<PAGE>
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D. C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
Commission file number 0-20440
-------
MEDICAL RESOURCES, INC.
-----------------------
(Exact Name of registrant as specified in its charter)
Delaware 13-3584552
- ------------------------ --------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
155 State Street Hackensack, New Jersey 07601
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (201) 488-6230
--------------
Title of Each Class
-------------------
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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ______
------
Indicate the number of shares outstanding of each class of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at May 14, 1997
----- ---------------------------
Common stock, par value
$.01 per share 20,197,541
Amendment No. 1
The registrant hereby amends its Form 10-Q for the Quarter ended March 31,
1997 as set forth hererin.
<PAGE>
MEDICAL RESOURCES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income for the
three months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis or Plan of
Operation 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities 29
Item 6. Exhibits and reports on Form 8-K 30
Exhibit 11. Computation of Shares Used For Earnings Per
Share Calculation 31
2
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,468,047 $ 15,346,254
Short-term investments 10,683,535 1,662,600
Restricted short-term investments --- 4,500,000
Accounts receivable, net 52,433,279 39,878,380
Other receivables 1,620,958 2,290,825
Prepaid expenses 4,824,740 3,715,092
Deferred tax assets, net 2,868,000 3,354,000
------------ ------------
Total current assets 91,898,559 70,747,151
------------ ------------
Medical diagnostic and office
equipment, net 47,728,267 24,397,077
Goodwill, net 90,765,203 62,638,656
Other assets 4,208,886 3,170,684
Deferred tax assets, net 2,311,112 2,351,089
Restricted cash 1,057,693 1,045,000
Value of venture contracts 142,655 164,155
------------ ------------
Total assets $238,112,375 $164,513,812
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments on notes and
mortgage payable $ 7,919,983 $ 6,728,668
Current installments on capital
lease obligations 7,469,959 5,991,626
Accounts payable and
accrued expenses 15,120,170 13,070,370
Income taxes payable 1,723,176 2,063,860
Other current liabilities 234,692 116,847
------------ ------------
Total current liabilities 32,467,980 27,971,371
Senior notes payable 52,000,000 ---
Notes and mortgage payable,
less current installments 10,970,014 12,637,926
Obligations under capital leases,
less current installments 6,750,673 8,373,681
Convertible debentures 1,370,000 6,988,089
Other long term liabilities 2,539,936 108,076
Minority interest 12,723,132 2,050,695
------------ ------------
Total liabilities 118,821,735 58,129,838
Stockholders' equity:
Common stock, $.01 par value;
authorized 50,000,000 shares,
20,001,014 issued and
outstanding at March 31, 1997 and
18,593,900 issued and 18,326,400
outstanding at December 31, 1996 200,010 185,939
Common stock to be issued; 125,000
shares at March 31, 1997 and 600,000
shares at December 31, 1996 358,594 1,721,250
Additional paid-in capital 112,158,370 102,927,874
Unrealized appreciation of investments 16,311 25,889
Retained earnings 6,557,355 2,955,530
Less, 267,500 common shares in
Treasury at December 31, 1996 --- ( 1,432,508)
------------ ------------
Stockholders' equity 119,290,640 106,383,974
------------ ------------
Total liabilities and stockholders'
equity $238,112,375 $164,513,812
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
4
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Quarter ended March 31,
1997 1996
----------- -----------
Net service revenues $40,592,640 $18,047,277
----------- -----------
Imaging center and staffing operating costs:
Technical services payroll and
related expenses 15,388,591 7,612,747
Medical supplies 1,390,290 823,000
Diagnostic equipment maintenance 1,509,435 580,837
Independent contractor fees 1,311,068 241,101
Administrative expenses 3,902,086 2,263,049
Other costs 1,194,893 516,265
Provision for uncollectible accounts
receivable 2,288,998 814,708
Corporate general and administrative 3,363,476 1,601,205
Depreciation and amortization 2,921,454 1,316,909
----------- -----------
Operating income 7,322,349 2,277,456
Interest expense, net 929,313 498,167
----------- -----------
Income before minority interest and
income taxes 6,393,036 1,779,289
----------- -----------
Minority interest 235,016 43,691
----------- -----------
Income before income taxes 6,158,020 1,735,598
Provision for income taxes 2,556,195 437,820
----------- -----------
Net income $ 3,601,825 $ 1,297,778
=========== ===========
Per share data
Primary:
Primary net income per share $ .18 $.16
=========== ===========
Fully diluted:
Fully diluted net income per share $ .18 $ .16
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31,
1997 1996
------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,601,825 $1,297,778
Adjustments to reconcile net income ----------- ----------
to net cash provided by
operating activities:
Depreciation and amortization 2,921,454 1,316,909
Provision for uncollectible accounts
receivable 2,288,998 814,708
Minority interest in income of
joint ventures and limited
partnerships, net of distributions 235,016 43,691
Deferred income tax provision 525,977 206,302
Changes in operating assets and liabilities:
Accounts receivable (9,376,261) (3,461,899)
Other receivables 486,345 ( 239,998)
Prepaid expenses (1,109,648) ( 522,376)
Other assets ( 430,844) ( 428,606)
Accounts payable and accrued
expenses (1,777,943) 2,797,716
Income taxes payable ( 340,684) 151,671
Other current liabilities 117,845 ( 122,191)
Other long term liabilities ( 319,138) ( 311,946)
---------- ----------
Total adjustments (6,778,883) 243,981
---------- ----------
Net cash (used in) provided by
operating activities (3,177,058) 1,541,759
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended March 31,
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from investing activities:
Purchase of MRI-CT, Inc. --- ( 463,130)
Purchase of NurseCare Plus, Inc. --- (1,263,992)
Purchase of National Healthcare
Solutions, Inc. ( 50,000) ---
Purchase of Melbourne center ( 1,125,000) ---
Purchase of southern California centers ( 1,021,351) ---
Purchase of Advanced Diagnostic
Imaging, Inc. ( 5,974,290) ---
Purchase of West Palm Beach center ( 2,000,000) ---
Purchase of Rancho Cucamonga center ( 2,603,615) ---
Purchase of medical diagnostic and
office equipment ( 1,736,388) ( 382,116)
Refinancing of assets under capital
leases ( 1,461,470) ---
Purchase of short-term investments,net ( 4,562,104) ---
------------- -----------
Net cash used in
investing activities (20,534,218) (2,109,238)
Cash flows from financing activities: ------------- -----------
Common Stock issuance costs --- ( 145,281)
Note and capital lease repayments
in connection with acquisitions ( 7,001,398) ---
Note and capital lease repayments in
connection with Senior notes
transaction ( 13,764,215) ---
Principal payments under capital
lease obligations ( 1,330,660) ( 928,786)
Principal payments on notes and
mortgage payable ( 1,633,875) ( 303,795)
Proceeds from Senior notes,
net of issuance costs 51,113,080 ---
Proceeds from borrowings 308,512 ---
Proceeds from convertible debentures,net 6,532,965
Redemption of convertible debentures ( 19,000) ---
Purchase of treasury stock --- ( 50,625)
Proceeds from exercises of options 160,626 56,668
------------- -----------
Net cash provided by
financing activities 27,833,070 5,161,146
Net increase in cash ------------- -----------
and cash equivalents 4,121,794 4,593,667
Cash and cash equivalents
at beginning of year 15,346,254 3,934,677
------------- -----------
Cash and cash equivalents $ 19,468,048 $ 8,528,344
at March 31, ============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
7
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended March 31,
1997 1996
------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 1,594,200 $ 557,000
Interest $ 583,647 $ 392,000
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Capital lease obligations assumed
in connection with acquisitions $ 6,552,966 $ 1,572,137
Note payable obligations assumed
in connection with acquisitions $ 14,544,252 ---
Capital lease obligations incurred
for use of equipment $ 1,703,147 $ 68,000
Conversion of subordinated debentures
to Common Stock $ 5,626,613 $ 650,000
Issuances of Common Stock in connection
with acquisitions $ 3,051,770 $ 914,000
Issuance of warrants in connection
with acquisitions $ 843,000 ---
Issuance of notes payable in connection
with acquisitions --- $ 1,338,315
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
MEDICAL RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
- -----------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the interim
periods are not necessarily indicative of the results that may be expected for
an entire year. The unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto contained in Medical Resources, Inc.'s (the "Company") Annual Report for
the year ended December 31, 1996.
Reclassification
- ----------------
Certain prior year items have been reclassified to conform to current year
presentation
Revenue Recognition
- -------------------
The Company has entered into three forms of agreements (defined as Type I,
Type II, and Type III as described below) to provide equipment,premises,
comprehensive management, administration and technical imaging services to
independent contractor interpreting physicians for the provision of medical
services with respect to magnetic resonance scanning, computerized tomography
scanning, radiography and fluoroscopy, ultrasound, x-ray, mammography and other
radiological modalities mutually agreed upon. In accordance with the agreements,
as part of the Company's administrative duties, the Company provides billing and
collection services on behalf of the interpreting physicians for the diagnostic
imaging services performed.
Type I
- ------
Under Type I agreements interpreting physicians are required to pay to the
Company
9
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)a charge per procedure
- -------------------------------------------
performed. These charges are specified in a schedule included by attachment to
the agreements and represent the Company's net service revenue, net of
contractually determined discounts. Under Type I agreements, the Company bears
the risk of amounts being uncollectible equivalent to the proportionate
relationship of its charge per procedure including LOP Type procedures (See Note
2) and the total charge to the referring physician's patient. The Company has
established and recognized reserves for potential uncollectibles.
Type II
-------
For the consolidated centers which the Company acquired, other than NMR
developed centers, subsidiaries of the Company have entered into independent
contractor agreements with unaffiliated professional corporations to provide
radiological services. Fees paid to the radiologists, based upon cash
collections, at these centers are reflected as a component of independent
contractor fees in the accompanying statements of operations. The Company has
entered directly into agreements, under its Type II structure, with third-party
payers that provides for payment to the Company at amounts which differ from its
established rates. Services rendered to medicare and medicaid beneficiaries are
provided under a prospective payment system which establishes a reinbursement
rate by modality. These rates vary depending upon the type of image rendered.
The Company has also entered directly into payment agreements, under its Type II
structure, with certain commercial insurance carriers, health maintenance
organizations and preferred provider organizations. The basis for payment to the
Company under these agreements includes contractually determined discounts from
established rates. Accordingly, net service revenue for these acquired centers
consists of patient billings adjusted for contractual allowances which have been
negotiated with various third party payers. Under Type II agreements, the
Company bears the risk of uncollectibles and has established and recognized
reserves for potential uncollectibles.
Type III
--------
For centers which NMR developed, Type III 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 had terms of up to six years and are
renewable at the option of the Company for a period of one year. All Type III
agreements are currently operating under one year extensions. Under the
agreements, Physicians has 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 fees, net of an allowance based upon Physicians ability to pay
after Physicians have fulfilled their obligations under facility subleases and
radiological service contracts as set forth above, and the recognition of
contractual allowances, which have been negotiated with various third party
payers, and uncollectibles for all procedures, including LOP Type sevices (See
Note 2) constitutes the Company's net service revenues for sites developed by
NMR. The fixed and determinable usage fees charged to Physicians amounts to
approximately $4,980,000 per annum.
10
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
Net service revenues are reported when earned at their estimated net
realizable amounts from patients, third party payers and others for services
rendered including estimated prospectively determined adjustments relating to
contractual adjustments, which pertain to prospectively determined (established)
rates. These adjustments are recognized at the time the services are rendered
and adjusted in future periods, if required, as final settlements are
determined. Revenues derived from medicare and medicaid are subject to audit.
The Company is aware of no pending audits.
The Company also recognizes revenue from temporary nurse staffing.
Revenues are recognized on an accrual basis as earned.
New Accounting Standards
- -------------------------
In the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of 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 the adoption of Statement
No. 121 by the Company.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("Statement No. 128"), was issued which established
standards for computing and presenting earnings per share. Statement No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods.
Had Statement No. 128 been used the Company would have reported the following
unaudited earnings per share for the three month periods ended:
March 31, 1997 March 31, 1996
-------------- --------------
Earnings per share:
Basic $ .19 $ .16
Fully Diluted $ .18 $ .14
Weighted Average Number
of shares used in computation:
Basic 19,001,393 8,250,589
Fully Diluted 21,033,802 10,024,272
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting and Disclosure of Stock Based Compensation" ("Statement No. 123")
was issued. It encourages but does not require
11
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MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
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
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in accounting for
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following:
<TABLE>
<CAPTION>
March 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Management and use receivables
Due from unaffiliated physicians................ $37,718,528 $23,569,802
Due from affiliated physicians................... 12,622,809 9,195,387
Patient accounts receivable....................... 22,231,911 $17,481,493
Less: Allowance for doubtful accounts............. (15,454,452) (9,598,740)
Allowance for contractual allowances........ (4,685,517) (769,562)
----------- -----------
$52,433,279 $39,878,380
=========== ===========
</TABLE>
Contractual adjustments, representing standard fee reductions negotiated with
the third party payers, amounted to approximately $25,270,000, for the year
ended December 31, 1996, and $8,462,000 for the three months ended March 31,
1997.
The Company's aged accounts receivable are as follows at:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
up to 1 year.................... $ 64,708,606 $ 43,121,992
up to 2 years................... 4,431,347 4,104,147
over 2 years.................... 3,433,295 3,020,543
------------ ------------
72,573,248 50,246,682
Less: Allowance for
doubtful accounts
and contractual
adjustments.............. (20,139,969) (10,368,302)
------------ ------------
$ 52,433,279 $ 39,878,380
============ ============
</TABLE>
A significant financial instrument is accounts receivable, which is
concentrated among third party medical reimbursement organizations, principally
insurance companies. Approximately 20% of the Company's 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). The Company undertakes certain measures to
identify and document the individual's obligation to pay for services rendered
regardless of the outcome of pending litigation. 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.
"LOP type" services are rendered at substantially all of the Company's imaging
centers, but only in the case of Type II agreements are such accounts
receivables reflected directly in the Company's financial records. This is as a
result of the structure in terms of the Company's Type I and Type III agreements
as described in Note 1 "Revenue Recognition."
3. Short-term investments
- -------------------------
<TABLE>
<CAPTION>
Gross
unrealized Fair
Cost gains value
----------- ---------- -----------
<S> <C> <C> <C>
March 31, 1997
Available-For-Sale:
U.S. Government obligations $ 9,891,207 $ 16,311 $ 9,907,518
Certificates of deposit 776,017 776,017
----------- ---------- -----------
Total $10,667,224 $ 16,311 $10,683,535
December 31, 1996
Available-For-Sale:
U.S. 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)
----------- ---------- -----------
$ 1,616,711 $ 25,889 $ 1,662,600
=========== ========== ===========
</TABLE>
4. Acquisitions
- ----------------
On January 9, 1996, the Company consummated the acquisition of the business
assets of MRI-CT, Inc., ("MRI-CT") comprised primarily of four diagnostic
imaging centers in the city of New York. 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
$533,000 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
excess of the purchase price and direct acquisition costs 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.
12
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MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
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 health care 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 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 excess of the purchase price and direct acquisition costs 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.
On May 1, 1996, the Company entered into an asset purchase agreement with
AmeriCare Imaging Centers, Inc. and MRI Associates of Tarpon Springs, Inc.
("AmeriCare"), which owned and operated imaging centers in the Tampa, Florida
area. 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 excess of the purchase
price 8 and direct acquisition costs 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.
On May 22, 1996, the Company entered into an asset purchase agreement with
Clearwater, Florida based 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 excess of the purchase price and direct acquisition
costs 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.
On June 28, 1996, the Company entered into an asset purchase agreement with
WeCare-Allied Health Care, Inc. ("WeCare"), a health care staffing company.
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 excess of the purchase price and direct acquisition costs 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.
On July 3, 1996, the Company acquired a diagnostic imaging center in
Centereach, New York ("Centereach"). Pursuant to the acquisition,
13
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MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
the Company acquired certain of the assets for approximately $3,100,000 in cash.
The excess of the purchase price and direct acquisition costs 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.
On August 30, 1996, the Company consummated the acquisition of NMR of
America, Inc. ("NMR"). 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
4,456,000 shares of the Company's common stock valued at $39,350,000. The
excess of the purchase price and direct acquisition costs (including $200,000
inn fees and 120,000 warrants with an exercise price of $9.00 valued at $325,000
for financial advisory services issued as affiliate of the Company's Chairman of
the Board and controlling stockholder (the "Affiliate")) over the fair value of
net assets acquired amounted to $35,286,000 and is being amortized on a
straight-line basis over 20 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 of the assets and
liabilities for $1,900,000 cash and 533,175 shares of the Company's Common
Stock valued at $4,500,000. The excess of the purchase price and direct
acquisition costs (including $60,000 in financial advisory fees paid to the
Affiliate) 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.
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 the Company's Common Stock valued at $200,000. The excess of the
purchase price and direct acquisition costs over the fair value of net assets
acquired amounted to $440,000 and is being amortized on a straight-line basis
over 20 years.
Each of the above acquisitions (the "1996 Acquisitions") were accounted for
under the purchase method of accounting. The operations of these acquisitions
are included in the unaudited consolidated financial statements from the date of
purchase.
On January 10, 1997, the Company, through its wholly owned subsidiary,
StarMed, acquired the assets of National Health Care Solutions, Inc. a medical
staffing company in Detroit, Michigan for
14
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
approximately $50,000 in cash. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
approximately $299,000 and is being amortized on a straight-line basis over 20
years.
On January 16, 1997, the Company acquired a diagnostic imaging center
located in Melbourne, Florida for approximately $1,125,000 in cash. The excess
of the purchase price and direct acquisition costs over the fair value of net
assets acquired amounted to approximately $1,250,000 and is being amortized on a
straight-line basis over 20 years.
On January 28, 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 $1,025,000
payable in cash and contingent consideration based on the centers achieving
certain financial objectives during the one year period subsequent to the
closing of the transaction. Contingent consideration of up to $2,000,000 is
payable in shares of the Company's Common Stock within 90 days of the end of the
measurement period. The excess of the purchase price and direct acquisition
costs over the fair value of net assets acquired amounted to approximately
$1,820,000 and is being amortized on a straight-line basis over 20 years.
On February 28, 1997, the Company acquired a diagnostic imaging center
located in Jacksonville, Florida for 215,000 shares of the Company's Common
Stock valued at $2,300,000 and contingent consideration based on the center
achieving certain financial objectives during the one year period subsequent to
the closing of the transaction. Contingent consideration of up to $1,850,000 is
payable in shares of the Company's Common Stock within 90 days of the end of the
measurement period. The excess of the purchase price and direct acquisition
costs (including 32,000 warrants, with an exercise price of $10.31, valued at
$96,000 issued to the Affiliate for financial advisory services) over the fair
value of net assets acquired amounted to approximately $1,960,000 and is being
amortized on a straight-line basis over 20 years.
On March 10, 1997, the Company acquired Advanced Diagnostic Imaging, Inc.
("ADI") for approximately $6,000,000 in cash consideration. ADI owned
interests in and operated nine diagnostic imaging centers in the Northeast. As
part of the transaction, the Company has acquired an option to purchase an
additional center located in the Northeast. The excess of the purchase price
and direct acquisition costs (including 137,000 warrants, with an exercise price
of $10.60, valued at $411,000 issued to the Affiliate for financial
15
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
advisory services) over the fair value of net assets acquired amounted to
approximately $15,980,000 and is being amortized on a straight-line basis over
20 years.
On March 10, 1997, the Company acquired a diagnostic imaging center located
in West Palm Beach, Florida for approximately $2,000,000 in cash and 56,670
share of the Company's Common stock valued at approximately $600,000. The
excess of the purchase price and direct acquisition costs (including 57,000
warrants, with an exercise price of $10.64, valued at $171,000 issued to the
Affiliate for financial advisory services) over the fair value of net assets
acquired amounted to approximately $2,440,000 and is being amortized on a
straight-line basis over 20 years.
On March 14, 1997, the Company acquired a diagnostic imaging center in
Rancho Cucamonga, California for approximately $2,605,000 in cash and 44,016
shares of the Company's Common Stock valued at approximately $500,000. The
excess of the purchase price and direct acquisition costs (including 55,000
warrants, with an exercise price of $11.25, valued at $165,000 issued to the
Affiliate for financial advisory services) over the fair value of net assets
acquired amounted to approximately $3,520,000 and is being amortized on a
straight-line basis over 20 years.
Each of the above acquisitions (the "1997 Acquisitions") were accounted for
under the purchase method of accounting. The operations of these acquisitions
are included in the unaudited consolidated financial statements from the date of
purchase.
The fair value of each warrant issued to the Affiliate for financial
advisory service has been accounted for as a component of
each acquisition's purchase price and the value has been estimated on the date
of grant using the Black-Scholes option-pricing model based upon the following
assumptions:
1997 1996
Dividend yield 0% 0%
Expected volatility 52% 52%
Expected life (years) 2 2
The risk-free interest rates for 1997 and 1996 were based upon a rate with
maturity equal to expected term. U.S. Treasury instruments were utilized. The
weighted average interest rate in 1997 and 1996 amounted to 6.01% and 5.93%,
respectively. The weighted average fair value of options and warrants granted
during the periods ended March 31, 1997 and 1996 were $3.00 and $2.34.
16
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
The following unaudited consolidated proforma data reflects the 1996
Acquisitions and 1997 Acquisitions as if they had occurred at the beginning of
each of the periods presented:
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenues, net $45,462 $38,079
Operating income $ 8,234 $ 6,647
Income before taxes $ 7,009 $ 5,126
Fully diluted net income
per share $ .21 $ .17
5. Debt Financing
- ------------------
On February 20, 1997, the Company completed a $52,000,000 private placement
of Senior Notes (the "Senior Notes") to a group of insurance companies led by
the John Hancock Mutual Life Insurance Company. The notes bear interest at an
annual rate of 7.77%, are subject to annual sinking fund payments commencing
February 2001 and have a final maturity in February 2005. The Senior Notes are
guaranteed by substantially all of the Company's diagnostic imaging subsidiaries
and collateralized by certain partnership interests owned through subsidiaries
by the Company. In addition, the agreement relating to the issuance of the
Senior Notes imposes certain affirmative and negative covenants on the Company
and its restricted subsidiaries. The Company used a portion of the proceeds
from the Senior Notes to retire capital lease obligations totaling $8,274,330
and notes payable totaling $5,489,885. The difference between the amount used
to retire capital lease obligations and the carrying value of such obligations
was approximately $1,461,000. In accordance with Financial Accounting Standards
Board Interpretation 26 ("FIN 26") "Accounting for the Purchase of a Leased
Asset by the Lessee During the Term of the Lease," the book value of the related
assets have been increased by this amount which will be amortized over the
remaining useful life of the assets. In connection with the Senior Note
transaction, the Company paid $225,000 plus expenses to the Affiliate for
financial advisory services.
The difference between the amount used to retire notes payable and the
carrying value of the related note obligations was approximately $185,000. Due
to the immaterial level of this amount, such amount has been classified as a
component of corporate general and administrative expenses during the quarter
ended March 31, 1997. The interest rates under the capital lease obligations
and notes
17
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
payable ranged from 4.9% to 18.5%. As a result of these retirements, the
Company's monthly cash flow and interest savings during 1997 approximate
$567,847 and $1,079,001, respectively, before income taxes. The balance of the
proceeds of the Senior Notes is being used to fund acquisitions and for general
corporate purposes.
6. Convertible Subordinated Debentures
- ---------------------------------------
On May 30, 1995 the Company issued at par $4,350,000 aggregate principal
amount of 11% Convertible Subordinated Debentures due 2000 (the "1995
Debentures"). The 1995 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
1995 Debentures automatically convert to Common Stock when, after June 1, 1997
the market price of the Common 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 March 31, 1997
$2,980,000 aggregate principal amount of the 1995 Debentures were converted into
745,000 shares of the Company's Common Stock. No conversions were made during
the quarter ended March 31, 1997.
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. The Company called for
the redemption of the 1996
Debentures at the conversion price of $6.00 per share on or before March 27,
1997. As of March 31, 1997 all of the 1996 Debentures have converted. The
unamortized portion of the debenture issuance costs of $342,000 has been
included as a component of additional paid-in capital in the Stockholders'
equity section of the accompanying March 31, 1997 balance sheet.
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"). The Company
called for redemption of the NMR Debentures at the conversion price of $6.54 per
share on or before March 27, 1997. As of March 31, 1997, all but $19,000 of the
NMR
Debentures had been converted into the Common Stock of the Company. The
unamortized portion of the debenture issuance costs of $32,387 has been recorded
as a component of additional paid-in capital in the Stockholders' equity section
of the accompanying March 31, 1997 balance sheet.
18
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
7. 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 diagnostic imaging centers.
The operations of the temporary staffing segment involves providing temporary
staffing of registered nurses, technicians and other medical industry personnel
to acute and sub acute care facilities.
The following table presents selected financial information by industry
segment as of and for the quarters ended March 31:
1997 1996
------------ -----------
Net Revenues:
Diagnostic imaging centers $ 27,446,504 $11,367,575
Temporary staffing services 13,146,134 6,679,702
------------ -----------
Total $ 40,592,640 $18,047,277
============ ===========
Operating income:
Diagnostic imaging centers $ 6,712,574 $ 2,064,614
Temporary staffing services 609,775 212,842
------------ -----------
Total $ 7,322,349 $ 2,277,456
============ ===========
Identifiable assets:
Diagnostic imaging centers $227,617,528 $48,119,862
Temporary staffing services 10,494,847 9,415,317
------------ -----------
Total $238,112,375 $57,535,179
============ ===========
Depreciation and amortization:
Diagnostic imaging centers $ 2,789,834 $ 1,197,664
Temporary staffing services 131,620 $ 119,245
------------ -----------
Total $ 2,921,454 $ 1,316,909
============ ===========
Capital expenditures:
Diagnostic imaging centers $ 1,716,098 $ 382,116
Temporary staffing services 20,290 ---
------------ -----------
Total $ 1,736,388 $ 382,116
============ ===========
8. Commitments and Contingencies
- ---------------------------------
In 1996, an individual and his spouse brought an action in the Supreme
Court of the State of New York, King's County against Advanced 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
19
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
supervision and hiring practices and 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 insurer 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 the 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.
9. 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 $56,250 for the quarter ended March 31,
1997 and 1996. During the quarter ended March 31, 1997, for financial advisory
services rendered by the Affiliate to the Company in connection with the
issuance by the Company of the Senior Notes and certain of the 1997 Acquisitions
, the Company also paid transaction related advisory fees and expenses of
$285,000 and issued to the Affiliate warrants to purchase 449,000 shares of the
Company's Common Stock, such warrants have been recorded, at their fair value,
as a component of each transaction's purchase price (See Note 3) In connection
with the Company's October 1996 Common Stock offering and certain of the 1996
Acquisitions, the Company paid transaction related financial advisory fees and
expenses of $423,000 and issued to the Affiliate warrants to purchase 120,000
shares of the Company's Common Stock, such warrants have been recorded, at their
fair value, as a component of each transaction's purchase price (See Note 3).
The Company believes that the foregoing financial advisory fees were on terms no
less favorable 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 March 31, 1997, stock options to
purchase 813,666 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 price of warrants
issued to the Affiliate were no less than the fair market value of the Company's
Common Stock on date of grant.
20
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------
10. Subsequent Events
- ---------------------
On May 7, 1997, the Company acquired the assets of ATI Centers, Inc., which
owns and operates 11 diagnostic imaging centers in eastern Pennsylvania and
southern New Jersey. The Company purchased the centers for approximately
$12,900,000 in cash consideration and contingent consideration based on the
centers achieving certain financial objectives during the one year period
subsequent to the transaction. Contingent consideration of up to $1,500,000 is
payable within 90 days of the end of the measurement period. 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 value
at the date of acquisition. The excess of the purchase price and direct
acquisition costs, including 168,000 warrants, with an exercise price of $11.06,
valued at $504,000 issued to the Affiliate for financial advisory services, over
the fair value of the assets acquired is estimated to be approximately
$13,255,000 and will be amortized on a straight line basis over 20 years.
On May 7, 1997, the Company acquired two diagnostic imaging centers located
in Silver Spring and Towson, Maryland for aggregate consideration of $4,300,000;
$2,800,000 in cash and 119,166 shares of the Company's Common Stock valued at
$1,500,000. The acquisition will be accounted for as purchases, under which the
purchase price will be allocated to the acquired assets and assumed liabilities
based upon fair value at the date of acquisition. The excess of the purchase
price and direct acquisition costs, including 66,000 warrants, with an exercise
price of $12.59, valued at $198,000 issued to the Affiliate for financial
advisory services, over the fair value of the assets acquired is estimated to be
approximately $4,070,000 and will be amortized on a straight line basis over 20
years.
On May 12, 1997 the Company entered into a definitive agreement to acquire
the assets of Capstone Management Group, Inc., which owns and operates 10
diagnostic imaging centers, nine of which are located in the northeast and one
of which is located in Ohio. The Company will purchase the centers for
approximately $10,000,000 in cash and Common Stock of the Company and contingent
consideration based on the centers' achieving certain financial objectives
during the one year period subsequent to the transaction. The consummation of
this transaction is subject to satisfactory completion of the Company's due
diligence investigation and other customary closing conditions.
21
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------
The following unaudited consolidated proforma data reflects the above
acquisitions as if they had occurred at the beginning of each of the periods
presented:
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenues, net $53,494 $46,111
Operating income $10,471 $ 8,884
Income before taxes $ 8,626 $ 6,743
Fully diluted net income
per share $ .25 $ .21
22
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
- ---------------------
Three months ended March 31, 1997 compared to three months ended March 31, 1996.
- --------------------------------------------------------------------------------
The following discussion and analysis provides information which management
believes is relevant to an assessment an understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the unaudited financial statements appearing in Item 1.
The Company's net service revenues for the quarters ended March 31, 1997
and 1996 were $40,592,640 and $18,047,277, respectively, representing an
increase of $22,545,363 or 124.9% in 1997. Management fee and use revenue
increased $6,955,000 from $7,975,000 for the three months ended March 31, 1996
to $14,970,000 for the three months ended March 31, 1997. This increase is
primarily attributable to the revenue generated by the 1996 Acquisitions
($4,477,000) and 1997 Acquisitions ($1,612,000). Increased volume at centers
owned prior to January 1, 1996 contributed additional revenue of $906,000.
Diagnostic imaging patient revenue increased $9,083,000 to $12,476,000 for the
three months ended March 31, 1997 from $3,393,000 for the three months ended
March 31, 1996. This increase is primarily attributable to revenue generated by
the 1996 Acquisitions ($8,248,000) and 1997 Acquisitions ($262,000). Increased
volume at centers owned prior to January 1, 1996 contributed additional revenue
of $573,000. Staffing revenue increased $6,467,000 primarily due to the opening
of additional per diem sites.
Technical services payroll and related expenses were $15,389,000 and
$7,613,000 for the quarters ended March 31, 1997 and 1996, respectively. The
increase of $7,776,000 was attributable to: an increase of $1,885,000 for
centers acquired during 1996; $383,000 for centers acquired during the first
quarter of 1997 and $5,097,000 is attributable to the to the opening of new per
diem offices and staffing operations.
Medical supplies increased $567,000 for the quarter ended March 31, 1997 to
$1,390,000 from $823,000 for the quarter ended March 31, 1996. This increase is
attributable to centers acquired during 1996 and 1997.
Diagnostic equipment maintenance costs were $1,390,000 for the quarter
ended March 31, 1997 as compared to $581,000 for the period ended March 31, 1996
an increase of $929,000 or 160%. This increase is attributable to maintenance
costs for equipment at centers acquired during 1996 and 1997.
Independent contractor fees increased $1,639,000 from $241,000 for the
quarter ended March 31, 1996 to $1,311,000 for the comparable 1997 quarter.
This increase is due to an increase in the Type II revenue recognition
agreements for the centers acquired during 1996.
Administrative expenses which include facilities rent, marketing and
personnel costs of employees whose activities relate to the
23
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
operations of multiple centers were $2,263,000 for the quarter ended March 31,
1996 as compared to $3,902,000 for the quarter ended March 31, 1997. This
increase of $1,639,000 is die to costs incurred at centers acquired during 1996
and 1997.
Other costs increased by $679,000 or 132% to $1,195,000 for the quarter
ended March 31, 1997 from $516,000 for the comparable 1996 quarter. This
increase is primarily due to an increase in professional fees at centers
acquired during 1996 and 1997.
Provision for uncollectible accounts receivable increased $1,474,290 or
181.0% from $814,708 for the quarter ended March 31, 1996 to $2,288,998 for the
quarter ended March 31, 1997. This increase is due to the significant increase
in imaging revenues which have a higher bad debt experience than staffing
revenues. The imaging segment provision for uncollectible accounts consists of
$2,285,218 or 8.3% of revenue for the quarter ended March 31, 1997 as compared
to $809,780 or 7.1% of revenue in 1996. The increase in the imaging provision
as a percentage of revenue is primarily due to changes in payor mix at centers
acquired during 1996 and 1997. The staffing segment's provision for
uncollectible accounts receivable was immaterial for the quarters ended March
31, 1997 and 1996.
Corporate general and administrative expense increased by $1,762,271 or
110.1% from $1,601,205 for the quarter ended March 31, 1996 to $3,363,476 for
the current quarter. This increase is primarily due to the expanded business
development activities during 1996 and 1997 and the resulting growth. Corporate
general and administrative expense for the quarter ended March 31, 1997 includes
a non-recurring charge of approximately $185,000 relating to the repayment of
certain notes payable in connection with the Senior Note transaction (see Note
4).
Depreciation and amortization expense was $2,921,454 for the quarter ended
March 31, 1997 compared to $1,316,909 for the quarter ended March 31, 1996 or an
increase of $1,604,545 (121.8%). The imaging center segment accounted for
$1,592,170 or 99.2% of the increase in aggregate depreciation and amortization
expense primarily due to the depreciation expense relating to acquired assets
and increased goodwill amortization expense incurred in connection with the
acquisitions.
Interest expense, net for the quarter ended March 31, 1997 was $929,313 as
compared to $498,167 for the comparable quarter last year, an increase of
$431,146 or 86.5%. The increase is primarily due to increases in interest on
the debt assumed as part of the 1996 and 1997 Acquisitions, the Senior Notes and
higher outstanding balances under convertible debentures offset by scheduled
reductions in outstanding
24
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
principal balances and an increase in interest income earned on invested cash
balances.
Minority interest was $235,016 for the quarter ended March 31, 1997
compared to $43,691 for the same quarter last year. The increase of $191,325,
or 437.9% is primarily due to the acquisition of entities which operate limited
partnerships with minority investors such as the NMR centers in August 1996 and
the ADI centers in March 1997.
The provision for income taxes increased $2,118,375 or 483.8% from $437,820
for the quarter ended March 31, 1996 to $2,556,195, for the same quarter in
1997. The Company's effective tax rate for the quarter ended March 31, 1997
increased to 42% from 25% at March 31, 1996. This increase is due to an
increase in the profitability of the Company's existing and acquired centers and
the impact of non-deductible goodwill.
For the reasons described above, the Company's net income for the quarter
ended March 31, 1997 increased by $2,304,047 or 177.5% to $3,601,825 from
$1,297,778 for the quarter ended March 31, 1996.
Liquidity and Capital Resources
- -------------------------------
The Company had net income of $3,601,825 for the quarter ended March 31,
1997 versus net income of $1,297,778 for the comparable prior quarter. At March
31, 1997, the Company's working capital totaled $59,430,579 which includes cash
and cash equivalents totaling $19,468,047, and short-term investments totaling
$10,683,535. The Company utilized $3,177,058 in net cash flow for operating
activities during the quarter ended March 31, 1997. Cash used by operating
activities during the quarter ended March 31, 1997 resulted from operating cash
flows of $9,583,270, an increase of $6,110,184 from $3,473,086 of operating cash
flows for the quarter ended March 31, 1996, offset by a $12,750,328 net increase
in the Company's operating assets and liabilities. The significant increase in
operating assets and liabilities relates primarily to accounts receivable
$9,376,261 which increased primarily due to (i) higher StarMed receivables
caused by a significant revenue increase during the quarter ended March 31, 1997
in comparison to prior quarters relating to the maturation of per diem sites and
the acquisition of per diem businesses ($3,345,000); and (ii) increases at
centers acquired during the quarter in which the sellers existing accounts
receivable were assumed by the Company ($5,888,000) or were not purchased at the
time of acquisition and, accordingly have increased to normal levels following
the acquisition($143,000). In addition, the Company utilized $1,777,943 of
operating cash flow to reduce accounts payable and accrued liabilities during
the three months ended March 31, 1997.
25
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
Investing activities used $20,534,218 in cash during the first quarter of
1997. The Company used $12,724,265 in cash to acquire additional imaging
centers during the quarter ended March 31, 1997. The Company purchased
$1,736,388 of equipment and leasehold improvements primarily for the imaging
centers. The Company intends to continue to evaluate hardware and software
upgrades for imaging equipment and expects to acquire such upgrades where deemed
advisable. The Company's net investments from sales and purchases of short-term
investments and marketable securities totaled $4,562,104 during the quarter
ended March 31, 1997. The Company invests substantially all of its excess cash
balances in government securities, certificates of deposit and other fixed
income instruments with maturities of up to one year. Such maturities are
scheduled to coincide with the Company's anticipated capital needs.
Financing activities provided the Company with net cash totaling
$27,833,070. This increase is comprised of $51,113,080 in net proceeds from the
issuance of the Senior Notes offset by normal repayments of debt and capital
lease obligations totaling $1,633,875 and $1,330,660, respectively, during the
quarter ended March 31, 1997. In addition, the Company repaid $13,764,215 and
$7,001,398 of outstanding notes payable and capital lease obligations in
conjunction with the Senior Notes transaction and certain acquisitions. The
Company may refinance certain of its assets using operating leases during the
remainder of 1997.
The Company has three revolving lines of credit from a third party
financing corporation. In May 1996, the Company obtained two $4 million lines
and in October 1996, a $4 million line. The lines bear interest at prime plus
1.5% (10% at March 31, 1997) and have a two year term. As of March 31, 1997 no
amounts were outstanding under these lines. The Company also has a $7 million
capital lease line of credit, which bears interest at the 30-day T-bill rate
plus 398 basis points. As of March 31, 1997 no amounts were outstanding under
this line of credit. The Company has agreed that in order to draw on such lines
it must pledge adequate collateral.
The Company believes that 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 imaging centers. Management reviews
proposals to acquire additional centers
26
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
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 eight
imaging centers in eight separate transactions through May 14, 1997. Management
intends to pursue the acquisition of additional 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. In the event
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 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 Federal government regarding
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.
Statements contained in this quarterly report 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 here can be no assurance that other factors will not affect the accuracy of
such forward-looking statements. While it is impossible to identify
27
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
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.
New Accounting Standards
- ------------------------
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("Statement No. 128"), was issued which established
standards for computing and presenting earnings per share. Statement No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods.
Had Statement No. 128 been used the Company would have reported the following
unaudited earnings per share for the three month periods ended:
March 31, 1997 March 31, 1996
-------------- --------------
Earnings per share:
Basic $ .19 $ .16
Fully Diluted $ .18 $ .14
Weighted Average Number
of shares used in computation:
Basic 19,001,393 8,250,589
Fully Diluted 21,033,802 10,024,272
28
<PAGE>
MEDICAL RESOURCES, INC.
PART II. OTHER INFORMATION
----------------------------
Item 2.c. Changes in Securities
---------------------
The following is a list of equity securities sold by the Company during the
quarter ended March 31, 1997 which, pursuant to the exemption covered under
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
were not registered under the Securities Act.
On February 28, 1997, the Company issued to The MRI Center of Jacksonville,
Inc. 215,000 share of the Company's Common Stock as consideration for the
acquisition of a diagnostic imaging center in Jacksonville, Florida.
On March 10, 1997, the Company issued to The Magnet of Palm Beach, Ltd.
56,670 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in West Palm Beach, Florida.
On March 14, 1997, the Company issued to Grove Diagnostic Center, Inc.
44,016 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in Rancho Cucamonga, California.
In addition, the Company issued to its financial advisor, for financial
advisory services rendered to the Company in connection with acquisitions which
were consummated in the first or second quarters of 1997, five-year warrants to
purchase an aggregate of 449,000 shares of the Company's Common Stock in
connection with acquisitions. These warrants were issued as of the date of the
public announcement of such acquisitions, and were contingent upon the
transaction closing. The exercise prices were based on the average of the last
sales price of the Company's Common Stock for the ten consecutive trading days
prior to the public announcement.
29
<PAGE>
MEDICAL RESOURCES, INC.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
Exhibit 11. Computation of Shares Used For Earnings Per
Share Calculation
b. Reports on Form 8-K
-------------------
On February 5, 1997, the Company filed a current report on Form 8-K,
reporting under Item 4, that it had dismissed Ernst & Young LLP as its
independent accountant.
On February 5, 1997, the Company filed a current report on Form 8-K,
reporting under Item 4, that it had engaged Coopers & Lybrand L.L.P.
as its independent accountant.
On February 20, 1997, the Company filed a current report on Form 8-K,
reporting under Item 5, that the Company completed a $52,000,000
private placement of Senior Notes.
30
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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
(Chief Operating Officer)
By /s/ John P. O'Malley III
__________________________
John P. O'Malley III
Executive Vice President-Finance
(Chief Financial Officer)
Date: May 15, 1997
31
<PAGE>
MEDICAL RESOURCES, INC.
Exhibit 11. Computation of Shares Used For Earnings Per Share Calculation.
Quarter ended March 31,
1997 1996
----------- -----------
Primary earnings per share information:
Net income per consolidated statements
of operations $ 3,601,825 $1,297,778
Add: Interest savings from proceeds
of conversion of outstanding
warrants and exercise of stock
options, net of minority
interest and income taxes
Net income used to compute primary
earnings per share $ 3,601,825 $1,297,778
=========== ===========
Weighted average number of
outstanding shares 19,001,393 8,250,589
Add: Incremental shares issuable
on conversion of outstanding
warrants and exercise of
stock options 930,452 82,110
----------- -----------
Weighted average number of shares
used to compute primary earnings
per share 19,931,845 8,332,699
=========== ===========
Primary earnings per share:
- ---------------------------
Primary net income per share $ .18 $ .16
=========== ==========
<PAGE>
MEDICAL RESOURCES, INC.
Exhibit 11. Computation of Shares Used For Earnings Per Share Calculation.
<TABLE>
<CAPTION>
Quarter ended March 31,
1997 1996
---------- ----------
Fully diluted earnings per share information:
<S> <C> <C>
Net income per consolidated statements
of operations $ 3,601,825 $1,297,778
Add: Interest savings from proceeds
of conversion of outstanding
warrants and exercise of stock
options, net of minority
interest and income taxes 21,851
----------- ----------
Net income used to compute fully
diluted earnings per share $ 3,623,676 $1,297,778
=========== ==========
Weighted average number of
outstanding shares 19,001,393 8,250,589
Add: Incremental shares issuable
on conversion of outstanding
warrants and exercise of
stock options 930,452 136,584
Incremental shares issuable on
conversion of convertible
subordinated debentures 342,500
Weighted average number of shares ----------- ----------
used to compute fully diluted
earnings per share 20,274,345 8,387,173
=========== ==========
Fully diluted earnings per share:
- ---------------------------------
Fully diluted net income per share $ .18 $ .16
========= ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 19,468,047
<SECURITIES> 0
<RECEIVABLES> 52,433,279
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 91,898,559
<PP&E> 47,728,267
<DEPRECIATION> 0
<TOTAL-ASSETS> 238,112,375
<CURRENT-LIABILITIES> 32,467,980
<BONDS> 85,110,629
0
0
<COMMON> 200,010
<OTHER-SE> 119,090,630
<TOTAL-LIABILITY-AND-EQUITY> 238,112,375
<SALES> 0
<TOTAL-REVENUES> 40,592,640
<CGS> 0
<TOTAL-COSTS> 24,696,363
<OTHER-EXPENSES> 6,519,949
<LOSS-PROVISION> 2,288,998
<INTEREST-EXPENSE> 929,313
<INCOME-PRETAX> 6,158,020
<INCOME-TAX> 2,556,195
<INCOME-CONTINUING> 3,601,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,601,825
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
