TABLE>
The Company leases its corporate offices and certain centers for periods
generally ranging from three to ten years. These leases include rent escalation
clauses generally tied to the consumer price index and contain provisions for
additional terms at the option of the tenant. The leases generally require the
Company to pay utilities, taxes, insurance and other costs. Rental expense
under such lease were approximately $2,597,381, $2,238,000 and $2,296,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. Ten of the
offices are subleased to affiliated Physicians. By reason of the sublease
arrangements, if the respective Physicians should be unable to pay the rental on
the site, the Company would be contingently liable. As of December 31, 1996, the
Company has subleased the operating sites to the Physicians for the base rental
as stipulated in the original lease. For the year ended December 31, 1996 the
related sublease income has been offset by the lease rent expense. The Company
also has operating lease for diagnostic imaging equipment installed in its
Philadelphia, Pennsylvania and Seabrook, Maryland centers. In addition, StarMed
leases temporary housing for its per diem employees under operating leases with
terms of one to three months. Total rent expense for temporary housing amounted
to approximately $1,744,000, $1,757,000 and $1,787,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The following summary of non-cancelable obligations includes the sublease
arrangements described above, certain equipment leases and the Company's
corporate rentals. As of December 31, 1996, the aggregate future minimum lease
payments and sublease rentals are as follows:
F-24
<PAGE>
10. Commitments and Contingencies (continued)
<TABLE>
<CAPTION>
Original
Year ended December 31, Leases Subleases Net
- ------------------------- ----------- ---------- -----------
<S> <C> <C> <C>
1997 $ 3,962,224 $ 777,391 $ 3,184,833
1998 2,926,586 673,875 2,252,711
1999 2,417,041 593,738 1,823,303
2000 1,799,553 476,635 1,322,918
2001 1,236,167 291,274 944,893
thereafter 984,783 36,861 947,922
- ------------------------- ----------- ---------- -----------
$13,326,354 $2,849,774 $10,476,580
=========== ========== ===========
</TABLE>
In September 1992, an individual brought an action in the Supreme Court of the
State of New York, County of Bronx, against a number of physicians, a hospital
and North Bronx Resources, Inc., a wholly owned subsidiary of the Company
("North Bronx"), for damages in an unspecified amount resulting from an alleged
failure to diagnose a brain tumor at the time the imaging services were
performed for the plaintiff. The complaint alleges that North Bronx was
negligent in its rendering of medical care and treatment to the patient. In
December 1992, North Bronx answered, denying the substantive allegations of the
complaint, raising an affirmative defense that the plaintiff's action does not
state a claim against North Bronx for which relief can be granted, and cross
claimed against the defendants in the action. In 1996, North Bronx settled for
an immaterial amount.
In 1996, an individual and his spouse brought an action in the Supreme Court of
the State of New York, King's County against MRA Imaging Associates in Brooklyn,
New York, a wholly owned subsidiary of the Company ("MRA Imaging") for damages
aggregating $12.5 million. The plaintiff alleges negligent operations, improper
supervision and hiring practices and the failure to operate the premises in a
safe manner, as a result of which the individual suffered physical injury. The
Company's general liability and professional negligence insurance carriers have
been notified, and it has been agreed that the general liability insurance will
pursue the defense of this matter, however such insurers have reserved the right
to claim that the scope of the matter falls outside the Company's coverage. The
parties to this matter are engaged in discovery. The Company's legal counsel
believes that it is more probable than not that the plaintiffs will not recover
the damages sought. The Company has made no provision in its financial
statements for this matter. In the event the plaintiffs prevail, this matter may
have a material adverse effect on the Company's financial condition, results of
operations and cash flow.
11. Related Parties
The Company pays an annual financial advisory fee to an affiliate (the
"Affiliate") of the Company's Chairman of the Board and controlling
stockholders. Such fees amounted to $102,084, $225,000 and $225,000 in the years
ended December 31, 1996, 1995 and 1994, respectively. During the year ended
December 31, 1996, the Company also paid transaction related advisory fees and
expenses to the Affiliate of $362,500 and issued to the affiliate warrants to
purchase 120,000 shares of the Company's common stock exercisable at $9.00 per
share for services rendered to the Company, including services in connection
with the NMR acquisition, the public offering of the Company's common stock in
October 1996 and other transactions.
F-25
<PAGE>
11. Related Parties (continued)
The Company believes that such fees were on terms no less favorable to the
Company than what the Company could have otherwise received from an unaffiliated
third party. In order to incentivize officers, directors, employees and
consultants to the Company, the Company from time to time grants options at fair
market value to such individuals. As of December 31, 1996, stock options to
purchase 764,666 shares of the Company's common stock have been issued to board
members, including the Chairman, who are also associated with or affiliated with
the Affiliate, options to purchase 15,000 shares of the Company's common stock
have been granted to an individual employed by an affiliate of the Affiliate for
consulting services rendered to the Company. The exercise prices of such options
and warrants, referred to below, were no less than the fair market value of the
Company's common stock at the date of grant.
In connection with the execution of four acquisitions in 1997 the Company has
issued warrants to purchase 281,000 shares of the Company's Common Stock to the
Affiliate. In addition, the Company has authorized the issuance of warrants to
purchase 168,000 shares of the Company's Common Stock to the Affiliate in
connection with a probable acquisition in 1997.
North Bronx Resources, Inc., a subsidiary of the Company and General Partner of
North Bronx Services Group, L.P. has entered into a noncancelable operating
lease for the rental of space from an affiliate, Inter-County Resources Company,
Inc. (a limited partner in North Bronx Services, L.P.) The lease provides for
scheduled increases in base rent at varying intervals during the lease term and
adjustments to the base rent based on increases in the consumer price index.
Under the terms of the agreement, the General Partner of North Bronx Services
Group, L.P. is responsible for the lease payments in the event of default by the
Partnership. Rental expense for the Partnership was approximately $262,000,
$306,000 and $418,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
During the year ended December 31, 1996, the Company, in accordance with the
related partnership agreements, allocated certain corporate overhead costs to
the limited partnerships which resulted in $1,781 of such costs being attributed
to the minority interests.
12. Segment Information
The Company operates in two industry segments - diagnostic imaging services and
temporary staffing services. The operations of the diagnostic imaging services
segment involves operating and managing 38 free standing imaging centers,
located in six states. The operations of the temporary staffing services segment
involves providing temporary staffing of registered nurses, technicians and
other medical industry personnel to acute and sub-acute care facilities.
F-26
<PAGE>
12. Segment Information (continued)
The following table shows net revenues, operating income and other financial
information by industry segment for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Net revenues:
Diagnostic imaging centers $ 64,762,017 $35,860,798 $30,607,729
Temporary staffing services 29,023,100 16,132,960 14,571,216
------------ ----------- -----------
Total $ 93,785,117 $51,993,758 $45,178,945
============ =========== ===========
Operating income (loss)(a):
Diagnostic imaging centers $ 13,699,824 $ 7,193,994 $ 1,168,896
Temporary staffing services 992,971 312,917 ( 133,267)
------------ ----------- -----------
Total $ 14,692,795 $ 7,506,911 $ 1,035,629
============ =========== ===========
Identifiable assets:
Diagnostic imaging centers $154,414,650 $36,549,946 $28,131,474
Temporary staffing services 10,099,162 7,585,877 7,778,000
------------ ----------- -----------
Total $164,513,812 $44,135,823 $35,909,474
============ =========== ===========
Depreciation and amortization:
Diagnostic imaging centers $ 6,963,834 $ 4,274,140 $ 4,545,054
Temporary staffing services 501,641 293,004 299,211
------------ ----------- -----------
Total $ 7,465,475 $ 4,567,144 $ 4,844,265
============ =========== ===========
Capital expenditures (b):
Diagnostic imaging centers $ 910,099 $ 771,090 $ 476,648
Temporary staffing services 159,771 105,928 86,426
------------ ----------- -----------
Total $ 1,069,870 $ 877,018 $ 563,074
============ =========== ===========
</TABLE>
(a) The Company's 1994 charges to operations relating to the write-down of
value of venture contracts and intangible assets, provision for minority
interest in losses of joint venture, executive severance, write-down of
medical diagnostic equipment and the gain on disposal of medical diagnostic
equipment, were attributable to the operations of the diagnostic imaging
services segment only.
(b) Equipment financed under capital leases and notes payable amounted to
$3,698,196, $1,159,000 and $892,000 in 1996, 1995 and 1994, respectively.
F-27
<PAGE>
13. Quarterly Consolidated Financial Information (Unaudited)
The following is a summary of unaudited quarterly consolidated financial
results for the years ended December 31:
<TABLE>
<CAPTION>
(000's omitted, except for per share amounts)
1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue, net $18,098 $18,678 $24,774 $32,235
Operating income 2,328 3,027 3,927 5,411
Net income 1,298 1,606 1,845 2,505
Fully diluted income
(loss) per share .16 .16 .15 .14
</TABLE>
<TABLE>
<CAPTION>
1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue, net $12,140 $12,759 $13,430 $13,665
Operating income (loss) 1,631 2,223 2,109 1,544
Net income (loss) (232) 997 (256) 1,181
Fully diluted income
(loss) per share (.03) .13 (.03) .15
</TABLE>
(1) Quarterly income per fully diluted common share does not equal the
annual amount due to changes in the common and equivalent shares
outstanding.
Quarterly results are generally effected by the timing of acquisitions,
including limited partner interests, and the number of operating days in the
quarter.
F-28
<PAGE>
14. Fair Value of Financial Instruments
The following estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgement is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
<TABLE>
<CAPTION>
December 31, 1995
------------------------
Carrying
Amount Fair Value
----------- -----------
Assets:
Cash and cash
equivalents $ 3,935,000 $ 3,935,000
Accounts receivable,
net 13,838,000 13,838,000
Liabilities:
Notes payable $ 5,407,000 $ 5,407,000
Convertible debentures 4,350,000 4,466,000
<CAPTION>
December 31, 1996
------------------------
Carrying
Amount Fair Value
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents $15,346,000 $15,346,000
Short-term investments 6,163,000 6,163,000
Restricted cash 1,045,000 1,045,000
Patient receivables and due from
affiliated physician
associations, net 39,878,000 39,878,000
Liabilities:
Notes payable $19,367,000 $19,093,000
Capital lease obligations 14,365,000 14,681,060
Convertible debentures 6,988,000 6,972,000
</TABLE>
The carrying amounts of cash and cash equivalents, short-term investments, long-
term investments and due from affiliated physician associations and patient
receivables, net are a reasonable estimate of their fair value. The fair value
of the Company's notes payable, capital lease obligations and convertible
debentures are based upon a discounted cash flow calculation utilizing rates
under which similar borrowing arrangements can be entered into by the Company.
15. Acquisitions
On May 26, 1995, the Company consummated the acquisition of the business
operations of New England MRI, Inc. (the "Seller"), a Florida corporation based
in Fort Myers, Florida, which owned and managed two diagnostic imaging centers
(the "Fort Myers Centers"). The acquisition was consummated pursuant to an Asset
Purchase Agreement (the "Agreement") dated as of May 17, 1995 by and among two
of the Company's wholly owned subsidiaries - Fort Myers Resources, Inc. ("FMR")
and Central Fort Myers Resources, Inc. ("CMFR"), and the Seller. Pursuant to the
Agreement, FMR acquired substantially all of the assets of one of the centers
and CMFR acquired all of the assets of the other center through the issuance of
1,200,000 shares of the Company's common stock valued at $3,448,500. Of the
1,200,000 shares, 600,000 shares were issued at closing with the remaining
600,000 shares to be issued within two years of closing (525,000 of such shares
were issued subsequent to December 31, 1996. The excess of the purchase price
over the fair value of net assets acquired amounted to approximately $2,980,000
and is being amortized on a straight
F-29
<PAGE>
15. Acquisitions (continued)
line basis over 20 years. Subject to the Centers achieving certain earning
objectives within the next three years, an additional 200,000 shares may be
issued to the Seller. These shares have not been included in the allocated
purchase price in light of the contingent nature of the arrangement. If the
earning objectives are ultimately achieved, the market value of the shares upon
issuance will be recorded as additional goodwill subject to amortization over
the stated period. The accompanying consolidated financial statements include
the operations of FMR and CMFR from the above date of acquisition. The shares
issued to the Seller as consideration for the purchased assets are subject to
certain registration rights.
On June 19, 1995, the Company consummated the acquisition of the business
operations of PCC Imaging, Inc. ("PCC"), a Delaware corporation based in
Hackensack, New Jersey, which owns and manages a diagnostic imaging center. The
acquisition was consummated pursuant to an Asset Purchase Agreement (the
"Agreement") dated June 19, 1995 by and among Hackensack Resources, Inc. ("HRI")
and PCC. Pursuant to the agreement, the Company's wholly owned subsidiary, HRI,
acquired substantially all of the assets of the center for $1,800,000 in cash.
The acquisition was accounted for as a purchase, under which the purchase price
was allocated to the acquired assets and assumed liabilities based upon fair
values at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired amounted to $751,000 and is being amortized on
a straight line basis over 20 years. The accompanying consolidated financial
statements include the operations of PCC from the above date of acquisition.
On January 9, 1996, the Company consummated the acquisition of the business
assets of MRI-CT, Inc., a New York corporation based in New York, New York (the
"MRI-CT") comprised primarily of four diagnostic imaging centers. The
acquisition was consummated pursuant to an Asset Purchase Agreement dated
December 21, 1995 by and among the Company and MRI-CT. Pursuant to the
Agreement, a wholly owned subsidiary of the Company acquired all of the business
assets of MRI-CT for a combination of $553,000 cash, 194,113 shares of the
Company's common stock valued at $914,000 and a $88,000 note payable bearing
interest at prime due January 9, 2001. The acquisition was accounted for as a
purchase, under which the purchase price was allocated to the acquired assets
and assumed liabilities based upon fair values at the date of acquisition. The
excess of the purchase price over the fair value of net assets acquired amounted
to $1,540,000 and is being amortized on a straight line basis over 20 years. The
accompanying consolidated financial statements include the operations of MRI-CT
from the above date of acquisition.
On January 12, 1996, the Company consummated the acquisition of the common stock
of NurseCare Plus, Inc. ("NurseCare") a California corporation based in
Oceanside, California, which provides supplemental healthcare staffing services
for clients including hospitals, clinics and home health agencies in Southern
California. The NurseCare acquisition was consummated pursuant to a Stock
Purchase Agreement dated as of January 11, 1996 by and among StarMed Staffing,
Inc. the Company's
F-30
<PAGE>
15. Acquisitions (continued)
wholly owned subsidiary ("StarMed") and NurseCare. Pursuant to the NurseCare
Agreement, StarMed acquired from NurseCare all of the common stock of NurseCare
for $2,514,000, payable in $1,264,000 cash and a note payable for $1,250,000
bearing interest at prime plus one percent due January 12, 1999. The acquisition
was accounted for as a purchase, under which the purchase price was allocated to
the acquired assets and assumed liabilities based upon fair values at the date
of acquisition. The excess of the purchase price over the fair value of net
assets acquired amounted to $2,087,000 and is being amortized on a straight line
basis over 20 years. The accompanying consolidated financial statements include
the operations of NurseCare from the above date of acquisition.
On April 19, 1996, the Company entered into an asset purchase agreement with
Americare Imaging Centers, Inc. and MRI Associates of Tarpon Springs, Inc.
("Americare"). Pursuant to the acquisition agreement, the Company acquired
certain of the assets and liabilities of Americare for $1,500,000 cash and
228,751 shares of the Company's common stock valued at $1,275,000. The
acquisition was accounted for as a purchase, under which the purchase price was
allocated to the acquired assets and assumed liabilities based upon fair values
at the date of acquisition. The excess of the purchase price over the fair value
of net assets acquired amounted to $2,862,000 and is being amortized on a
straight line basis over 20 years. The accompanying consolidated financial
statements include the operations of AmeriCare from the above date of
acquisition.
On April 30, 1996, the Company entered into an asset purchase agreement with
Access Imaging center, Inc. ("Access"). Pursuant to the acquisition, the Company
acquired certain of the assets and liabilities of Access for $1,300,000 cash and
192,063 shares of the Company's common stock valued at $1,445,000. The
acquisition was accounted for as a purchase, under which the purchase price was
allocated to the acquired assets and assumed liabilities based upon fair values
at the date of acquisition. The excess of the purchase price over the fair value
of net assets acquired amounted to $1,972,000 and is being amortized on a
straight line basis over 20 years. The accompanying consolidated financial
statements include the operations of Access from the above date of acquisition.
On June 28, 1996, the Company entered into an asset purchase agreement with
WeCare Allied Health Care, Inc. ("WeCare"). Pursuant to the agreement, the
Company acquired certain assets for $1,050,000 cash and a $510,000 note payable
bearing interest at prime plus one percent due July 1998. The acquisition was
accounted for as a purchase, under which the purchase price was allocated to the
acquired assets and assumed liabilities based upon fair values at the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired amounted to $1,769,000 and is being amortized on a straight line basis
over 20 years. The accompanying consolidated financial statements include the
operations of WeCare from the above date of acquisition.
F-31
<PAGE>
14. Acquisitions (continued)
On July 8, 1996, the Company acquired a diagnostic imaging center in Centereach,
New York ("Centereach"). Pursuant to the acquisition, the Company acquired
certain of the assets for approximately $3,100,000 in cash. The acquisition was
accounted for as a purchase, under which the purchase price was allocated to the
acquired assets and assumed liabilities based upon fair values at the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired amounted to $2,989,000 and is being amortized on a straight line basis
over 20 years. The accompanying consolidated financial statements include the
operations of Centereach from the above date of acquisition.
On August 30, 1996, the Company consummated the NMR Acquisition. NMR is engaged
directly and through limited partnerships in the operation of eighteen
diagnostic imaging centers. Pursuant to the acquisition agreement, NMR was
merged into a wholly owned subsidiary of the Company and each issued and
outstanding share of NMR common stock was converted into 0.6875 shares of the
Company's common stock resulting in the issuance of 4,456,500 shares of the
Company's common stock valued at $39,350,000. The transaction was accounted for
as a purchase transaction where the value of the shares issued was allocated to
the net assets acquired based upon their respective fair values. The operating
results of NMR are consolidated with the Company for the periods following the
acquisition. Approximately $35,286,000 in goodwill was recognized with this
transaction and is being amortized on a straight line basis over twenty years.
On November 25, 1996 the Company consummated the acquisition of two diagnostic
imaging centers in Garden City and East Setauket, New York. Pursuant to the
acquisition agreement, the Company acquired certain assets and liabilities for
573,175 shares of the Company's common stock valued at $4,500,000 and $1,900,000
in cash. The acquisition was accounted for as a purchase, under which the
purchase price was allocated to the acquired assets and assumed liabilities
based upon fair values at the date of acquisition. The excess of the purchase
price over the fair value of net assets acquired amounted to $6,042,000 and is
being amortized on a straight line basis over 20 years. The accompanying
consolidated financial statements include the operations of the centers from the
above date of acquisition.
On December 16, 1996, the Company acquired the Imaging Center of the Ironbound
in Newark, New Jersey from TME, Inc. for $216,000 in cash and 18,868 shares of
Company common stock valued at $200,000. The acquisition was accounted for as a
purchase, under which the purchase price was allocated to the acquired assets
and assumed liabilities based upon fair values at the date of acquisition. The
excess of the purchase price over the fair value of net assets acquired amounted
to $440,663 and is being amortized on a straight line basis over 20 years. The
accompanying consolidated financial statements include the operations of the
center from the above date of acquisition.
F-32
<PAGE>
17. Subsequent Events (Unaudited)
Acquisitions:
- ------------
On January 17, 1997, the Company acquired a diagnostic imaging center located in
Melbourne, Florida for approximately $1,100,000 in cash. The acquisition will be
accounted for as a purchase, under which the purchase price will be allocated to
the acquired assets and assumed liabilities based upon fair values at the date
of acquisition. The excess of the purchase price over the fair value of net
assets acquired is estimated to be approximately $663,000 and will be amortized
on a straight line basis over 20 years.
On January 29, 1997, the Company acquired two diagnostic imaging centers in
southern California; a multi-modality imaging center in San Clemente, California
and an imaging facility in Oceanside, California for approximately $1,000,000
payable in cash and contingent consideration, payable in the Company's common
stock, based on the centers achieving certain financial objectives. The
acquisition will be accounted for as a purchase, under which the purchase price
will be allocated to the acquired assets and assumed liabilities based upon fair
values at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired is estimated to be approximately $1,157,000
and will be amortized on a straight line basis over 20 years.
On March 3, 1997, the Company acquired a diagnostic imaging center located in
Jacksonville, Florida for $2,300,000 in the Company's common stock. The
acquisition will be accounted for as a purchase, under which the purchase price
will be allocated to the acquired assets and assumed liabilities based upon fair
values at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired is estimated to be approximately $1,612,000
and will be amortized on a straight line basis over 20 years.
F-33
<PAGE>
17. Subsequent Events (Unaudited) (continued)
On March 11, 1997, the Company acquired Advanced Diagnostic Imaging, Inc.
("ADI") for approximately $10,600,000 in cash consideration. ADI owned interests
in and operated nine diagnostic imaging centers throughout the Northeast. As
part of the transaction, the Company has acquired an option to purchase an
additional center located in the Northeast. The acquisition will be accounted
for as a purchase, under which the purchase price will be allocated to the
acquired assets and assumed liabilities based upon fair values at the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired is estimated to be approximately $17,945,000 and will be amortized on a
straight line basis over 20 years.
On March 12, 1997, the Company acquired a diagnostic imaging center located in
West Palm Beach, Florida for approximately $2,000,000 in cash and approximately
$600,000 in the Company's common stock. The acquisition will be accounted for as
a purchase, under which the purchase price will be allocated to the acquired
assets and assumed liabilities based upon fair values at the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired is estimated to be approximately $2,236,000 and will be amortized on a
straight line basis over 20 years.
On March 14, 1997, the Company acquired a diagnostic imaging center located in
Rancho Cucamonga, California for approximately $2,500,000 in cash and
approximately 500,000 in the Company's common stock. The acquisition will be
accounted for as a purchase, under which the purchase price will be allocated to
the acquired assets and assumed liabilities based upon fair values at the date
of acquisition. The excess of the purchase price over the fair value of net
assets acquired is estimated to be approximately $3,143,000 and will be
amortized on a straight line basis over 20 years.
Debt Financing:
- --------------
On February 20, 1997 the Company completed a $52,000,000 private placement of
Senior Notes to a group of insurance companies led by John Hancock Mutual Life
Insurance Company. Dillon, Reed & Co., Inc. acted as agent in connection with
the placement. The notes bear interest at an annual rate of 7.77%, are subject
to equal annual sinking fund payments commencing in February 2001 and have a
final maturity in February 2005. The Company used a portion of the proceeds from
the private debt placement to retire approximately $14,000,000 of existing
equipment debt. The balance of the net proceeds is being used to fund
acquisitions and for general corporate purposes. In connection with this
placement, the Company paid an advisory fee of $225,000 to the Affiliate of the
Company's Chairman of the Board and its controlling shareholder.
18. Pro Forma Information (Unaudited)
The Company's consolidated financial statements for the year ended December 31,
1995, do not include the results of operations of MRI-CT, Inc., NurseCare,
Americare, Access, WeCare, Centereach, NMR, Long Island, and Ironbound and
include the results of operations of New England MRI, Inc., and PCC ("Historical
Acquisitions") from the effective date of such transactions.
The Company's consolidated financial statements for the year ended December 31,
1996 include the results of operations of MRI-CT, Inc., NurseCare, Americare,
Access, WeCare, Centereach, NMR, Long Island, and Ironbound from the effective
dates of such transactions. The Company in October 1996, completed a secondary
stock offering resulting in the issuance of 3,680,000 shares. Such offering was
undertaken to fund the purchase of individual or groups of centers. As such, pro
forma earnings per share reflects the dilutive effect of such incremental
shares, as if the secondary offering was effected on January 1, 1996. The
following summarizes the unaudited pro forma results of operations for the years
ended December 31, 1996 and 1995, assuming all of the foregoing acquisitions had
occurred on January 1, 1996 and 1995 and the Company's secondary equity offering
was effected on January 1, 1996 (in thousands, except per share data):
F-34
<PAGE>
18. Pro Forma Information (Unaudited) (continued)
<TABLE>
<CAPTION>
1995 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenue, net $ 99,896 $122,692
Operating income $ 13,821 $ 20,258
Income before income taxes $ 9,888 $ 16,835
Fully diluted net income per share $ .51 $ .59
</TABLE>
The Company's consolidated financial statements for the year ended December 31,
1996, do not reflect the impact of its acquisitions effected subsequent to such
date (See note 17). The following summerizes the unaudited pro forma results of
operations for the year ended December 31, 1996, as if such acquisitions had
occurred on January 1, 1996, as well as the Company's 1996 acquisitions and its
October 1996 secondary offering.
<TABLE>
<CAPTION>
1996
(Unaudited)
-----------
<S> <C>
Revenue, net $163,730
Operating income $ 28,868
Income before income taxes $ 23,201
Fully diluted net income per share $ .77
</TABLE>
F-35
<PAGE>
Medical Resources, Inc. and Subsidiaries
Schedule II Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charged to at End
Description of Period Expense Deductions of Period
- ------------------------------ --------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Total Allowance for Doubtful
Accounts and Contractual
Adjustments $2,549,304 $2,495,413 $2,163,290 $2,881,427
==================================================
Year ended December 31, 1995
Total Allowance for Doubtful
Accounts and Contractual
Adjustments $2,881,427 $3,377,862 $427,772 $5,831,517
==================================================
Year ended December 31, 1996
Total Allowance for Doubtful
Accounts and Contractual
Adjustments $5,831,517 $4,783,307 $2,079,641 $8,535,183
==================================================
</TABLE>
<PAGE>
EXHIBIT 10.4
MEDICAL RESOURCES, INC.
1996 STOCK OPTION PLAN
1. Purpose. The purpose of this Plan is to strengthen Medical Resources,
-------
Inc. by providing an incentive to its employees, consultants and directors,
encouraging them to devote their abilities to the success of the Company. It is
intended that this purpose be achieved by extending to employees, consultants
and directors of the Company or any subsidiary an added long-term incentive for
high levels of performance and exceptional efforts through the grant of options
to purchase shares of the Company's common stock under this Medical Resources,
Inc. 1996 Stock Option Plan.
2. Definitions. For purposes of the Plan:
-----------
2.1. "Agreement" means the written agreement between the Company and an
Optionee evidencing the grant of an Option and setting forth the terms and
conditions thereof.
2.2. "Board" means the Board of Directors of the Company.
2.3. "Cause" means with respect to an Eligible Employee, including an
Eligible Employee who is a director of the Company, (i) the voluntary
termination of employment by such Eligible Employee, (ii) intentional failure to
perform, or habitual neglect of, reasonably assigned duties, (iii) dishonesty or
willful misconduct in the performance of an Optionee's duties, (iv) an
Optionee's engaging in a transaction in connection with the performance of such
Optionee's duties to the Company or any of its Subsidiaries thereof which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit to the Optionee, (v)
willful violation of any law, rule or regulation in connection with the
performance of an Optionee's duties, (vi) willful violation of any policy
adopted by the Company relating to the performance or behavior of employees or
(vii) acts of carelessness or misconduct which have in the reasonable judgment
of the Company's Board of Directors, an adverse effect on the Company.
2.4. "Change in Capitalization" means any increase or reduction in the
number of Shares, or any change (including, but not limited to, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, spin-off, split-up,
issuance of warrants or rights or debentures, stock dividend, stock split or
<PAGE>
reverse stock split, cash dividend, property dividend, combination or exchange
of shares, repurchase of shares, public offering, private placement, change in
corporate structure or otherwise.
2.5. "Code" means the Internal Revenue Code of 1986, as amended.
2.6. "Committee" means a committee consisting of at least two (2)
Disinterested Directors appointed by the Board to administer the Plan and to
perform the functions set forth herein.
2.7. "Company" means Medical Resources, Inc.
2.8. "Consultant Option" means an Option granted to a consultant pursuant
to Section 7.
2.9. "Director Option" means an Option granted to a Nonemployee Director
pursuant to Section 5.
2.10. "Disability" means a physical or mental infirmity which impairs the
Optionee's ability to perform substantially his or her duties for a period of
sixty (60) consecutive days.
2.11. "Disinterested Director" means a director of the Company who is
"disinterested" within the meaning of Rule 16b-3 under the Exchange Act.
2.12. "Eligible Employee" means an officer or other employee of the
Company or a Subsidiary who is designated by the Committee as eligible to
receive Options subject to the conditions set forth herein.
2.13. "Employee Options" means an Option granted to an Eligible Employee
pursuant to Section 6.
2.14. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.15. "Fair Market Value" on any date means the average of the high and
low sales prices of the Shares on such date on the principal national securities
exchange on which such Shares are listed or admitted to trading, or if such
Shares are not so listed or admitted to trading, the arithmetic mean of the per
Share closing bid price and per Share closing asked price on such date as quoted
on the National Association of Securities Dealers Automated Quotation System or
such other market in which such prices are regularly quoted, or, if there have
been no published bid or asked quotations with respect to Shares on such date,
the Fair Market Value shall be the value established by the Board in good faith
and in accordance with Section 422 of the Code.
2
<PAGE>
2.16. "Incentive Stock Option" means an Option satisfying the requirements
of Section 422 of the Code and designated by the Committee as an Incentive Stock
Option.
2.17. "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.18. "Nonemployee Director" means a director of the Company who is not an
employee of the Company or any Subsidiary.
2.19. "Option" means an Employee Option, a Director Option, a Consultant
Option or any or all of them.
2.20. "Optionee" means a person to whom an Option has been granted under
the Plan.
2.21. "Parent" means any corporation which is a parent corporation (within
the meaning of Section 424(e) of the Code) with respect to the Company.
2.22. "Plan" means the Medical Resources, Inc. 1996 Stock Option Plan.
2.23. "Shares" means the common stock, par value $.01 per share, of the
Company.
2.24. "Subsidiary" means any corporation which is a subsidiary corporation
(within the meaning of Section 424(f) of the Code) with respect to the Company.
2.25. "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.
2.26. "Ten-Percent Stockholder" means an Eligible Employee or other
eligible Plan participant, who, at the time an Incentive Stock Option is to be
granted to him or her, owns (within the meaning of Section 422(b)(6) of the
Code) stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, or of a Parent or a Subsidiary.
3. Administration.
--------------
3.1. The Plan shall be administered by the Committee which shall hold
meetings at such times as may be necessary for the proper administration of the
Plan. The Committee shall keep minutes of its meetings. A quorum shall consist
of not less than two members of the Committee and a majority of a quorum may
authorize any action. Any decision or determination reduced to writing and
signed by a majority of all of the members of the
3
<PAGE>
Committee shall be as fully effective as if made by a majority vote at a meeting
duly called and held. Each member of the Committee shall be a Disinterested
Director. No member of the Committee shall be liable for any action, failure to
act, determination or interpretation made in good faith with respect to this
Plan or any transaction hereunder, except for liability arising from his or her
own willful misfeasance, fraud or bad faith. The Company hereby agrees to
indemnify each member of the Committee for all costs and expenses and, to the
extent permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiation for the settlement of or otherwise
dealing with any claim, cause of action or dispute of any kind arising in
connection with any action or failure to act in administering this Plan or in
authorizing or denying authorization to any transaction hereunder.
3.2. Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time to determine those Eligible
Employees to whom Employee Options shall be granted under the Plan and the
number of Incentive Stock Options and/or Nonqualified Stock Options to be
granted to each Eligible Employee and to prescribe the terms and conditions
(which need not be identical) of each Employee Option, including the purchase
price per Share subject to each Employee Option, and make any amendment or
modification to any Agreement consistent with the terms of the Plan.
3.3. Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time:
(a) to construe and interpret the Plan and the Options granted thereunder
and to establish, amend and revoke rules and regulations for the administration
of the Plan, including, but not limited to, correcting any defect or supplying
any omission, or reconciling any inconsistency in the Plan or in any Agreement,
in the manner and to the extent it shall deem necessary or advisable to make the
Plan fully effective, and all decisions and determinations by the Committee in
the exercise of this power shall be final, binding and conclusive upon the
Company, its Subsidiaries, the Optionees and all other persons having any
interest therein;
(b) to determine the duration and purposes for leaves of absence which may
be granted to an Optionee on an individual basis without constituting a
termination of employment or service for purposes of the Plan;
(c) to exercise its discretion with respect to the powers and rights
granted to it as set forth in the Plan;
4
<PAGE>
(d) generally, to exercise such powers and to perform such acts as are
deemed necessary or advisable to promote the best interests of the Company with
respect to the Plan.
4. Stock Subject to Plan.
---------------------
4.1. The maximum number of Shares that may be made the subject of Options
granted under the Plan is 250,000 Shares (or the number and kind of shares of
stock or other securities to which such Shares are adjusted upon a Change in
Capitalization pursuant to Section 9) and the Company shall reserve for the
purposes of the Plan, out of its authorized but unissued Shares or out of Shares
held in the Company's treasury, or partly out of each, such number of Shares as
shall be determined by the Board.
4.2. Whenever any outstanding Option or portion thereof expires, is
canceled or is otherwise terminated for any reason, the Shares allocable to the
canceled or otherwise terminated Option or portion thereof may again be the
subject of Options granted hereunder.
5. Option Grants for Nonemployee Directors.
---------------------------------------
5.1. Authority of Committee. Subject to the provisions of the Plan, the
----------------------
Committee shall have full and final authority to select those Nonemployee
Directors who will receive Director Options, the terms and conditions of which
shall be set forth in an Agreement.
5.2. Purchase Price. The purchase price or the manner in which the
--------------
purchase price is to be determined for Shares under each Director Option shall
be determined by the Committee and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Director Option
shall be not less than the Fair Market Value of a Share on the date the Director
Option is granted.
5.3. Duration. Director Options shall be for a term to be designated by
--------
the Committee and set forth in the Agreement evidencing the Option.
5.4. Vesting. Each Director Option shall, commencing not earlier than
-------
the date of its grant, become exercisable in such installments (which need not
be equal or may be one installment) and at such times as may be designated by
the Committee and set forth in the Agreement evidencing the Option. To the
extent not exercised, installments shall accumulate and be exercisable, in whole
or part, at any time after becoming exercisable, to not later than the date the
Director Option expires. The Committee may accelerate the exercisability of any
Option or portion thereof at any time.
5
<PAGE>
6. Option Grants for Eligible Employees.
------------------------------------
6.1. Authority of Committee. Subject to the provisions of the Plan, the
----------------------
Committee shall have full and final authority to select those Eligible Employees
who will receive Employee Options, the terms and conditions of which shall be
set forth in an Agreement; provided, however, that no Eligible Employee shall
-------- -------
receive an Incentive Stock Option unless he is an employee of the Company, a
Parent or a Subsidiary at the time the Incentive Stock Option is granted.
6.2. Purchase Price. The purchase price or the manner in which the
--------------
purchase price is to be determined for Shares under each Employee Option shall
be determined by the Committee and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Employee Option
shall be (i) except as provided in clause (ii) of this Section 6.2, not less
than the Fair Market Value of a Share on the date the Employee Option is
granted; and (ii) with respect to any Incentive Stock Option granted to a Ten
Percent Stockholder, not less than 110% of the Fair Market Value of a Share on
the date the Option is granted.
6.3. Duration. Employee Options granted hereunder shall be for such term
--------
as the Committee shall determine, provided that no Employee Option shall be
exercisable after the expiration of ten (10) years from the date it is granted
(five (5) years in the case of an Incentive Stock Option granted to a Ten-
Percent Stockholder). The Committee may, subsequent to the granting of any
Employee Option, extend the term thereof but in no event shall the term as so
extended exceed the maximum term provided for in the preceding sentence.
6.4. Vesting. Each Employee Option shall, commencing not earlier then the
-------
date of its grant, become exercisable in such installments (which need not be
equal or may be in one installment) and at such times as may be designated by
the Committee and set forth in the Agreement evidencing the Option. To the
extent not otherwise provided by the Committee, Employee Options shall be
exercisable in three (3) equal installments each equal to one-third of the
entire Option granted, the first of which shall become exercisable on the first
anniversary of the date of the grant of the Employee Option, the second
installment of which shall become exercisable on the second anniversary of the
date of grant of the Employee Option, and the final installment of which shall
become exercisable on the third anniversary of the date of grant. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or
part, at any time after becoming exercisable, to not later than the date the
Employee Option expires. The Committee may accelerate the exercisability of any
Option or portion thereof at any time.
6
<PAGE>
6.5. Modification or Substitution. The Committee may, in its discretion,
----------------------------
modify outstanding Employee Options or accept the surrender of outstanding
Employee Options (to the extent not exercised) and grant new Options in
substitution for them. Notwithstanding the foregoing, no modification of an
Employee Option shall adversely alter or impair any rights or obligations under
the Employee Option without the Optionee's consent.
7. Option Grants for Consultants.
-----------------------------
7.1. Authority of Committee. Subject to the provisions of the Plan, the
----------------------
Committee shall have full and final authority to select those consultants to the
Company or a Subsidiary who will receive Consultant Options, the terms and
conditions of which shall be set forth in an Agreement.
7.2. Purchase Price. The purchase price or the manner in which the
--------------
purchase price is to be determined for Shares under each Consultant Option shall
be determined by the Committee and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Consultant Option
shall be not less than the Fair Market Value of a Share on the date the
Consultant Option is granted.
7.3. Duration. Consultant Options granted hereunder shall be for such
--------
term as the Committee shall determine, provided that no Consultant Option shall
be exercisable after the expiration of ten (10) years from the date it is
granted. The Committee may, subsequent to the granting of any Consultant
Option, extend the term thereof but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
7.4. Vesting. Each Consultant Option shall, commencing not earlier then
-------
the date of its grant, become exercisable in such installments (which need not
be equal or may be in one installment) and at such times as may be designated by
the Committee and set forth in the Agreement evidencing the Option. To the
extent not otherwise provided by the Committee, Consultant Options shall be
exercisable in three (3) equal installments each equal to one-third of the
entire Option granted, the first of which shall become exercisable on the first
anniversary of the date of grant of the Consultant Options, the second
installment of which shall become exercisable on the second anniversary of the
date of grant, and the final installment of which shall become exercisable on
the third anniversary of the date of grant. To the extent not exercised,
installments shall accumulate and be exercisable, in whole or part, at any time
after becoming exercisable, to not later than the date the Consultant Option
expires. The Committee may accelerate the exercisability of any Option or
portion thereof at any time.
7
<PAGE>
8. Terms and Conditions Applicable to All Options
----------------------------------------------
8.1. Non-transferability. No Option granted hereunder shall be
-------------------
transferable by the Optionee to whom granted otherwise than by will or the laws
of descent and distribution, and an Option may be exercised during the lifetime
of such Optionee only by the Optionee or his or her guardian or legal
representative. The terms of each Option shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Optionee.
8.2. Method of Exercise. The exercise of an Option shall be made only by
------------------
a written notice delivered in person or by mail to the Secretary of the Company
at the Company's principal executive office, specifying the number of Shares to
be purchased and accompanied by payment therefor and otherwise in accordance
with the Agreement pursuant to which the Option was granted. The purchase price
for any Shares purchased pursuant to the exercise of an Option shall be paid in
full upon such exercise, as determined by the Committee in its discretion, by
any one or a combination of the following: (i) cash, or (ii) transferring
Shares to the Company upon such terms and conditions as determined by the
Committee. At the Optionee's request and subject to the consent of the
Committee, Shares to be acquired upon the exercise of a portion of an Employee
Option will be applied automatically to pay the purchase price in connection
with the exercise of additional portions of the Employee Option then being
exercised. The written notice pursuant to this Section 8.2 may also provide
instructions from the Optionee to the Company that upon receipt of the purchase
price in cash from the Optionee's broker or dealer, designated as such on the
written notice, in payment for any Shares purchased pursuant to the exercise of
an Option, the Company shall issue such Shares directly to the designated broker
or dealer. Any Shares transferred to the Company as payment of the purchase
price under an Option shall be valued at their Fair Market Value on the day
preceding the date of exercise of such Option. If requested by the Committee,
the Optionee shall deliver the Agreement evidencing the Option to the Secretary
of the Company who shall endorse thereon a notation of such exercise and return
such Agreement to the Optionee. No fractional shares (or cash in lieu thereof)
shall be issued upon exercise of an Option and the number of Shares that may be
purchased upon exercise shall be rounded to the nearest number of whole Shares.
8.3. Rights of Optionees. No Optionee shall be deemed for any purpose to
-------------------
be the owner of any Shares subject to any Option unless and until (i) the Option
shall have been exercised pursuant to the terms thereof, (ii) the Company shall
have issued and delivered the Shares to the Optionee and (iii) the Optionee's
name shall have been entered as a stockholder of record on the books of the
Company. Thereupon, the Optionee shall have full
8
<PAGE>
voting, dividend and other ownership rights with respect to such Shares.
8.4. Termination of Employment. Unless otherwise provided in the
-------------------------
Agreement evidencing the Option, an Option (other than an Option granted to a
consultant or a Nonemployee Director) shall terminate upon an Optionee's
termination of employment with the Company and its Subsidiaries as follows:
(a) in the event the Optionee's employment terminates as a result of
Disability, the Optionee may at any time within three (3) months after such
event exercise the Option or portion thereof that was exercisable on the date of
such termination;
(b) if an Optionee's employment terminates for Cause, the Option shall
terminate immediately and no rights thereunder may be exercised;
(c) if an Optionee's employment terminates without Cause, the Optionee may
at any time within one (1) month after such event exercise the Option or portion
thereof that was exercisable on the date of such termination; and
(d) if an Optionee dies while an employee of the Company or any Subsidiary
or within six (6) months after termination as a result of Disability as
described in clause (a) of this Section 8.4, the Option may be exercised at any
time within six (6) months after the Optionee's death by the person or persons
to whom such rights under the Option shall pass by will or by the laws of
descent and distribution; provided, however, that an Option may be exercised to
-------- -------
the extent, and only to the extent, that the Option or portion thereof was
exercisable on the date of death or earlier termination.
Notwithstanding the foregoing, in no event may any Option be exercised by
anyone after the expiration of the term of the Option.
8.5. Termination of Nonemployee Director Options and Consultant Options.
------------------------------------------------------------------
Nonemployee Director Options and Consultant Options granted to Nonemployee
Directors and consultants to the Company or a Subsidiary shall terminate under
such circumstances as are provided in the Agreement evidencing the Option, and
if not expressly specified, as of the close of business on the last day of the
term of the Option, but in no event may such an Option be exercised by anyone
after the expiration of the term of the Option.
9
<PAGE>
9. Adjustment Upon Changes in Capitalization.
-----------------------------------------
9.1. Subject to Section 10, in the event of a Change in Capitalization,
the Committee shall conclusively determine the appropriate adjustments, if any,
to the maximum number or class of Shares or other stock or securities with
respect to which Options may be granted under the Plan, the number and class of
Shares or other stock or securities which are subject to outstanding Options
granted under the Plan, and the purchase price therefor, if applicable.
9.2. Any such adjustment in the Shares or other stock or securities
subject to outstanding Incentive Stock Options (including any adjustments in the
purchase price) shall be made in such manner as not to constitute a modification
as defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code.
9.3. If, by reason of a Change in Capitalization, an Optionee shall be
entitled to exercise an Option with respect to new, additional or different
shares of stock or securities, such new, additional or different shares shall
thereupon be subject to all of the conditions which were applicable to the
Shares subject to the Option, as the case may be, prior to such Change in
Capitalization.
10. Effect of Certain Transactions.
------------------------------
In the event of (i) the liquidation or dissolution of the Company or (ii) a
merger or consolidation of the Company (a "Transaction"), the Plan and the
Options issued hereunder shall continue in effect in accordance with their
respective terms and each Optionee shall be entitled to receive in respect of
each Share subject to any outstanding Options, as the case may be, upon exercise
of any Option, the same number and kind of stock, securities, cash, property, or
other consideration that each holder of a Share was entitled to receive in the
Transaction in respect of a Share. In the event that, after a Transaction,
there occurs any change of a type described in Section 2.4 hereof with respect
to the shares of the surviving or resulting corporation, then adjustments
similar to, and subject to the same conditions as, those in Section 9 hereof
shall be made by the Committee.
11. Termination and Amendment of the Program.
----------------------------------------
11.1. The Plan shall terminate on the day preceding the tenth anniversary
of the date of its adoption by the Board and no Option may be granted
thereafter. The Board may sooner terminate or amend the Plan at any time and
from time to time; provided, however, that to the extent necessary under Section
-------- -------
16(b) of the Exchange Act and the rules and regulations promulgated thereunder
or other applicable law, no amendment shall be effective
10
<PAGE>
unless approved by the stockholders of the Company in accordance with applicable
law and regulations at an annual or special meeting held within twelve (12)
months after the date of adoption of such amendment.
11.2. Except as provided in Sections 9 and 10 hereof, rights and
obligations under any Option granted before any amendment or termination of the
Plan shall not be adversely altered or impaired by such amendment or
termination, except with the consent of the Optionee, nor shall any amendment or
termination deprive any Optionee of any Shares which he may have acquired
through or as a result of the Plan.
12. Non-Exclusivity of the Plan. The adoption of the Plan by the Board
---------------------------
shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
13. Limitation of Liability. As illustrative of the limitations of
-----------------------
liability of the Company, but not intended to be exhaustive thereof, nothing in
the Plan shall be construed to:
(i) give any person any right to be granted an Option other than at the
sole discretion of the Committee;
(ii) give any person any rights whatsoever with respect to Shares except as
specifically provided in the Plan;
(iii) limit in any way the right of the Company to terminate the employment
of any person at any time; or
(iv) be evidence of any agreement or understanding, expressed or implied,
that the Company will employ any person at any particular rate of compensation
or for any particular period of time.
14. Regulations and Other Approvals; Governing Law.
----------------------------------------------
14.1. This Plan and the rights of all persons claiming hereunder shall be
construed and determined in accordance with the laws of the State of New York.
14.2. The obligation of the Company to sell or deliver Shares with respect
to Options granted under the Plan shall be subject to all applicable laws, rules
and regulations, including all applicable federal and state securities laws, and
the obtaining of all such approvals by governmental agencies as may be deemed
necessary or appropriate by the Committee.
11
<PAGE>
14.3. The Plan is intended to comply with Rule 16b-3 promulgated under the
Exchange Act and the Committee shall interpret and administer the provisions of
the Plan or any Agreement in a manner consistent therewith. Any provisions
inconsistent with such Rule shall be inoperative and shall not affect the
validity of the Plan.
14.4. The Board may make such changes as may be necessary or appropriate
to comply with the rules and regulations of any government authority, or to
obtain for Eligible Employees granted Incentive Stock Options the tax benefits
under the applicable provisions of the Code and regulations promulgated
thereunder.
14.5. Each Option is subject to the requirement that, if at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the grant of an Option or the issuance of
Shares, no Options shall be granted or payment made or Shares issued, in whole
or in part, unless listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions, or as otherwise determined to
be acceptable to the Committee.
14.6. Notwithstanding anything contained in the Plan to the contrary, in
the event that the disposition of Shares acquired pursuant to the Plan is not
covered by a then current registration statement under the Securities Act of
1933, as amended, and is not otherwise exempt from such registration, such
Shares shall be restricted against transfer to the extent required by the
Securities Act of 1933, as amended, and Rule 144 or other regulations
thereunder. The Committee may require any individual receiving Shares pursuant
to the Plan, as a condition precedent to receipt of such Shares upon exercise of
an Option, to represent and warrant to the Company in writing that the Shares
acquired by such individual are acquired without a view to any distribution
thereof and will not be sold or transferred other than pursuant to an effective
registration thereof under said act or pursuant to a exemption applicable under
the Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder. The certificates evidencing any of such Shares shall be
appropriately amended to reflect their status as restricted securities as
aforesaid.
15. Miscellaneous.
-------------
15.1. Multiple Agreements. The terms of each Option may differ from other
-------------------
Options granted under the Plan at the same time, or at some other time. The
Committee may also grant
12
<PAGE>
more than one Option to a given Eligible Employee during the term of the Plan,
either in addition to, or in substitution for, one or more Options previously
granted to that Eligible Employee.
15.2. Withholding of Taxes. (a) The Company shall have the right to
--------------------
deduct from any distribution of cash to any Optionee, an amount equal to the
federal, state and local income taxes and other amounts as may be required by
law to be withheld (the "Withholding Taxes") with respect to any Option. If an
Optionee is entitled to receive Shares upon exercise of an Option, the Optionee
shall pay the Withholding Taxes to the Company prior to the issuance of such
Shares. In satisfaction of the Withholding Taxes, the Optionee may make a
written election (the "Tax Election"), which may be accepted or rejected in the
discretion of the Committee, to have withheld a portion of the Shares issuable
to him or her upon exercise of the Option having an aggregate Fair Market Value,
on the date preceding the date of exercise, equal to the Withholding Taxes,
provided that in respect of an Optionee who may be subject to liability under
Section 16(b) of the Exchange Act either (i) (A) the Optionee makes the Tax
Election at least six (6) months after the date the Option was granted, (B) the
Option is exercised during the ten day period beginning on the third business
day and ending on the twelfth business day following the release for publication
of the Company's quarterly or annual statements of earnings (a "Window Period")
and (C) the Tax Election is made during the Window Period in which the Option is
exercised or prior to such Window Period and subsequent to the immediately
preceding Window Period or (ii) (A) the Tax Election is made at least six months
prior to the date the Option is exercised and (B) the Tax election is
irrevocable with respect to the exercise of all Options which are exercised
prior to the expiration of six months following an election to revoke the Tax
Election. Notwithstanding the foregoing, the Committee may, by the adoption of
rules or otherwise, (i) modify the provisions in the preceding sentence or
impose such other restrictions or limitations on Tax Elections as may be
necessary to ensure that the Tax Elections will be exempt transactions under
Section 16(b) of the Exchange Act, and (ii) permit Tax Elections to be made at
such other times and subject to such other conditions as the Committee
determines will constitute exempt transactions under Section 16(b) of the
Exchange Act.
(b) If an Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any Share or
Shares issued to such Optionee pursuant to the exercise of an Incentive Stock
Option within the two-year period commencing on the day after the date of
transfer of such Share or Shares to the Optionee pursuant to such exercise, the
Optionee shall, within ten (10) days of such disposition, notify the Company
thereof, by delivery of written notice to the Company at its principal executive
office, and immediately deliver to the Company the amount of Withholding Taxes.
13
<PAGE>
15.3. Designation of Beneficiary. Each Optionee may designate a person or
--------------------------
persons to receive in the event of his or her death, any Option or any amount
payable pursuant thereto, to which he or she would then be entitled. Such
designation will be made upon forms supplied by and delivered to the Company and
may be revoked in writing. If an Optionee fails effectively to designate a
beneficiary, then his or her estate will be deemed to be the beneficiary.
16. Effective Date. The effective date of the Plan shall be the date of
--------------
its adoption by the Board, subject only to the approval by the affirmative votes
of the holders of a majority of the securities of the Company present, or
represented, and entitled to vote at a meeting of stockholders duly held in
accordance with the applicable laws of the State of Delaware within twelve (12)
months of such adoption.
14
<PAGE>
EXHIBIT 10.5
MEDICAL RESOURCES, INC.
1996 STOCK OPTION PLAN B
1. Purpose. The purpose of this Plan is to strengthen Medical
-------
Resources, Inc. by providing an incentive to its employees, consultants and
directors, encouraging them to devote their abilities to the success of the
Company. It is intended that this purpose be achieved by extending to
employees, consultants and directors of the Company or any subsidiary an added
long-term incentive for high levels of performance and exceptional efforts
through the grant of options to purchase shares of the Company's common stock
under this Medical Resources, Inc. 1996 Stock Option Plan B.
2. Definitions. For purposes of the Plan:
-----------
2.1. "Agreement" means the written agreement between the Company and
an Optionee evidencing the grant of an Option and setting forth the terms and
conditions thereof.
2.2. "Board" means the Board of Directors of the Company.
2.3. "Cause" means with respect to an Eligible Employee, including an
Eligible Employee who is a director of the Company, (i) the voluntary
termination of employment by such Eligible Employee, (ii) intentional failure to
perform, or habitual neglect of, reasonably assigned duties, (iii) dishonesty or
willful misconduct in the performance of an Optionee's duties, (iv) an
Optionee's engaging in a transaction in connection with the performance of such
Optionee's duties to the Company or any of its Subsidiaries thereof which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit to the Optionee, (v)
willful violation of any law, rule or regulation in connection with the
performance of an Optionee's duties, (vi) willful violation of any policy
adopted by the Company relating to the performance or behavior of employees or
(vii) acts of carelessness or misconduct which have in the reasonable judgment
of the Company's Board of Directors, an adverse effect on the Company.
2.4. "Change in Capitalization" means any increase or reduction in
the number of Shares, or any change (including, but not limited to, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, spin-off, split-up,
issuance of warrants or rights or debentures, stock dividend, stock split or
<PAGE>
reverse stock split, cash dividend, property dividend, combination or exchange
of shares, repurchase of shares, public offering, private placement, change in
corporate structure or otherwise.
2.5. "Code" means the Internal Revenue Code of 1986, as amended.
2.6. "Committee" means a committee consisting of at least two (2)
Disinterested Directors appointed by the Board to administer the Plan and to
perform the functions set forth herein.
2.7. "Company" means Medical Resources, Inc.
2.8. "Consultant Option" means an Option granted to a consultant
pursuant to Section 7.
2.9. "Director Option" means an Option granted to a Nonemployee
Director pursuant to Section 5.
2.10. "Disability" means a physical or mental infirmity which impairs
the Optionee's ability to perform substantially his or her duties for a period
of sixty (60) consecutive days.
2.11. "Disinterested Director" means a director of the Company who is
"disinterested" within the meaning of Rule 16b-3 under the Exchange Act.
2.12. "Eligible Employee" means an officer or other employee of the
Company or a Subsidiary who is designated by the Committee as eligible to
receive Options subject to the conditions set forth herein.
2.13. "Employee Options" means an Option granted to an Eligible
Employee pursuant to Section 6.
2.14. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
2.15. "Fair Market Value" on any date means the average of the high
and low sales prices of the Shares on such date on the principal national
securities exchange on which such Shares are listed or admitted to trading, or
if such Shares are not so listed or admitted to trading, the arithmetic mean of
the per Share closing bid price and per Share closing asked price on such date
as quoted on the National Association of Securities Dealers Automated Quotation
System or such other market in which such prices are regularly quoted, or, if
there have been no published bid or asked quotations with respect to Shares on
such date, the Fair Market Value shall be the value established by the Board in
good faith and in accordance with Section 422 of the Code.
2
<PAGE>
2.16. "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
2.17. "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.18. "Nonemployee Director" means a director of the Company who is
not an employee of the Company or any Subsidiary.
2.19. "Option" means an Employee Option, a Director Option, a
Consultant Option or any or all of them.
2.20. "Optionee" means a person to whom an Option has been granted
under the Plan.
2.21. "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with respect to the Company.
2.22. "Plan" means the Medical Resources, Inc. 1996 Stock Option
Plan B.
2.23. "Shares" means the common stock, par value $.01 per share,
of the Company.
2.24. "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
2.25. "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.
2.26. "Ten-Percent Stockholder" means an Eligible Employee or other
eligible Plan participant, who, at the time an Incentive Stock Option is to be
granted to him or her, owns (within the meaning of Section 422(b)(6) of the
Code) stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, or of a Parent or a Subsidiary.
3. Administration.
--------------
3.1. The Plan shall be administered by the Committee which shall hold
meetings at such times as may be necessary for the proper administration of the
Plan. The Committee shall keep minutes of its meetings. A quorum shall consist
of not less than two members of the Committee and a majority of a quorum may
authorize any action. Any decision or determination reduced to writing and
signed by a majority of all of the members of the
3
<PAGE>
Committee shall be as fully effective as if made by a majority vote at a meeting
duly called and held. Each member of the Committee shall be a Disinterested
Director. No member of the Committee shall be liable for any action, failure to
act, determination or interpretation made in good faith with respect to this
Plan or any transaction hereunder, except for liability arising from his or her
own willful misfeasance, fraud or bad faith. The Company hereby agrees to
indemnify each member of the Committee for all costs and expenses and, to the
extent permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiation for the settlement of or otherwise
dealing with any claim, cause of action or dispute of any kind arising in
connection with any action or failure to act in administering this Plan or in
authorizing or denying authorization to any transaction hereunder.
3.2. Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time to determine those Eligible
Employees to whom Employee Options shall be granted under the Plan and the
number of Incentive Stock Options and/or Nonqualified Stock Options to be
granted to each Eligible Employee and to prescribe the terms and conditions
(which need not be identical) of each Employee Option, including the purchase
price per Share subject to each Employee Option, and make any amendment or
modification to any Agreement consistent with the terms of the Plan.
3.3. Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time:
(a) to construe and interpret the Plan and the Options granted
thereunder and to establish, amend and revoke rules and regulations for the
administration of the Plan, including, but not limited to, correcting any defect
or supplying any omission, or reconciling any inconsistency in the Plan or in
any Agreement, in the manner and to the extent it shall deem necessary or
advisable to make the Plan fully effective, and all decisions and determinations
by the Committee in the exercise of this power shall be final, binding and
conclusive upon the Company, its Subsidiaries, the Optionees and all other
persons having any interest therein;
(b) to determine the duration and purposes for leaves of absence which
may be granted to an Optionee on an individual basis without constituting a
termination of employment or service for purposes of the Plan;
(c) to exercise its discretion with respect to the powers and rights
granted to it as set forth in the Plan;
4
<PAGE>
(d) generally, to exercise such powers and to perform such acts as are
deemed necessary or advisable to promote the best interests of the Company with
respect to the Plan.
4. Stock Subject to Plan.
---------------------
4.1. The maximum number of Shares that may be made the subject of
Options granted under the Plan is 1,000,000 Shares (or the number and kind of
shares of stock or other securities to which such Shares are adjusted upon a
Change in Capitalization pursuant to Section 9) and the Company shall reserve
for the purposes of the Plan, out of its authorized but unissued Shares or out
of Shares held in the Company's treasury, or partly out of each, such number of
Shares as shall be determined by the Board.
4.2. Whenever any outstanding Option or portion thereof expires, is
canceled or is otherwise terminated for any reason, the Shares allocable to the
canceled or otherwise terminated Option or portion thereof may again be the
subject of Options granted hereunder.
5. Option Grants for Nonemployee Directors.
---------------------------------------
5.1. Authority of Committee. Subject to the provisions of the Plan,
----------------------
the Committee shall have full and final authority to select those Nonemployee
Directors who will receive Director Options, the terms and conditions of which
shall be set forth in an Agreement.
5.2. Purchase Price. The purchase price or the manner in which the
--------------
purchase price is to be determined for Shares under each Director Option shall
be determined by the Committee and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Director Option
shall be not less than the Fair Market Value of a Share on the date the Director
Option is granted.
5.3. Duration. Director Options shall be for a term to be designated
--------
by the Committee and set forth in the Agreement evidencing the Option.
5.4. Vesting. Each Director Option shall, commencing not earlier
-------
than the date of its grant, become exercisable in such installments (which need
not be equal or may be one installment) and at such times as may be designated
by the Committee and set forth in the Agreement evidencing the Option. To the
extent not exercised, installments shall accumulate and be exercisable, in whole
or part, at any time after becoming exercisable, to not later than the date the
Director Option expires. The Committee may accelerate the exercisability of any
Option or portion thereof at any time.
5
<PAGE>
6. Option Grants for Eligible Employees.
------------------------------------
6.1. Authority of Committee. Subject to the provisions of the Plan,
----------------------
the Committee shall have full and final authority to select those Eligible
Employees who will receive Employee Options, the terms and conditions of which
shall be set forth in an Agreement; provided, however, that no Eligible Employee
-------- -------
shall receive an Incentive Stock Option unless he is an employee of the Company,
a Parent or a Subsidiary at the time the Incentive Stock Option is granted.
6.2. Purchase Price. The purchase price or the manner in which the
--------------
purchase price is to be determined for Shares under each Employee Option shall
be determined by the Committee and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Employee Option
shall be (i) except as provided in clause (ii) of this Section 6.2, not less
than the Fair Market Value of a Share on the date the Employee Option is
granted; and (ii) with respect to any Incentive Stock Option granted to a Ten
Percent Stockholder, not less than 110% of the Fair Market Value of a Share on
the date the Option is granted.
6.3. Duration. Employee Options granted hereunder shall be for such
--------
term as the Committee shall determine, provided that no Employee Option shall be
exercisable after the expiration of ten (10) years from the date it is granted
(five (5) years in the case of an Incentive Stock Option granted to a Ten-
Percent Stockholder). The Committee may, subsequent to the granting of any
Employee Option, extend the term thereof but in no event shall the term as so
extended exceed the maximum term provided for in the preceding sentence.
6.4. Vesting. Each Employee Option shall, commencing not earlier
-------
then the date of its grant, become exercisable in such installments (which need
not be equal or may be in one installment) and at such times as may be
designated by the Committee and set forth in the Agreement evidencing the
Option. To the extent not otherwise provided by the Committee, Employee Options
shall be exercisable in three (3) equal installments each equal to one-third of
the entire Option granted, the first of which shall become exercisable on the
first anniversary of the date of the grant of the Employee Option, the second
installment of which shall become exercisable on the second anniversary of the
date of grant of the Employee Option, and the final installment of which shall
become exercisable on the third anniversary of the date of grant. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or
part, at any time after becoming exercisable, to not later than the date the
Employee Option expires. The Committee may accelerate the exercisability of any
Option or portion thereof at any time.
6
<PAGE>
6.5. Modification or Substitution. The Committee may, in its
----------------------------
discretion, modify outstanding Employee Options or accept the surrender of
outstanding Employee Options (to the extent not exercised) and grant new Options
in substitution for them. Notwithstanding the foregoing, no modification of an
Employee Option shall adversely alter or impair any rights or obligations under
the Employee Option without the Optionee's consent.
7. Option Grants for Consultants.
-----------------------------
7.1. Authority of Committee. Subject to the provisions of the Plan,
----------------------
the Committee shall have full and final authority to select those consultants to
the Company or a Subsidiary who will receive Consultant Options, the terms and
conditions of which shall be set forth in an Agreement.
7.2. Purchase Price. The purchase price or the manner in which the
--------------
purchase price is to be determined for Shares under each Consultant Option shall
be determined by the Committee and set forth in the Agreement evidencing the
Option, provided that the purchase price per Share under each Consultant Option
shall be not less than the Fair Market Value of a Share on the date the
Consultant Option is granted.
7.3. Duration. Consultant Options granted hereunder shall be for
--------
such term as the Committee shall determine, provided that no Consultant Option
shall be exercisable after the expiration of ten (10) years from the date it is
granted. The Committee may, subsequent to the granting of any Consultant
Option, extend the term thereof but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
7.4. Vesting. Each Consultant Option shall, commencing not earlier
-------
then the date of its grant, become exercisable in such installments (which need
not be equal or may be in one installment) and at such times as may be
designated by the Committee and set forth in the Agreement evidencing the
Option. To the extent not otherwise provided by the Committee, Consultant
Options shall be exercisable in three (3) equal installments each equal to one-
third of the entire Option granted, the first of which shall become exercisable
on the first anniversary of the date of grant of the Consultant Options, the
second installment of which shall become exercisable on the second anniversary
of the date of grant, and the final installment of which shall become
exercisable on the third anniversary of the date of grant. To the extent not
exercised, installments shall accumulate and be exercisable, in whole or part,
at any time after becoming exercisable, to not later than the date the
Consultant Option expires. The Committee may accelerate the exercisability of
any Option or portion thereof at any time.
7
<PAGE>
8. Terms and Conditions Applicable to All Options
----------------------------------------------
8.1. Non-transferability. No Option granted hereunder shall be
-------------------
transferable by the Optionee to whom granted otherwise than by will or the laws
of descent and distribution, and an Option may be exercised during the lifetime
of such Optionee only by the Optionee or his or her guardian or legal
representative. The terms of each Option shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Optionee.
8.2. Method of Exercise. The exercise of an Option shall be made
------------------
only by a written notice delivered in person or by mail to the Secretary of the
Company at the Company's principal executive office, specifying the number of
Shares to be purchased and accompanied by payment therefor and otherwise in
accordance with the Agreement pursuant to which the Option was granted. The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid in full upon such exercise, as determined by the Committee in its
discretion, by any one or a combination of the following: (i) cash, or (ii)
transferring Shares to the Company upon such terms and conditions as determined
by the Committee. At the Optionee's request and subject to the consent of the
Committee, Shares to be acquired upon the exercise of a portion of an Employee
Option will be applied automatically to pay the purchase price in connection
with the exercise of additional portions of the Employee Option then being
exercised. The written notice pursuant to this Section 8.2 may also provide
instructions from the Optionee to the Company that upon receipt of the purchase
price in cash from the Optionee's broker or dealer, designated as such on the
written notice, in payment for any Shares purchased pursuant to the exercise of
an Option, the Company shall issue such Shares directly to the designated broker
or dealer. Any Shares transferred to the Company as payment of the purchase
price under an Option shall be valued at their Fair Market Value on the day
preceding the date of exercise of such Option. If requested by the Committee,
the Optionee shall deliver the Agreement evidencing the Option to the Secretary
of the Company who shall endorse thereon a notation of such exercise and return
such Agreement to the Optionee. No fractional shares (or cash in lieu thereof)
shall be issued upon exercise of an Option and the number of Shares that may be
purchased upon exercise shall be rounded to the nearest number of whole Shares.
8.3. Rights of Optionees. No Optionee shall be deemed for any
-------------------
purpose to be the owner of any Shares subject to any Option unless and until (i)
the Option shall have been exercised pursuant to the terms thereof, (ii) the
Company shall have issued and delivered the Shares to the Optionee and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full
8
<PAGE>
voting, dividend and other ownership rights with respect to such Shares.
8.4. Termination of Employment. Unless otherwise provided in the
-------------------------
Agreement evidencing the Option, an Option (other than an Option granted to a
consultant or a Nonemployee Director) shall terminate upon an Optionee's
termination of employment with the Company and its Subsidiaries as follows:
(a) in the event the Optionee's employment terminates as a result of
Disability, the Optionee may at any time within three (3) months after such
event exercise the Option or portion thereof that was exercisable on the date of
such termination;
(b) if an Optionee's employment terminates for Cause, the Option shall
terminate immediately and no rights thereunder may be exercised;
(c) if an Optionee's employment terminates without Cause, the Optionee
may at any time within one (1) month after such event exercise the Option or
portion thereof that was exercisable on the date of such termination; and
(d) if an Optionee dies while an employee of the Company or any
Subsidiary or within six (6) months after termination as a result of Disability
as described in clause (a) of this Section 8.4, the Option may be exercised at
any time within six (6) months after the Optionee's death by the person or
persons to whom such rights under the Option shall pass by will or by the laws
of descent and distribution; provided, however, that an Option may be exercised
-------- -------
to the extent, and only to the extent, that the Option or portion thereof was
exercisable on the date of death or earlier termination.
Notwithstanding the foregoing, in no event may any Option be exercised
by anyone after the expiration of the term of the Option.
8.5. Termination of Nonemployee Director Options and Consultant
----------------------------------------------------------
Options. Nonemployee Director Options and Consultant Options granted to
- -------
Nonemployee Directors and consultants to the Company or a Subsidiary shall
terminate under such circumstances as are provided in the Agreement evidencing
the Option, and if not expressly specified, as of the close of business on the
last day of the term of the Option, but in no event may such an Option be
exercised by anyone after the expiration of the term of the Option.
9
<PAGE>
9. Adjustment Upon Changes in Capitalization.
-----------------------------------------
9.1. Subject to Section 10, in the event of a Change in
Capitalization, the Committee shall conclusively determine the appropriate
adjustments, if any, to the maximum number or class of Shares or other stock or
securities with respect to which Options may be granted under the Plan, the
number and class of Shares or other stock or securities which are subject to
outstanding Options granted under the Plan, and the purchase price therefor, if
applicable.
9.2. Any such adjustment in the Shares or other stock or securities
subject to outstanding Incentive Stock Options (including any adjustments in the
purchase price) shall be made in such manner as not to constitute a modification
as defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code.
9.3. If, by reason of a Change in Capitalization, an Optionee shall
be entitled to exercise an Option with respect to new, additional or different
shares of stock or securities, such new, additional or different shares shall
thereupon be subject to all of the conditions which were applicable to the
Shares subject to the Option, as the case may be, prior to such Change in
Capitalization.
10. Effect of Certain Transactions.
------------------------------
In the event of (i) the liquidation or dissolution of the Company or
(ii) a merger or consolidation of the Company (a "Transaction"), the Plan and
the Options issued hereunder shall continue in effect in accordance with their
respective terms and each Optionee shall be entitled to receive in respect of
each Share subject to any outstanding Options, as the case may be, upon exercise
of any Option, the same number and kind of stock, securities, cash, property, or
other consideration that each holder of a Share was entitled to receive in the
Transaction in respect of a Share. In the event that, after a Transaction,
there occurs any change of a type described in Section 2.4 hereof with respect
to the shares of the surviving or resulting corporation, then adjustments
similar to, and subject to the same conditions as, those in Section 9 hereof
shall be made by the Committee.
11. Termination and Amendment of the Program.
----------------------------------------
11.1. The Plan shall terminate on the day preceding the tenth
anniversary of the date of its adoption by the Board and no Option may be
granted thereafter. The Board may sooner terminate or amend the Plan at any
time and from time to time; provided, however, that to the extent necessary
-------- -------
under Section 16(b) of the Exchange Act and the rules and regulations
promulgated thereunder or other applicable law, no amendment shall be effective
10
<PAGE>
unless approved by the stockholders of the Company in accordance with applicable
law and regulations at an annual or special meeting held within twelve (12)
months after the date of adoption of such amendment.
11.2. Except as provided in Sections 9 and 10 hereof, rights and
obligations under any Option granted before any amendment or termination of the
Plan shall not be adversely altered or impaired by such amendment or
termination, except with the consent of the Optionee, nor shall any amendment or
termination deprive any Optionee of any Shares which he may have acquired
through or as a result of the Plan.
12. Non-Exclusivity of the Plan. The adoption of the Plan by the
---------------------------
Board shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
13. Limitation of Liability. As illustrative of the limitations of
-----------------------
liability of the Company, but not intended to be exhaustive thereof, nothing in
the Plan shall be construed to:
(i) give any person any right to be granted an Option other than
at the sole discretion of the Committee;
(ii) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(iii) limit in any way the right of the Company to terminate the
employment of any person at any time; or
(iv) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
14. Regulations and Other Approvals; Governing Law.
----------------------------------------------
14.1. This Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the State of
New York.
14.2. The obligation of the Company to sell or deliver Shares with
respect to Options granted under the Plan shall be subject to all applicable
laws, rules and regulations, including all applicable federal and state
securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
11
<PAGE>
14.3. The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith. Any
provisions inconsistent with such Rule shall be inoperative and shall not affect
the validity of the Plan.
14.4. The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Employees granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
14.5. Each Option is subject to the requirement that, if at any time
the Committee determines, in its discretion, that the listing, registration or
qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the grant of an Option or the issuance of
Shares, no Options shall be granted or payment made or Shares issued, in whole
or in part, unless listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions, or as otherwise determined to
be acceptable to the Committee.
14.6. Notwithstanding anything contained in the Plan to the contrary,
in the event that the disposition of Shares acquired pursuant to the Plan is not
covered by a then current registration statement under the Securities Act of
1933, as amended, and is not otherwise exempt from such registration, such
Shares shall be restricted against transfer to the extent required by the
Securities Act of 1933, as amended, and Rule 144 or other regulations
thereunder. The Committee may require any individual receiving Shares pursuant
to the Plan, as a condition precedent to receipt of such Shares upon exercise of
an Option, to represent and warrant to the Company in writing that the Shares
acquired by such individual are acquired without a view to any distribution
thereof and will not be sold or transferred other than pursuant to an effective
registration thereof under said act or pursuant to a exemption applicable under
the Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder. The certificates evidencing any of such Shares shall be
appropriately amended to reflect their status as restricted securities as
aforesaid.
15. Miscellaneous.
-------------
15.1. Multiple Agreements. The terms of each Option may differ from
-------------------
other Options granted under the Plan at the same time, or at some other time.
The Committee may also grant
12
<PAGE>
more than one Option to a given Eligible Employee during the term of the Plan,
either in addition to, or in substitution for, one or more Options previously
granted to that Eligible Employee.
15.2. Withholding of Taxes. (a) The Company shall have the right to
--------------------
deduct from any distribution of cash to any Optionee, an amount equal to the
federal, state and local income taxes and other amounts as may be required by
law to be withheld (the "Withholding Taxes") with respect to any Option. If an
Optionee is entitled to receive Shares upon exercise of an Option, the Optionee
shall pay the Withholding Taxes to the Company prior to the issuance of such
Shares. In satisfaction of the Withholding Taxes, the Optionee may make a
written election (the "Tax Election"), which may be accepted or rejected in the
discretion of the Committee, to have withheld a portion of the Shares issuable
to him or her upon exercise of the Option having an aggregate Fair Market Value,
on the date preceding the date of exercise, equal to the Withholding Taxes,
provided that in respect of an Optionee who may be subject to liability under
Section 16(b) of the Exchange Act either (i) (A) the Optionee makes the Tax
Election at least six (6) months after the date the Option was granted, (B) the
Option is exercised during the ten day period beginning on the third business
day and ending on the twelfth business day following the release for publication
of the Company's quarterly or annual statements of earnings (a "Window Period")
and (C) the Tax Election is made during the Window Period in which the Option is
exercised or prior to such Window Period and subsequent to the immediately
preceding Window Period or (ii) (A) the Tax Election is made at least six months
prior to the date the Option is exercised and (B) the Tax election is
irrevocable with respect to the exercise of all Options which are exercised
prior to the expiration of six months following an election to revoke the Tax
Election. Notwithstanding the foregoing, the Committee may, by the adoption of
rules or otherwise, (i) modify the provisions in the preceding sentence or
impose such other restrictions or limitations on Tax Elections as may be
necessary to ensure that the Tax Elections will be exempt transactions under
Section 16(b) of the Exchange Act, and (ii) permit Tax Elections to be made at
such other times and subject to such other conditions as the Committee
determines will constitute exempt transactions under Section 16(b) of the
Exchange Act.
(b) If an Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any Share or
Shares issued to such Optionee pursuant to the exercise of an Incentive Stock
Option within the two-year period commencing on the day after the date of
transfer of such Share or Shares to the Optionee pursuant to such exercise, the
Optionee shall, within ten (10) days of such disposition, notify the Company
thereof, by delivery of written notice to the Company at its principal executive
office, and immediately deliver to the Company the amount of Withholding Taxes.
13
<PAGE>
15.3. Designation of Beneficiary. Each Optionee may designate a
--------------------------
person or persons to receive in the event of his or her death, any Option or any
amount payable pursuant thereto, to which he or she would then be entitled.
Such designation will be made upon forms supplied by and delivered to the
Company and may be revoked in writing. If an Optionee fails effectively to
designate a beneficiary, then his or her estate will be deemed to be the
beneficiary.
16. Effective Date. The effective date of the Plan shall be the date
--------------
of its adoption by the Board, subject only to the approval by the affirmative
votes of the holders of a majority of the securities of the Company present, or
represented, and entitled to vote at a meeting of stockholders duly held in
accordance with the applicable laws of the State of Delaware within twelve (12)
months of such adoption.
14
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement is made and entered into as
of this 1st day of January, 1997, by and between Medical Resources, Inc., a
Delaware corporation (the "Company"), and William D. Farrell, an individual
("Executive").
RECITALS
A. The Company and the Executive are parties to an employment agreement
dated as of September 30, 1994, amended as of August 1, 1995.
B. The Company desires to be assured of the continued association and
services of Executive for the Company.
C. Executive is willing and desires to continue his employment by the
Company, upon the terms, covenants and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties hereto do hereby agree as follows:
1. Employment. The Company hereby employs Executive with such title or
----------
titles as the Board of Directors approves in its sole discretion. Initially,
such titles shall be President and Chief Operating Officer of the Company.
2. Term. The term of this Agreement shall be for a period commencing on
----
the date hereof to December 31, 1999, unless terminated earlier pursuant to
Section 6 herein; provided, however, that Executive's obligations in Sections 5,
7 and 8 herein shall continue in effect after such termination, unless this
Agreement is terminated in accordance with Section 6.3 hereof. The Company
agrees that it shall commence negotiations with Executive to extend, modify or
renew the terms of this Agreement no less than nine months prior to the
expiration of the Term; provided, however, that the Company is not obligated to
offer continued employment to the Executive. The initial period described in
the first sentence of Section 2 is herein referred to as the "Term."
3. Compensation; Reimbursement.
---------------------------
3.1 Base Salary and Bonus. (a) For all services rendered by
---------------------
Executive under this Agreement, the Company shall pay Executive a base salary of
Two Hundred Twenty Five Thousand
<PAGE>
Dollars ($225,000) per annum, payable biweekly in equal installments (the "Base
Salary").
(b) In addition to Base Salary, the Company agrees to pay Executive a
bonus of $50,000 if the Company meets the income results target established in
its Annual Budget for that specific year. Such bonus shall increase to $125,000
if the Company exceeds the income results target established by the Annual
Budget by 50%. For income results between 100% and 150% of such target, the
bonus shall be prorated. For example, for income results of 125% of such
target, the bonus shall be $87,500. For purposes of this Section 3.1(b), Annual
Budget shall mean the annual budget and forecast of the Company, which shall
contain the income results target, approved by the Company's Board of Directors
in its sole discretion. Calculation of the Company's income results shall be
made net of the bonus to be paid to Executive hereunder.
3.2 Additional Benefits. In addition to the Base Salary,
-------------------
Executive shall be entitled to (i) a monthly car allowance of $800 and (ii) all
benefits of employment which he has been currently receiving while employed by
the Company.
3.3 Reimbursement. Executive shall be reimbursed for all
-------------
reasonable "out-of-pocket" business expenses incurred in connection with the
performance of his duties under this Agreement. The reimbursement of Executive's
business expenses shall be upon presentation to and approval by the Company of
valid receipts and other appropriate documentation for such expenses.
4. Scope of Duties.
---------------
4.1 Assignment of Duties. Executive shall have such duties as
--------------------
may be assigned to him from time to time by the Company's Board of Directors
commensurate with his experience and responsibilities. Such duties shall be
exercised subject to the control, supervision and direction of the Board of
Directors of the Company.
4.2 Executive's Devotion of Time. Executive hereby agrees to
----------------------------
devote his full time, abilities and energy to the faithful performance of the
duties assigned to him and to the promotion and forwarding of the business
affairs of the Company.
5. Confidentiality of Trade Secrets and Other Materials.
----------------------------------------------------
5.1 Trade Secrets. Executive understands and acknowledges that
-------------
because of his experience, knowledge and expertise and because of his duties and
position of trust under this Agreement, he will become familiar with the trade
secrets and other confidential information of the Company and its
- 2 -
<PAGE>
affiliates. Executive further understands and acknowledges the importance to
the Company of the Company's trade secrets and other confidential information.
Other than in the performance of his duties hereunder, Executive agrees not to
disclose, either during the term of his employment by the Company or at any time
thereafter, to any person, firm or corporation or to use any information
concerning the business affairs, the trade secrets or similar confidential
information of the Company, including, but not limited to, trade secrets; lists
of past or present clients (which, for purposes of this Agreement, shall include
referring physicians and referring medical entities, such as HMO's),
radiologists, customers or consultants; product or service development plans;
marketing plans; pricing policies; business acquisition plans or targets; any
portion or phase of any technical information, technique, method, process,
procedure, technology or know-how (whether or not in written or tangible form)
used by the Company or any portion or phase of any technical information, ideas,
discoveries, designs, computer programs (including source or object codes),
processes, procedures, formulae or improvements of the Company that is valuable
(whether or not in written or tangible form or whether or not down-loaded into a
computer or on computer discs) to the Company. All such information, in
whatever form, including all memoranda, notes, plans, reports, records,
documents and other evidence thereof and any other information of whatever
nature which gives the Company an opportunity to obtain an advantage over its
competitors shall be considered a "trade secret" for the purposes of this
Agreement.
5.2 Ownership of Trade Secrets; Assignment of Rights. Executive
------------------------------------------------
hereby agrees that all trade secrets, know-how, documents, records, reports,
plans, proposals, marketing and sales plans, client lists, files and materials,
and copies of the foregoing, made by him or by the Company are the property of
the Company and shall not be used by him in any way adverse to the Company's
interests (the "Property"). Executive shall not deliver, reproduce or in any way
allow such documents or things to be delivered or used by any third party
without specific direction or consent of the Board of Directors of the Company.
Executive hereby assigns to the Company any rights which he may have in any such
trade secret or proprietary information. Upon termination of this Agreement,
Executive shall promptly return to the Company all such Property, in whatever
form (including on computer discs), to the Company, or, at the Company's
request, destroy the same.
6. Termination.
-----------
6.1 Bases for Termination.
---------------------
(1) Executive's employment hereunder may be terminated at any
time by mutual agreement of the parties.
- 3 -
<PAGE>
(2) This Agreement shall automatically terminate upon the Executive's
death or incapacity. "Incapacity" as used herein shall mean mental or
physical incapacity, or both, reasonably determined by the Company's Board
of Directors based upon a certification of such incapacity by, in the
discretion of the Company's Board of Directors, either Executive's
regularly attending physician or a duly licensed physician selected by the
Company's Board of Directors, rendering Executive unable to perform
substantially all of his duties hereunder and which appears reasonably
certain to continue for at least 60 consecutive days without substantial
improvement. Executive shall be deemed to have "become incapacitated" on
the date the Company's Board of Directors has determined that Executive is
incapacitated and so notifies Executive.
(3) Executive's employment may be terminated by the Company "with
cause," effective upon delivery of written notice to Executive given at any
time (without any necessity for prior notice) if any of the following shall
occur:
(a) any action by Executive which would be grounds for
termination under the New Jersey Labor Code or any successor provision
(currently covering any willful breach of duty, habitual neglect of
duty, and continued incapacity);
(b) any material acts or events which inhibit Executive from
fully performing his responsibilities to the Company as determined by
the Company's Board of Directors in good faith, such as (i) a felony
criminal conviction; (ii) any other criminal conviction involving
Executive's lack of honesty or Executive's moral turpitude; (iii) drug
or alcohol abuse; (iv) acts of dishonesty, gross carelessness or gross
misconduct which have in the reasonable judgment of the Company's
Board of Directors, an adverse effect on the Company; or (v) material
breach of any provision of this Agreement.
(4) Executive's employment may be terminated by the Company
"without cause" (for any reason or no reason at all) at any time by giving
Executive three days prior written notice of termination, which termination
shall be effective on the fourth day following such notice. At the
Company's option, Executive shall immediately leave the Company's premises
on the date notice of termination is given by the Company. It shall be
deemed termination "without cause" if after an Authorized Change of
Control, Executive is assigned a non-executive position with the surviving
company. For purposes of this Section, "Authorized Change of Control"
shall mean a transaction
- 4 -
<PAGE>
described in (i), (ii) or (iii) of Section 6.3 which was approved by a
majority of the Continuing Directors (as defined in Section 6.3).
6.2 Payment Upon Termination.
------------------------
(1) If Executive's employment under this Agreement is terminated
under Section 6.1(4) herein, the Company shall pay to Executive, in the
manner set forth below, an amount equal to the sum of (a) Executive's Base
Salary through the Term; plus (b) any unpaid out-of-pocket expenses
incurred by the Executive prior to the date of termination which are
reimbursable pursuant to Section 3.3 herein; plus (c) health insurance
coverage through the Term. Subject to the foregoing, after the Company's
termination of Executive under this provision, the Company shall not be
obligated to provide any other benefits to Executive described in Section
3.2 (except as may be required by law). Payments made above shall be made
in equal installments over such period of time in regularly scheduled
Company paydays. In addition, if Executive's employment under this
Agreement is termination under Section 6.1(4), Executive's stock options
shall vest and expire in accordance with the terms of the stock option
agreement as though Executive's employment with the Company continued
through the Term; provided, however, if Executives breaches any of the
covenants contained in Sections 5 and 7 hereof, such options shall
immediately terminate.
(2) Upon termination under Sections 6.1(1), (2) or (3), the
Company shall not be obligated to compensate Executive, his estate or
representatives except for unpaid out-of-pocket expenses incurred by the
Executive prior to the date of termination which are reimbursable pursuant
to Section 3.3 herein, nor provide the benefits to Executive described in
Section 3.2 (except as provided by law).
6.3 Payment and Termination of Agreement Upon Unauthorized Change in
----------------------------------------------------------------
Control. In the event of an "Unauthorized Change in Control" of the Company,
- -------
the Company shall immediately (within one business day of such Unauthorized
Change in Control) pay to Executive in one lump-sum, an amount equal to the sum
of (a) the Executive Base Salary through December 31, 1999; plus (b) any unpaid
out-of-pocket expenses incurred by the Executive prior to the date of the
Unauthorized Change in Control which are reimbursable pursuant to Section 3.3
herein, and this Agreement, including the restrictions contained in Section 7,
shall terminate. In addition, in the event of an Unauthorized Change in Control
of the Company, or the sale of all or substantially all of the assets, business
or common stock of the Company in a transaction in which the Company's
stockholders receive no
- 5 -
<PAGE>
publicly traded equity securities, all of Executive's outstanding stock options
shall vest. For purposes of this Agreement, "Unauthorized Change of Control" of
the Company shall be deemed to have occurred if a transaction described in (i),
(ii) or (iii) below was not approved by a majority of the Continuing Directors
(as defined below) and (i) the Company sells all or substantially all of its
assets to another person or entity or is acquired by another person or entity,
whether such acquisition is in the form of a sale, merger, consolidation or
other similar transaction; (ii) any person or group (as such terms are used in
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) other than the Company's current affiliates is or becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Company representing 40% or more of the
combined voting power of the Company then outstanding; or (iii) during any
period of two consecutive years, individuals who, at the beginning of such
period, constituted the Board of Directors of the Company cease for any reason
to constitute at least a majority thereof unless the election, or the nomination
for election, by the Company's stockholders of each new director was approved by
a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period (the "Continuing Directors").
6.4 Stock Option Changes. Any provisions hereunder relating to
--------------------
Executive's stock options shall be treated as an amendment to Executive's Stock
Option Agreements relating thereto and approval by the Board of Directors of
this Agreement shall be deemed Board approval of an amendment with respect to
such provisions to the Executive's Stock Option Agreements.
7. Non-Competition/Non-Interference.
--------------------------------
7.1 Non-Competition. In consideration of all of the payments due to
---------------
him hereunder and the other value provided to him as a result of his
relationship with the Company, during the Term and for a period of fifteen (15)
months following the Term, he will not, directly or indirectly, as principal,
partner, agent, employee, consultant, officer, lender, director or shareholder
(except as an investor in securities of publicly owned corporations so long as
Executive's ownership of stock of any one company does not exceed the lesser of
(i) 1% of the outstanding stock of said company, or (ii) an aggregate purchase
price of $50,000) engage in any business or enterprise in the United States
which is competitive with the business heretofore conducted or hereafter
conducted by the Company or any present subsidiary or affiliate of the Company,
including any business or enterprise involving magnetic resonance imaging or
other diagnostic imaging procedure; provided, however, that the restrictions
-------- -------
contained in this Section 7.1 shall not apply, and
- 6 -
<PAGE>
shall be of no force and effect, in the event that this Agreement is terminated
due to an "Unauthorized Change in Control".
7.2 Non-Interference. In consideration of all of the payments due to
----------------
him hereunder, and the other value provided to him as a result of his
relationship with the Company, Executive covenants and agrees that he will not,
during the Term and for a period of three (3) years following the Term, directly
or indirectly, engage in soliciting, placing or recruiting any of the Company's
(or any of the Company's affiliate's) employees (or person who within six months
prior to such contact was an employee) for employment with any other entity
other than the Company and its affiliates or soliciting clients, reading
radiologists or customers, where such relationship with the Company or any
affiliate is in existence at the relevant time (if the contact occurs during
employment) or at the date of termination (if the act occurs following the
termination of employment) or any supplier, lender, lessor or any other person
or entity which has a business relationship with the Company or any of its
affiliates, with a view to influencing or inducing such supplier, lender, lessor
or such person or entity to terminate or materially lessen his, her or its
relationship with the Company or to develop relationships with Executive or any
other person or entity that would have the same effect; provided, however, that
-------- -------
the restrictions contained in this Section 7.2 shall not apply, and shall be of
no force and effect, in the event that this Agreement is terminated due to a
"Unauthorized Change in Control".
8. Injunctive Relief; Independence and Severability of Covenants.
-------------------------------------------------------------
8.1 Injunctive Relief. Executive acknowledges and agrees that, in
-----------------
the event of any breach or likely breach of any of the covenants of Sections 5
and 7 herein, the Company and any relevant affiliate(s) would incur damages in
an amount difficult to ascertain and/or be irreparably harmed and could not be
made whole solely by monetary damages. It is accordingly agreed that such
persons, in addition to any other remedy to which they may be entitled at law or
in equity, shall be entitled to injunctive relief in respect of such breach or
likely breach as may be ordered by any court of competent jurisdiction
including, but not limited to, an injunction restraining any violation of
Sections 5 and 7 herein and without the proof of actual damages. It is intended
to grant full third party rights under this provision.
8.2 Independence and Severability of Covenants. Executive
------------------------------------------
acknowledges and agrees that the covenants and other provisions set forth in
Sections 5 and 7 herein and in this Section 8 are reasonable, including with
respect to duration and subject matter, and that he is receiving valuable and
adequate consideration for such covenants under this Agreement. The
- 7 -
<PAGE>
parties acknowledge that it is their intention that all such covenants and
provisions be enforceable to the fullest extent possible under applicable law.
If any of the provisions set forth in Sections 5 or 7 and or in this Section 8
is found to be unenforceable in any instance, such finding shall not preclude
any other enforcement of such provisions and reference is made to Section 9.2.
If any of the provisions set forth in Sections 5 or 7 or in this Section 8 is
found to be invalid, such finding or invalidity shall not affect the validity of
the remaining provisions and the provisions of Section 9.2 will apply.
9. Miscellaneous.
-------------
9.1 Transfer and Assignment. This Agreement is personal as to
-----------------------
Executive and shall not be assigned or transferred by Executive without the
prior written consent of the Company. This Agreement shall be binding upon and
inure to the benefit of all of the parties hereto and their respective permitted
heirs, personal representatives, successors and assigns.
9.2 Severability. Nothing contained herein shall be construed to
------------
require the commission of any act contrary to law. Should there be any conflict
between any provisions hereof and any present or future statute, law, ordinance,
regulation, or other pronouncement having the force of law, the latter shall
prevail, but the provision of this Agreement affected thereby shall be curtailed
and limited only to the extent necessary to bring it within the requirements of
the law, and the remaining provisions of this Agreement shall remain in full
force and effect.
9.3 Governing Law. This Agreement is made under and shall be
-------------
construed pursuant to the laws of the State of New Jersey.
9.4 Counterparts. This Agreement may be executed in several
------------
counterparts and all documents so executed shall constitute one agreement,
binding on all of the parties hereto, notwithstanding that all of the parties
did not sign the original or the same counterparts.
9.5 Entire Agreement. This Agreement constitutes the entire
----------------
agreement and understanding of the parties with respect to the subject matter
hereof and supersedes all prior oral or written agreements, arrangements, and
understandings with respect thereto. No representation, promise, inducement,
statement or intention has been made by any party hereto that is not embodied
herein, and no party shall be bound by or liable for any alleged representation,
promise, inducement, or statement not so set forth herein.
- 8 -
<PAGE>
9.6 Modification. This Agreement may be modified, amended,
------------
superseded, or cancelled, and any of the terms, covenants, representations,
warranties or conditions hereof may be waived, only by a written instrument
executed by the party or parties to be bound by any such modification,
amendment, supersession, cancellation, or waiver.
9.7 Waiver. The waiver by either of the parties, express or implied,
------
of any right under this Agreement or any failure to perform under this Agreement
by the other party, shall not constitute or be deemed as a waiver of any other
right under this Agreement or of any other failure to perform under this
Agreement by the other party, whether of a similar or dissimilar nature.
9.8 Cumulative Remedies. Each and all of the several rights and
-------------------
remedies provided in this Agreement, or by law or in equity, shall be
cumulative, and no one of them shall be exclusive of any other right or remedy,
and the exercise of any one or such rights or remedies shall not be deemed a
waiver of, or an election to exercise, any other such right or remedy.
9.9 Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not in any way affect the
meaning and interpretation of this Agreement.
9.10 Notices. Any notice under this Agreement must be in writing,
-------
may be telecopied, sent by express 24-hour guaranteed courier, or hand-
delivered, or may be served by depositing the same in the United States mail,
addressed to the party to be notified, postage-prepaid and registered or
certified with a return receipt requested. The addresses of the parties for the
receipt of notice shall be as follows:
If to the Company:
Medical Resources, Inc.
155 State Street
Hackensack, NJ 07601
With a copy to:
Werbel & Carnelutti
711 Fifth Avenue
New York, New York 10022
Attn: Stephen M. Davis, Esq.
- 9 -
<PAGE>
If to Executive:
William D. Farrell
14 Bluefield Avenue
Harrington Park, NJ 07640
Each notice given by registered or certified mail shall be deemed delivered and
effective on the date of delivery as shown on the return receipt, and each
notice delivered in any other manner shall be deemed to be effective as of the
time of actual delivery thereof. Each party may change its address for notice
by giving notice thereof in the manner provided above.
9.11 Survival. Subject to Section 6.3, any provision of this
--------
Agreement which imposes an obligation after termination or expiration of this
Agreement shall survive the termination or
- 10 -
<PAGE>
expiration of this Agreement and be binding on Executive and the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed as of the date first set forth above.
MEDICAL RESOURCES, INC.
By:___________________________
Name:
Title:
___________________________
William D. Farrell
- 11 -
<PAGE>
Medical Resources, Inc., and Subsidiaries
Exhibit 11. Computation of Shares Used for Earnings Per Share Calculation
<TABLE>
<CAPTION>
Years Ended December 31,
________________________________________________________________________________
1996 1995 1994
________________________________________________________________________________
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE INFORMATION:
Net income (loss) per consolidated
statements of operations $7,254,208 $1,690,224 $(1,994,347)
========== ========== ===========
Weighted average number of
outstanding shares 11,363,273 7,730,000 7,097,500
Add: Incremental shares issuable
on conversion of outstanding
warrants and exercise of
stock options 306,376 55,000 ---
Incremental shares issuable on
conversion of Convertible
Subordinated Debentures --- --- ---
---------- --------- ---------
Weighted average number of shares
used to compute primary earnings
per share 11,669,649 7,785,000 7,097,500
---------- --------- ---------
Primary Earnings Per Share:
---------------------------
Primary net income (loss) per share $ .62 $ .22 $(.28)
---------- --------- ---------
</TABLE>
<PAGE>
Medical Resources, Inc., and Subsidiaries
Exhibit 11. Computation of Shares Used for Earnings Per Share Calculation
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
FULLY DILUTED EARNINGS PER SHARE INFORMATION:
Net income (loss) per consolidated
statements of operations $ 7,254,208 $1,690,224 $(1,994,347)
Add: Interest savings from proceeds
of conversion of outstanding
convertible debentures,
net of minority
interest and taxes 299,154 --- ---
Net income (loss) used to compute fully ----------- ---------- -----------
diluted earnings per share $ 7,553,362 $1,690,224 $(1,994,347)
----------- ---------- -----------
Weighted average number of
outstanding shares 11,363,273 7,730,000 7,097,500
Add: Incremental shares issuable
on conversion of outstanding
warrants and exercise of
stock options 637,508 55,000 ---
Incremental shares issuable on
conversion of Convertible
Subordinated Debentures 902,129 --- ---
Weighted average number of shares ----------- ---------- -----------
used to compute fully diluted
earnings per share 12,902,910 7,785,000 7,097,500
----------- ---------- -----------
Fully Diluted Earnings Per Share:
- ---------------------------------
Fully diluted net income (loss)
per share $ .59 $ .22 $(.28)
----------- ---------- -----------
</TABLE>
<PAGE>
Medical Resources, Inc.
Schedule 21 - Subsidiaries
Jurisdiction of
Name Organization
- -------------------------------- ------------
Collier Resources, Inc. Delaware
Central Fort Myers Resources, Inc. Delaware
Diagnostic Imaging Resources, Inc. Delaware
East Bergen Resources, Inc. New Jersey
StarMed Staffing, Inc. Delaware
Hackensack Resources, Inc. Delaware
Imaging Networks, Inc. Delaware
Morgan Medical Holdings, Inc. Colorado
Morgan Medical Corp. Florida
MRI Sub, Inc. Delaware
West Essex Resources, Inc. Delaware
Brooklyn Resources, Inc. New York
C.D. Acquisition, Inc. Illinois
Diagnostic Imaging Services of Delaware
New York, Inc.
49th Street Imaging Assoc. (J.V.) New York
Fort Myers Resources, Inc. Delaware
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,346,254
<SECURITIES> 0
<RECEIVABLES> 39,878,380
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,747,151
<PP&E> 24,397,077
<DEPRECIATION> 0
<TOTAL-ASSETS> 164,513,812
<CURRENT-LIABILITIES> 27,971,371
<BONDS> 33,731,901
0
0
<COMMON> 185,939
<OTHER-SE> 106,198,035
<TOTAL-LIABILITY-AND-EQUITY> 164,513,812
<SALES> 0
<TOTAL-REVENUES> 93,785,117
<CGS> 0
<TOTAL-COSTS> 59,064,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,783,306
<INTEREST-EXPENSE> 2,968,206
<INCOME-PRETAX> 11,416,208
<INCOME-TAX> 4,162,000
<INCOME-CONTINUING> 7,254,208
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,254,208
<EPS-PRIMARY> .62
<EPS-DILUTED> .59
</TABLE>
<PAGE>
EXHIBIT 99.1
------------
IMPORTANT FACTORS REGARDING FORWARD - LOOKING STATEMENTS
The Company may occasionally make forward-looking statements and
estimates such as forecasts and projections of the Company's future performance
or statement of management's plans and objectives. These forward-looking
statements may be contained in, among other places, SEC filings, Annual Reports
to Shareholders, press releases and oral statements, made by the Company. Actual
results could differ materially from those in such forward-looking statements.
Therefore, no assurances can be given that the results in such forward-looking
statements will be achieved. Important factors that could cause the Company's
actual results to differ from those contained in such forward-looking statements
include, among other things, the factors mentioned below.
ACQUISITION STRATEGY; MANAGEMENT OF GROWTH
One of the Company's key objectives is to continue to acquire
diagnostic imaging centers and temporary healthcare staffing businesses and
integrate them into the Company's operations. Successfully accomplishing this
goal depends upon a number of factors, including the Company's ability to find
suitable acquisition candidates, negotiate acquisitions on acceptable terms,
obtain necessary financing on acceptable terms, retain key personnel of the
acquired entities, hire and train other competent managers, and effectively and
profitably integrate the operations of the acquired businesses into the
Company's existing operations. The process of integrating acquired businesses
may require a significant amount of resources and management attention which
will temporarily detract from attention to the day-to-day business of the
Company and may be prolonged due to unforeseen circumstances.The Company's
ability to manage its growth effectively will require it to continue to improve
its operational, financial and management information systems and controls, and
to attract, retain, motivate and manage employees effectively. The failure of
the Company to manage growth in its business effectively would have a material
adverse effect on its results of operations. Future acquisitions may be
financed through the incurrence of additional indebtedness or the issuance of
equity securities. The issuance by the Company of additional Common Stock in
connection with acquisitions could be dilutive to Company stockholders.
Competition for suitable acquisition candidates is expected to be intense and,
in addition to local hospital and physician groups, to include regional and
national diagnostic imaging service companies, regional and national staffing
companies and other medical services companies, many of which have greater
financial resources than the Company. The Company may also pursue the
development of new centers. New centers may incur significant operating losses
during their development stages, and could materially adversely affect the
Company's operating results and financial condition.
<PAGE>
LIMITATIONS AND DELAYS IN REIMBURSEMENT
Third-party payors, including Medicare, Medicaid, managed care/HMO
providers and certain commercial payors have taken extensive steps to contain or
reduce the costs of healthcare. In certain areas, the payors are subject to
regulations which limit the amount of payments. Discussions within the Federal
government regarding national healthcare reform are emphasizing containment of
healthcare costs. In addition, certain managed care organizations have
negotiated capitated payment arrangements for imaging services. Under
capitation, diagnostic imaging service providers are compensated using a fixed
rate per member of the managed care organization regardless of the total cost of
rendering diagnostic services to the members. Services provided under these
contracts are expected to become an increasingly significant part of the
Company's business. The inability of the Company to properly manage the
administration of capitated contracts could materially adversely effect the
Company. Although patients are ultimately responsible for payment for services
rendered, substantially all of the Company's imaging centers' revenues are
derived from third-party payors. Successful reduction of reimbursement amounts
and rates, changes in services covered, delays or denials of reimbursement
claims, negotiated or discounted pricing and other similar measures could
materially adversely affect the Company's respective imaging centers' revenues,
profitability and cash flow.
The Company's management believes that reimbursement rates will
continue to decline due to factors such as the expansion of managed care
providers and continued national healthcare reform efforts. The Company enters
into contractual arrangements with managed care organizations which, due to the
size of their membership, are able to command reduced rates for services. These
agreements are expected to increase the number of procedures performed due to
the additional referrals from these managed care arrangements. However, there
can be no assurance that the increased volume of procedures associated with
these contractual arrangements will offset the reduction in reimbursement rate
per procedure.
In addition, the Company derives a significant percentage of its net
service revenues from imaging centers through physicians providing imaging
services to patients involved in personal injury claims. Receivables relating to
personal injury claims require more extensive documentation than other
procedures. In addition, those individuals with obligations to the Company in
excess of insurance coverage or those who do not have insurance coverage tend to
delay payment until legal claims are resolved, which may result in significant
collection delays. Due to the greater complexity in processing receivables
relating to personal injury claims, as well as increased information
requirements from third-party payors, such receivables typically require a
longer period of time to collect compared to other receivables and, in the
experience of the Company, incur a higher bad debt expense. The Company believes
that providing imaging services to patients
2
<PAGE>
involved in personal injury claims is an attractive revenue source because of
the higher reimbursement rates typically realized in such cases as compared to
payors such as Medicare, Medicaid and managed care providers. Therefore, the
Company expects new centers which it has recently acquired and centers which it
may acquire in the future to target actively such personal injury cases, which
may increase such centers' bad debt expense levels. Significant delays in the
collection or the inability to collect receivables relating to personal injury
claims could have an adverse effect on the Company's diagnostic imaging
operations.
RESTRICTIONS IMPOSED BY GOVERNMENT REGULATION
The healthcare industry is highly regulated. The ownership,
construction, operation, expansion and acquisition of outpatient diagnostic
imaging centers are subject to various federal and state laws, regulations and
approvals concerning such matters as physician referrals, licensing of
facilities and personnel, and Certificates of Need and other required
certificates for certain types of healthcare facilities and major medical
equipment. Among other penalties, violations of these laws can result in the
shutdown of a company's facilities and loss of Medicare and Medicaid
reimbursement. The Federal Anti-Kickback Act of 1977, as amended (the "Anti-
Kickback Act") prohibits the offer, payment, solicitation or receipt of any form
of remuneration in return for referring Medicare or Medicaid patients or
purchasing, leasing, ordering or arranging for any item or service that is
covered by Medicare or Medicaid. The law provides several penalties for
engaging in prohibited acts, including criminal sanctions and exclusion from the
Medicare and Medicaid programs. Although the Company does not believe that it
is operating in violation of this law, the scope of the law remains somewhat
unclear and there is no assurance that the Company would prevail in its
position. In addition, in 1991 and subsequently, the Office of the Inspector
General of the Department of Health and Human Services promulgated "safe harbor"
regulations specifying activities that will be protected from criminal and civil
investigation and prosecution under the Anti-Kickback Act. The Office of the
Inspector General has stated that failure to satisfy the conditions of an
applicable "safe harbor" does not necessarily indicate that the arrangement in
question violates the Anti-Kickback Act, but means that the arrangement is not
among those that the "safe harbor" regulations protect from criminal and civil
investigation and prosecution under that law. The finding of a violation must
still be determined based upon the precise language of the Anti-Kickback Act.
The Federal Omnibus Budget Reconciliation Act of 1989, as amended by
the Federal Omnibus Budget Reconciliation Act of 1993 contains provisions that,
unless an exception applies, restrict physicians from making referrals to, among
others, providers of MR and other radiological services for services to be
rendered to Medicare or Medicaid patients in which the physicians have a
"financial relationship" or an ownership interest or with which they have a
compensation arrangement (the "Stark Law").
3
<PAGE>
The Stark Law provides exceptions for certain types of employment and
contractual relationships. The Company believes that it is in compliance with
the Stark Law, but there is no assurance that the Company will prevail in its
position if challenged.
The State of Florida also enacted in 1992 an anti-kickback statute
substantially similar in scope to the Anti-Kickback Act. Although the Company
does not believe that it is operating in violation of this law, as with its
Federal counterpart, the scope of the Florida law remains unclear and there is
no assurance that the Company would prevail in its position.
The States of Florida, Illinois, New Jersey, New York, Maryland and
Pennsylvania in which the Company currently operates centers have enacted laws
that restrict or prohibit physicians from referring patients to healthcare
facilities in which such physicians have a financial interest. Although the
Company does not believe that these laws will have a material adverse effect on
its operations in these states, there is no assurance that these laws will not
be interpreted or applied in such a way as to create such a material adverse
effect, or that these states, or other states in which the Company does
business, will not adopt similar or more restrictive laws or regulations that
could have such a material adverse effect.
All states where the Company has imaging centers have enacted
Certificate of Need laws to facilitate healthcare planning by placing
limitations on the purchase of certain major medical equipment and certain other
capital expenditures. These statutes, together with their implementing
regulations, could limit the Company's ability to acquire new imaging equipment
or expand or replace its equipment at existing centers, and no assurances can be
given that the required regulatory approvals for any future acquisitions,
expansions or replacements will be granted to the Company.
The Company continues to review all aspects of its operations and
believes that it complies in all material respects with applicable provisions of
the Anti-Kickback Act, the Stark Law and applicable state laws governing fraud
and abuse as well as licensing and certification, although because of the broad
and sometimes vague nature of these laws and requirements, there can be no
assurance that an enforcement action will not be brought against the Company or
that the Company will not be found to be in violation of one or more of these
regulatory provisions. Further, there can be no assurance that new laws or
regulations will not be enacted, or existing laws or regulations interpreted or
applied in the future in such a way as to have a material adverse impact on the
Company, or that Federal or state governments will not impose additional
restrictions upon all or a portion of the Company's activities, which might
adversely affect the Company's business.
4
<PAGE>
SIGNIFICANT LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS
The Company has significant outstanding debt, including capitalized
lease obligations relating to equipment at its centers. The Company has financed
the acquisition of substantially all of the diagnostic imaging equipment used at
its centers (typically with terms ranging from five to seven years) from lenders
and lessors, with the equipment and other assets serving as collateral for the
loans. Substantially all of the Company's assets have been pledged as collateral
for its capitalized lease obligations, as well as other indebtedness. In certain
cases, the center leasing the equipment and the subsidiary which operates the
center are the only obligors under the capitalized leases. A default under an
equipment lease or certain other indebtedness of the Company could materially
adversely affect the operations of the Company.
COMPETITION; RELIANCE ON REFERRALS
The outpatient diagnostic imaging industry is highly competitive.
Competition focuses primarily on attracting physician referrals, including
referrals through relationships with managed care organizations, at the local
market level. The Company believes that principal competitors in each of its
markets are hospitals and independent or management company owned imaging
centers, some of which are owned with physician investors. Some of these
competitors have greater financial and other resources than the Company.
Principal competitive factors include facility location, type and quality of
equipment, quality and timeliness of test results, ability to develop and
maintain relationships with referring physicians, convenience of scheduling and
availability of patient appointment times and the pricing of services.
Competition for physician referrals can also be affected by the ownership or
affiliation of competing centers or hospitals, with certain of the Company's
competitors having historically derived a significant portion of their revenues
from referrals by physicians who are also investors and have a financial
interest in, or are otherwise affiliated with, the competing center or hospital.
In addition, managed care has affected the availability of referrals by
approving only a certain number of centers in a given geographic region.
The temporary healthcare staffing business is also very competitive.
StarMed competes for clients' business with other providers of travel nurse
temporary staffing and with other staffing companies that provide per diem
staffing services. StarMed also competes for the limited number of available
qualified staff. StarMed competes with several companies which are larger and
may possess greater financial and other resources.
5
<PAGE>
POTENTIAL ADVERSE EFFECT OF RESTRICTIONS ON UNLICENSED PRACTICE OF MEDICINE
Diagnostic imaging centers are subject to laws prohibiting the
practice of medicine by non-physicians and the rebate or division of fees
between physicians and non-physicians. Professional radiology services are
performed at the Company's centers by licensed physicians under contract with a
medical professional corporation, while the Company provides the imaging
equipment, technical employees and administrative functions. Although the
Company believes that it is in compliance with relevant existing laws, there can
be no assurance that state authorities or others may not challenge this
structure as involving the Company in the unlawful practice of medicine.
DEPENDENCE ON QUALIFIED INTERPRETING PHYSICIANS
The Company's strategy of maintaining the high quality of its services
is dependent upon its ability to obtain and maintain arrangements with qualified
interpreting physicians at each of its centers. No assurance can be given that
the Company's contractual arrangements with interpreting physician groups at
each of the Company's centers can be maintained on terms advantageous to the
Company. No assurance can be given that the interpreting physicians with whom
the Company has contracts will perform satisfactorily or continue to practice in
the markets served by its imaging centers. In addition, with respect to the
development of new centers, there can be no assurance that arrangements can be
entered into with interpreting physicians on acceptable terms or that such
physicians will be successful in such centers. The Company's success is
significantly dependent on the ability of these physicians to attract patient
referrals, thereby enabling the Company's centers to operate profitably. The
inability of these physicians to attract sufficient referrals could have a
material adverse effect on the Company's financial condition and operating
results.
TECHNOLOGICAL OBSOLESCENCE
There have been rapid technological advancements made in the software
and, to a lesser extent, hardware in the diagnostic imaging industry. Although
the Company believes that its equipment can generally be upgraded as necessary,
the development of new technologies or refinements of existing technologies
might make existing equipment technologically or economically obsolete. If such
obsolescence were to occur, the Company may be compelled to acquire new
equipment, which could have a material adverse effect on its earnings and cash
flow. In addition, certain of the Company's centers compete against local
centers which contain more advanced imaging equipment or provide additional
modalities.
6
<PAGE>
LIABILITY CLAIMS AND INSURANCE
Although the Company provides administrative and technical services
and is not engaged in the practice of medicine, the diagnostic imaging and
temporary staffing businesses entail the risk of professional liability claims.
The Company's exposure to such liability is reduced for its imaging centers
because interpreting physicians are required to carry their own medical
malpractice insurance. Similarly, the Company's nursing personnel perform
services in accordance with treatments prescribed by third-party physicians or
under hospital supervision. Nevertheless, the Company maintains general
liability insurance and professional liability insurance for both its diagnostic
imaging business and its temporary staffing business in amounts deemed adequate
by management of the Company. There can be no assurance, however, that
potential claims will not exceed the coverage limits or that, in the future,
such insurance will be available.
LOSSES FROM CERTAIN CENTERS
Certain centers of which the Company has acquired since January 1996
have generated losses. With respect to these centers, the Company has advanced,
and, in most circumstances, will continue to advance, working capital to fund
the operations of such centers. The Company cannot determine if or when such
centers will become profitable, or if or when these advances will be repaid. In
the event that the Company determines to close any such center, the Company
would expect to incur a loss in connection with such closure.
7
