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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, 1997
COMMISSION FILE NO. 1-12461
MEDICAL RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3584552
(STATE OF INCORPORATION) (IRS EMPLOYER)
IDENTIFICATION NO.)
155 STATE STREET, HACKENSACK, NJ 07601
(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
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 [ ] No [X]
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 May 26, 1998, 22,925,277 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 $50,920,781.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
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PART I
ITEM 1. BUSINESS
GENERAL
Medical Resources, Inc. ("Medical Resources" and collectively with its
subsidiaries, affiliated partnerships and joint ventures, the "Company")
specializes in the operation and management of fixed-site outpatient diagnostic
imaging centers, and also provides temporary healthcare staffing services to
acute and sub-acute care facilities. Through its Diagnostic Imaging division,
the Company currently operates 98 outpatient diagnostic imaging centers located
in the Northeast (58), Southeast (24), the Midwest (11) and California (5), and
provides network management services to managed care organizations. The Company
has grown rapidly and has increased the number of diagnostic imaging centers it
operates from 39 at December 31, 1996 to 98 at May 26, 1998. The Company,
through its wholly-owned subsidiary, Dalcon Technologies, Inc. ("Dalcon"), also
develops and markets software products and systems for the diagnostic imaging
industry. Through the Per Diem and Travel Nursing divisions of its wholly-owned
subsidiary, StarMed Staffing, Inc. ("StarMed"), the Company also provides
temporary healthcare staffing of registered nurses and other medical personnel
to acute and sub-acute care facilities nationwide.
Diagnostic Imaging Division. The Company's diagnostic imaging centers
provide diagnostic imaging services in a comfortable, service-oriented
outpatient environment to patients referred by physicians. At each of its
centers, the Company provides management, administrative, marketing and
technical services, as well as equipment, technologists and facilities, to
physicians who interpret scans performed on patients. Medical services at the
Company's imaging centers are provided by board certified interpreting
physicians, generally radiologists, with whom the Company enters into contracts.
Of the Company's 98 centers, 84 provide magnetic resonance imaging. Many of the
Company's centers also provide some or all of the following services:
computerized tomography, ultrasound, nuclear medicine, general radiology,
fluoroscopy and mammography.
The Company's goal is to become the leading operator of fixed-site
outpatient diagnostic imaging centers in the United States. The number of
outpatient diagnostic imaging centers in the United States is estimated to have
grown from approximately 700 in 1984 to approximately 2,500 as of December 31,
1997. Ownership of fixed-site 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 an
increased influence of managed care organizations, rising business complexity,
growing control over patient flows by payors, and continued overall
reimbursement pressures, all of which have been and will continue to 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 intends, over time, to capitalize on the fragmented nature of
the diagnostic imaging center industry through the acquisition of additional
centers. The Company's strategy has also been to seek 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 organizations.
Dalcon is a developer and provider of software system applications to
diagnostic imaging center operators. Through its proprietary radiology
information system, ICIS, Dalcon provides the Company's imaging centers, as well
as imaging centers owned and/or operated by third-parties, with information
system development, service and support specifically designed for the
administration and operation of imaging centers, including patient scheduling,
registration, transcription, film tracking, billing, and insurance claim
processing. The Company purchased Dalcon in September 1997. By the end of June
1998, the substantial majority of the Company's imaging centers are expected to
be fully integrated and operating on Dalcon's ICIS system. In addition, in
February 1998, Dalcon entered into a multi-year
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agreement with HealthSouth Corporation, pursuant to which Dalcon is to install
its ICIS information system at all of HealthSouth's imaging centers not
currently using it.
Per Diem and Travel Nursing Divisions. 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 35 offices located in 16
states as of March 31, 1998. 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 that time, it
has opened 31 offices, acquired 4 staffing companies operating six additional
offices and consolidated the operations of two other offices. 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.
On March 31, 1998, the Company announced that it had retained SBC Warburg
Dillon Read ("Dillon Read") to assist the Company with respect to exploring
strategic alternatives for (and the possible sale of) its StarMed Temporary
Staffing and Per Diem business.
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
OVERVIEW
Imaging centers have played a vital role in the healthcare delivery system
by offering diagnostic services such as Magnetic Resonance Imaging ("MR"),
Computerized Tomography ("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
debilitating for patients. In addition, diagnostic imaging is increasingly
being used as a screening tool for preventative 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
involving new or existing modalities.
EQUIPMENT AND MODALITIES
Diagnostic imaging systems are generally 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 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 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
affecting bones and internal organs. CT provides higher resolution images than
conventional X-rays. 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
procedures in obstetrics, gynecology and cardiology. Ultrasound imaging relies
on the computer-assisted processing of sound waves to develop images
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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
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
of imaging equipment in radiology utilizes "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
using low dosage X-rays to visualize breast tissue. It is the primary screening
tool for breast cancer.
IMAGING CENTER LOCATION AND OWNERSHIP STRUCTURE
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 services provided under
management agreements with the imaging center's ownership entity.
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OWNER-
OPERATED ------
LOCATION NAME SINCE (1) SHIP(2) MODALITIES(3)
- -------- ---- --------- ------- -------------
<S> <C> <C> <C> <C>
Northeast Region (58)
Englewood, NJ............ Englewood Imaging Center December 1979 100% MR, CT, US, R, F, M
Marlton, NJ.............. MRImaging of South Jersey July 1984 91.0% MR
Union, NJ................ Open MRI of Union August 1984 79.7% MR
Morristown, NJ........... MRImaging of Morristown December 1984 94.2% MR
Philadelphia, PA......... Academy Imaging Center January 1986 97.7% MR, CT, US, NM, R, F, M
Allentown, PA............ 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, R, F, M
West Orange, NJ(4)....... Northfield Imaging January 1991 100% MR, CT, US, NM, R, F, M
Bel Air, MD.............. Colonnade Imaging Center November 1991 62.9% MR, CT, US, NM, R, F, M
Jersey City, NJ.......... M.R. Institute at Midtown July 1992 100% MR
Brooklyn, NY............. Advanced MRA Imaging Associates January 1993 100% MR, CT, US, NM, R, F, M
Seabrook, MD............. 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
Centereach, NY........... Open MRI of Centereach 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......... The MRI Center at Palisades 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, R, F, M
Randolph, NJ............. Morris-Sussex MRI March 1997 20.0% MR
Totowa, NJ............... Advantage Imaging at Totowa Road March 1997 15.0% MR
Dedham, MA............... MRI of Dedham March 1997 35.0% MR
Seekonk, MA.............. RI-MASS MRI March 1997 5.0% MR
Chelmsford, MA........... MRI of Chelmsford March 1997 65.0% MR
Parlin, NJ............... Parlin Diagnostic Imaging May 1997 100% CT, US, R, F, M
Vineland, NJ............. South Jersey MRI May 1997 100% MR
Baltimore, MD............ Baltimore Open MRI May 1997 100% MR
Silver Springs, MD....... Accessible MRI of Montgomery Cty May 1997 100% MR
Towson, MD............... Accessible MRI of Baltimore County May 1997 100% MR, CT
Trevose, PA.............. Bensalem Open MRI May 1997 100% MR
Philadelphia, PA......... Callowhill Open MRI May 1997 100% MR
Broomall, PA............. Mainline Open MRI May 1997 100% MR
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Langhorn, PA............. Oxford Valley Diagnostic Center May 1997 100% MR, CT, US, NM, R, F, M
Springfield, PA.......... Springfield Diagnostic Imaging Center May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA......... Lansdowne Medical Center May 1997 100% R
Havertown, PA............ Manoa Radiology May 1997 100% CT, US, NM, R, F, M
Havertown, PA............ Haverford MRI May 1997 100% MR
Broomall, PA............. Lawrence Park Radiology Center May 1997 100% R
Havertown, PA............ Pick & Levine Radiology May 1997 100% US, R, F, MM
Philadelphia, PA......... Northeast Imaging May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA......... South Phildelphia Radiology Center May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA......... Union Health Radiology May 1997 100% R, M
Philadelphia, PA......... Juaniata Park May 1997 100% R
Albany, NY............... Albany Open MRI May 1997 100% MR
Syracuse, NY............. Syracuse Open MRI May 1997 100% MR
Brooklyn, NY - Ave P..... Brooklyn Medical Imaging Center June 1997 100% MR, CT, US, NM, R, F, M
Brooklyn, NY - Midwood... Brooklyn Medical Imaging Center June 1997 100% US, R, F, M
Flushing, NY............. Meadows Mid-Queens Imaging Center June, 1997 100% MR, CT, US, R, M
Staten Island, NY........ Staten Island Medical Imaging Center June, 1997 100% MR, CT
Bronx, NY................ MRI of the Bronx September 1997 100% MR, CT
Flushing, NY............. MRI of Queens September 1997 100% MR
Philadelphia, PA......... Germantown MRI Center September 1997 100% MR
Philadelphia, PA......... Diamond Radiology September 1997 100% R
Southeast (24)
St. Petersburg, FL....... Magnetic Resonance Associates July 1984 80.2% MR
Naples, FL............... Gulf Coast MRI June 1993 100% MR
Fort Myers, FL........... Fort Myers MRI Central May 1995 100% MR, CT
Fort Myers, FL........... Fort Myers MRI South May 1995 100% MR
Cape Coral, FL........... Cape Coral MRI September 1996 100% MR
Naples, FL............... Naples MRI September 1996 100% MR
Titusville, FL........... MRI of North Brevard September 1996 100% MR
Sarasota, FL............. Sarasota Outpatient MRI & September 1996 100% MR, CT
Diagnostic Center
Tampa, FL................ Americare MRI May 1996 100% MR
Tampa, FL................ Americare Imaging May 1996 100% CT, US, R, F, M
Clearwater, FL........... Access Imaging May 1996 100% MR, CT
Melbourne, FL............ South Brevard Imaging January 1997 100% MR
Jacksonville, FL......... MRI Center of Jacksonville February 1997 100% MR
West Palm Beach, FL...... The Magnet of Palm Beach March 1997 100% MR, CT, US, NM, R, F, M
Monticello, AR (5)....... Monticello Center May 1997 (5) R
Ocala, FL (5)............ Ocala Center May 1997 (5) R
Miami, FL................ Coral Way MRI August 1997 100% MR
Sarasota, FL............. Gulf Side Open MRI August 1997 100% MR
Jupiter, FL.............. MRI of Jupiter August 1997 100% MR, R
Bradenton, FL............ Magnetic Imaging Center of Manatee August 1997 100% MR
Hollywood, FL............ Open MRI of South Florida August 1997 100% MR
Tampa, FL................ Northside Imaging & Breast Care Center August 1997 100% MR
Venice, FL............... Venice Imaging & MRI Center August 1997 100% MR, CT, US, R, F, M
Port Charlotte, FL....... The MRI Center of Charlotte County September 1997 100% MR
Midwest (11)
Chicago, IL.............. MRImaging of Chicago April 1987 87.2% MR
Chicago, IL.............. Open MRI of Chicago June 1992 79.6% MR, CT, US, NM, R, F, M
Oak Lawn, IL............. Oak Lawn MR & Imaging Center January 1994 100% MR, CT, US, R, F, M
Des Plaines, IL.......... Golf MRI & Diagnostic Imaging Center January 1995 75.0% MR, CT, US, NM, R, F, M
Libertyville, IL......... Libertyville Imaging Center January 1995 100% MR
Chicago, IL.............. Central Diversey Imaging Center January 1996 100% MR
Centerville, OH.......... Dayton Open MRI May 1997 100% MR
Warren, OH............... Advanced Radiology/Access MRI October 1997 100% MR, CT, US, R, F, M
Austintown, OH........... Austintown X-Ray October 1997 100% CT, US, R, F, M
Boardman, OH............. Boardman X-Ray/MRI October 1997 100% MR, CT, US, R, F, M
Youngstown, OH........... Western Reserve Imaging Center October 1997 100% CT, US, R, F, M
California (5)
Long Beach, CA........... Pacific MRI January 1997 100% MR
San Clemente, CA......... OceanView Radiology Center January 1997 100% MR, CT, US, R, F, M
Rancho Cucamonga, CA..... Grove Diagnostic Imaging March 1997 100% MR, CT, US, NM, R, F, M
San Jose, CA............. Diagnostic Imaging Network August 1997 51% MR, CT, US, NM, R, F, M
San Jose, CA............. O'Connor MRI August 1997 60% MR, CT
</TABLE>
(1) Operated by the Company or NMR of America, Inc. since such date.
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(2) Represents the Company's ownership interest in the respective centers.
(3) Modalities are magnetic resonance imaging (MR), computerized tomography
(CT), ultrasound (US), nuclear medicine (NM), radiology (R), fluorscopy (F)
and mammography (M).
(4) Includes the operation of the Livingston Breast Care mammography unit which
is located at the Northfield Imaging Center.
(5) The Company manages the operations of a radiology facility under the terms
of a management agreement.
Where it deems it economically attractive, the Company may further increase
its ownership of its non-wholly-owned centers by acquiring additional minority
interests in such centers, but there can be no assurance that the Company will
be successful in so doing. The Company has also added 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 ranges from 1,500 to 11,400 square
feet.
GROWTH STRATEGY AT EXISTING AND ACQUIRED CENTERS
Leveraging Geographic Concentration. The Company has developed clusters of
imaging centers in certain geographic areas that enable it to improve the
utilization of its centers by attracting business from larger referral sources,
such as managed care organizations, due to the Company's ability to meet the
quality, volume and geographical coverage requirements of these payors. The
Company intends, over time, 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 and other contracts.
Expanding Imaging Services Offered. The Company expands the imaging
services it offers by upgrading existing technology and adding new modalities at
selected centers. In 1997 and to date in 1998, the Company upgraded technology
and expanded service modalities at 15 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 ancillary benefit of reducing imaging time and thus increasing capacity
of the centers' imaging equipment. The development and improvement of
diagnostic quality "open" MR systems have expanded the public acceptance and
potential market for MR imaging services. The Company currently operates 32
centers that provide MR imaging services using "open" systems and the Company
plans to expand this coverage in markets where it believes such expansion is
economically justified.
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 an attempt to optimize their
performance. The financial systems and operating procedures of acquired centers
are, over time, integrated with those of the Company. In that regard, the
Company is presently completing the installation of the ICIS system developed by
Dalcon in substantially all of its centers. The ICIS system will enable the
Company to standardize reporting of each center and provide management with on-
line access to its centers nationwide. The Company expects installation of the
ICIS system and the related training to be substantially complete by the end of
June 1998. 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 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.
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CENTER OPERATIONS AND IMAGING SERVICES PROVIDED BY THE COMPANY
General. The Company's diagnostic imaging centers provide diagnostic
imaging services in a comfortable, service-oriented environment located mainly
in an outpatient setting to patients referred by physicians. Of the Company's
98 centers, 84 provide magnetic resonance imaging, which accounts for a majority
of the Company's diagnostic imaging revenues. Many of the Company's centers also
provide some or all of the following services: Computerized Tomography,
Ultrasound, Nuclear Medicine, General Radiology and Fluoroscopy and Mammography.
Interpreting Physician Arrangements. At each of the Company's centers, all
medical services are performed exclusively by physician groups (the "Physician
Group" or the "Interpreting Physician"), generally consisting of radiologists,
with whom the Company enters into independent contractor agreements. Pursuant to
these agreements, the Company, among other duties, provides to the Physician
Group the diagnostic imaging facility and equipment, performs all marketing and
administrative functions at the centers and is responsible for the maintenance
and servicing of the equipment and leasehold improvements. The Physician Group
is solely responsible for, and has complete and exclusive control over, all
medical and professional services performed at the centers, including, most
importantly, the interpretation of diagnostic images, as well as the supervision
of technicians, and medical-related quality assurance and communications with
referring physicians.
Insofar as the Physician Group has complete and exclusive control over the
medical services performed at the centers, including the manner in which medical
services are performed, the assignment of individual physicians to center duties
and the hours that physicians are to be present at the center, the Company
believes that the Interpreting Physicians who perform medical services at the
centers are independent contractors. In addition, Physician Groups that furnish
professional services at the centers generally have their own medical practices
and, in most instances, perform medical services at non-Company related
facilities. The Company's employees do not perform professional medical services
at the centers. Consequently, the Company believes that it does not engage in
the practice of medicine in jurisdictions that prohibit or limit the corporate
practice of medicine. The Company performs only administrative and technical
services and does not exercise any control over the practice of medicine by
physicians at the centers or employ physicians to provide medical services. The
Company is aware of three Interpreting Physicians who own a nominal percentage
of three limited partnerships that are managed and partially owned by the
Company.
As part of its administrative responsibilities under the terms of the
Interpreting Physician agreements, the Company is responsible for the
administrative aspects of billing and collection functions at the centers.
Certain third-party payor sources, such as Medicare, insurance companies and
managed care organizations, require that they receive a single or "global"
billing statement for the imaging services provided at the Company's centers.
Consequently, billing is done in the name of the Physician Group because such
billings include a medical component. The Physician Group grants a power of
attorney to the Company authorizing the Company to establish bank accounts using
the Physician Group's name related to that center's collection activities and to
access such accounts. In states where permitted by law, such as Florida, the
Company generally renders bills in the center's name. In such circumstances, the
Physician Group has no access to associated collections.
The Company recognizes revenue under its agreements with Interpreting
Physicians in one of three ways: (I) the Company receives a technical fee for
each diagnostic imaging procedure performed at the center, the amount of which
is fixed based upon the type of the procedure performed; (II) the Company pays
the Interpreting Physicians a fixed percentage of fees collected at the center,
or a contractually fixed amount based upon the specific diagnostic imaging
procedures performed; or, (III) the Company receives from an affiliated
physician association a fee for the use of the premises, a fee per procedure for
acting as billing and collection agent for the affiliated physician association
and for administrative and technical services performed at the centers and the
affiliated physician association pays the Physician Group based upon a
percentage of the cash collected at the center. All of such amounts and the
basis for payments are negotiated between the Physician Group and the Company.
The fees received or retained by the Company under the three types of
agreements with Interpreting Physicians described above, expressed as a
percentage of the gross billings net of contractual allowances for the imaging
services provided, range from 78% to 93% for the agreements described in item
(I), 80% to 93% for the agreements described in item (II) and 80% to 89% for the
agreements described in item (III). The agreements generally have terms ranging
from one to ten years. For additional information pertaining to the Company's
arrangements with Interpreting Physicians, see Note 1 to the Company's
Consolidated Financial Statements--Revenue Recognition.
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
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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 specialties and reimbursement yields. Corporate and center managers
determine these market segments based upon an analysis of competition, imaging
demand, medical specialty and/or payor mix of each referral from the local
market. The Company also directs marketing efforts at managed care
organizations.
Managed care organizations 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 effective services and its
experience in developing relationships with various managed care organizations
will constitute a competitive advantage with managed care organizations.
Personal Injury Revenue. A significant percentage of the Company's net
service revenues from imaging centers is derived by providing imaging services
to individuals involved in personal injury claims, mainly involving automobile
accidents. Imaging revenue derived from personal injury claims, mainly involving
automobile accidents, represented approximately 24% of the Diagnostic Imaging
business net service revenues for 1997. Due to the greater complexity in
processing receivables relating to personal injury claims with automobile
insurance carriers (including dependency on the outcome of settlements or
judgements for collections directly from such individuals), such receivables
typically require a longer period of time to collect, compared to the Company's
other receivables and, in the experience of the Company, incur a higher bad debt
expense.
While the collection process employed by the Company varies from
jurisdiction to jurisdiction, the processing of a typical personal injury claim
generally commences with the Company obtaining and verifying automobile, primary
health and secondary health insurance information at the time services are
rendered. The Company then generates and sends a bill to the automobile
insurance carrier, which under state law, typically has an extended period of
time (usually up to 105 days) to accept or reject a claim. The amount of
documentation required by the automobile insurance carriers to support a claim
is substantially in excess of what most other payors require and carriers
frequently request additional information after the initial submission of a
claim. If the individual is subject to a co-payment or deductible under the
automobile insurance policy or has no automobile insurance coverage, the Company
generally will bill the individual's primary and secondary health policies for
the uncovered balance. The automobile insurance carrier may reject coverage or
fail to accept a claim within the statutory time limit on the basis of, among
other reasons, the failure to provide complete documentation. In such
circumstances, the Company may pursue arbitration, which typically takes up to
90 days for a judgment, to collect from the carrier.
The Company will then pursue collection of the remaining receivable from
the individual. Although the Company attempts to bill promptly after providing
services and typically requests payment upon receipt of invoice, the Company
generally defers aggressive collection efforts for the remaining balance until
the individual's claim is resolved in court, which frequently takes longer than
a year and may take as long as two or three years. Consequently, the Company's
practice is to attempt to obtain a written assurance from the individual and the
individual's legal counsel, under which the individual confirms in writing his
or her obligation to pay the outstanding balance regardless of the outcome of
any settlement or judgment of the claim. If the settlement or judgment proceeds
received by the individual are insufficient to cover the individual's obligation
to the Company, and the individual does not otherwise satisfy his or her
liability to the Company, the Company either (i) accepts a reduced amount in
full satisfaction of the individual's outstanding obligation, or (ii) commences
collection proceedings, which may ultimately result in the Company taking legal
action to enforce its collection rights against the individual regarding all
uncollected accounts. As a result of the foregoing, the average age of
receivables relating to personal injury claims is greater than for non-personal
injury claim receivables.
Managed Care Capitation Agreements. The Company has entered into a number
of "capitated contracts" with third party payors which typically provide for the
payment of a fixed fee per month on a per member basis, without regard to the
amount or scope of services rendered. Because the obligations to perform
service are not related to the payments, it is possible that either the cost or
the value of the services performed may significantly exceed the fees received,
and there may be a significant period between the time the services are rendered
and payment is received. While only approximately 2% of the Company's 1997 net
service revenues were derived from capitated contracts, and although the Company
carefully analyzes the potential risks of capitation arrangements, there can be
no assurances that any capitated contracts to which the Company is or may in the
future become a party will not generate significant losses to the Company.
In addition, certain types of capitation agreements may be deemed a form of
risk contracting. Many states limit the extent to which any person can engage
in risk contracting, which involves the assumption of a financial risk with
respect to providing services to a patient. If the fees received by the Company
are less than the
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cost of providing the services, the Company may be deemed to be acting as a de
facto insurer. In some states, only certain entities, such as insurance
companies, HMOs and independent practice associations, are permitted to contract
for the financial risk of patient care. In such states, risk contracting in
certain cases has been deemed to be engaging in the business of insurance. The
Company believes that it is not in violation of any restrictions on risk bearing
or engaging in the business of insurance. If the Company is held to be
unlawfully engaged in the business of insurance, such finding could result in
civil or criminal penalties or require the restructuring of some or all of the
Company's operations, which could have a material adverse effect upon the
Company's business.
Billings And Collections. Under the Interpreting Physician agreements, the
Company is generally responsible for preparing and submitting bills per imaging
study performed. The preparation and submission of bills is completed by each
center, or by a regional billing office, generally on behalf of and in the name
of the appropriate Interpreting Physician. Prior to 1998, each center was also
responsible for collecting its own receivables and pursuing any parties that
were delinquent in payment of their bills. In February 1998, the Company
commenced a restructuring of its collection efforts for the purpose of
ultimately consolidating all collection activities within four or more regional
collection offices. The restructuring is in response to the need to improve
overall collection results and controls, and to better coordinate collection
efforts previously employed by individual centers (especially where third
parties had been retained to manage the center's collection efforts), as well as
the need to integrate the Company's 1997 acquisitions and to insure consistent
Company-wide collection policies and practices.
Management Information Systems. The Company acquired Dalcon in September
1997. By the end of June 1998, a substantial majority of the Company's imaging
centers are expected to be fully operating on Dalcon's ICIS radiology
information system. The ICIS radiology information system is designed to, among
other things, enhance the efficiency and productivity of the Company's centers,
lower operating costs, facilitate financial controls, increase reimbursement and
assist in the analysis of sales, marketing and referral data. The ICIS system
provides on-line, real-time information, reporting and access to managers with
respect to billing, patient scheduling, marketing, sales, accounts receivable,
referrals and collections, as well as other matters.
Healthcare Reform and Cost Reduction Efforts. Third-party payors,
including Medicare, Medicaid, managed care/HMO organizations 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 arrangements, diagnostic
imaging service providers are compensated using a fixed rate per member of the
managed care organization regardless of the number of procedures performed or
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 of 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 overall reimbursement rates will
continue to gradually decline for some period of time due to factors such as the
expansion of managed care organizations 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. The Company expects these agreements to increase the
number of procedures performed due to the additional referrals from these
managed care entities. 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.
ACQUIRED CENTERS; COMMON STOCK REPURCHASE OBLIGATIONS.
Since 1996, the Company has grown by aggressively acquiring imaging centers
and integrating their operations. The Company has acquired 92 imaging centers
through 27 acquisitions since January 1, 1996. When the Company acquires an
imaging center, it generally acquires assets relating to the provision of
technical, financial, administrative and marketing services which support the
provision of medical services performed by the Interpreting Physicians. Such
assets typically include equipment, furnishings, supplies, tradenames of the
center, books and records, contractual rights with respect to leases, managed
care and other agreements and, in most instances, accounts receivable. Other
than with respect to such accounts receivable for
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services performed by the acquired company, the Company does not acquire any
rights with respect to or have any direct relationship, with patients. Patients
have relationships with referral sources who are the primary or specialty care
physicians for such patients. These physicians refer their patients to
diagnostic imaging centers which may include the Company's centers where
Interpreting Physicians, under independent contractor agreements, provide
professional medical services. The Company's acquired imaging centers do not
constitute either a radiology, primary care or specialty care medical practice.
In connection with an acquisition of a center, the Company will generally enter
into an agreement, as described above, with a Physician Group to act as an
independent contractor to perform medical services at the center.
In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as consideration, the Company agreed
to register such shares for resale pursuant to the federal securities laws. In
certain of such acquisitions, the Company has granted specific remedies to the
sellers in the event that a registration statement covering the relevant shares
is not declared effective by the Securities and Exchange Commission (the "SEC")
within an agreed-upon period of time, including the right to require the Company
to repurchase the shares issued to such seller. In the event the Company is
unable to register such shares by the required dates, the Company would become
obligated to repurchase the shares issued in connection with such acquisition.
As of May 26, 1998, the Company had not registered any shares of Common Stock
issued in connection with the Company's 1997 acquisitions under a registration
statement declared effective by the SEC. As of December 31, 1997, the Company
had reflected $9,734,000 of Common Stock subject to redemption on its
Consolidated Balance Sheets related to shares that the Company may be required
to repurchase. From January 1, 1998 through May 26, 1998, the Company paid
$3,275,000 to sellers who exercised their rights to have 179,000 shares of
Common Stock repurchased. In addition, the Company expects to become obligated
to pay an additional $5,763,000 during the remainder of 1998 in connection with
the settlement of certain repurchase obligations of the Company subject to,
under certain circumstances, the consent of the Senior Note holders. See "ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-LIQUIDITY AND CAPITAL RESOURCES."
In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay to the seller (in
additional shares and/or cash) an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or, in
other cases, as of the execution of the relevant acquisition agreement. Based
upon the closing sales price of the Company's Common Stock on May 26, 1998 ($3
1/16 per share), such shortfall would be approximately $9,634,000, which amount
may be reduced by up to $5,977,000 to the extent certain sellers exercise their
repurchase rights referred to above.
In connection with certain of the Company's acquisitions, the Company has
also agreed with certain sellers that all or a portion of the consideration for
such acquisitions will be paid on a contingent basis based upon the
profitability, revenues or other financial criteria of the acquired business
during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differs for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration and in other cases the parties have agreed
that any payment of such contingent consideration may be paid in cash or shares
of Common Stock, or a combination of both.
Although the Company has the option, in certain of such cases, to pay
certain of such amounts in shares of Common Stock, payment of significant cash
funds to sellers in the event such remedies or earnout provisions are triggered
could have a material adverse effect on the Company's cash flow and financial
condition. In addition, the Company may be required to finance all or a portion
of any such cash payments from third-party sources. No assurance can be given
that such capital will be available on terms acceptable to the Company. In
addition, the issuance by the Company of shares of Common Stock in payment of
any such owed amounts could be dilutive to the Company's stockholders.
TEMPORARY HEALTHCARE STAFFING INDUSTRY
OVERVIEW
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 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 commitment in salary and benefits which it can avoid with per
diem
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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 services 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 specialty.
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.
Temporary Healthcare Staffing 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 35 offices located in 16
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. StarMed 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.
StarMed commenced its Per Diem operations in March 1995 and, since that
time, it has opened 31 offices, acquired 4 staffing companies operating six
additional offices and consolidated the operations of two other offices. 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.
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.
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 licenses 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.
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 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.
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COMPETITION
Each of the Company's business segments is highly competitive. In the
Company's diagnostic imaging business, competition focuses primarily on
attracting physician referrals at the local market level and, increasingly,
referrals through relationships with managed care and physician/hospital
organizations. The Company believes that principal competitors in each of the
Company's markets are hospitals, independent or management company-owned imaging
centers, individual-owned imaging centers and mobile MR units. Many 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.
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 benefits 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
Many of the 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 movable
equipment, including outpatient diagnosis imaging centers utilizing MR or other
major medical equipment. At the present time, the CON laws of New Jersey, New
York, Illinois, Florida, Maryland and California 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 unnecessary 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, addition or expansion 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.
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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, accreditation 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 Federal Medicare and Medicaid Anti-Kickback Statute (the "Anti-Kickback
Statute") prohibits the offering, payment, solicitation or receipt of any form
of remuneration in return for the referral of patients covered by Medicare,
Medicaid or certain other Federal and state healthcare programs, or in return
for the purchase, lease or order or provision of any item or service that is
covered by Medicare or Medicaid or certain other Federal and state healthcare
programs. Violation of the Anti-Kickback Statute 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 (the "Protection Act")
provides that persons guilty of violating the Anti-Kickback Statute 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").
The OIG has issued "safe harbor" regulations which describe practices that
will not be considered violations of the Anti-Kickback Statute. The fact that a
particular arrangement does not fall within a safe harbor does not mean that the
arrangement does not comply with the Anti-Kickback Statute. The safe harbor
regulations simply provide a guarantee that qualifying arrangements do not
violate this federal law. They do not extend the scope of the statutory
prohibitions. Thus, arrangements that do not qualify for safe harbor protection
are in largely the same position as they were prior to the promulgation of these
regulations, meaning that they must be carefully evaluated in light of the
provisions of the Anti-Kickback Statute itself. To the extent possible, the
Company will structure its agreements with referral sources, such as physicians
to comply with applicable safe harbors, but there are no assurances that it will
be able to so with every contract. Further, these safe harbor regulations have
so far been relatively untested in practice. No assurances can be given that a
Federal or state agency charged with enforcement of the Anti-Kickback Statute
and similar laws might not assert a contrary position or that new Federal or
state laws or new interpretation 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.
Corporate Practice Of Medicine And Fee Splitting
The laws of many states prohibit unlicensed, non-physician-owned entities
or corporations from performing medical services or physicians from splitting
fees with non-physicians. The Company is unlicensed for certain of its services.
The Company does not believe however, that it engages in the unlawful practice
of medicine or the delivery of medical services in any state where it is
prohibited, and is not licensed to practice medicine in states which permit such
licensure. Professional medical services, such as the interpretation of MRI
scans, are separately provided by independent contractor Interpreting Physicians
pursuant to agreements with the Company. The Company performs only
administrative and technical services and does not exercise control over the
practice of medicine by physicians or employ physicians to provide medical
services. However, in many jurisdictions, the laws restricting the corporate
practice of medicine and fee-splitting have been subject to limited judicial and
regulatory interpretation and, therefore,
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there can be no assurance that, upon review, some of the Company's activities
would not be found to be in violation of such laws. If such a claim were
successfully asserted against it, the Company could be subject to civil and
criminal penalties and could be required to restructure its contractual
relationships. In addition, certain provisions of its contracts with
Interpreting Physicians, including the payment of management fees and
restrictive covenants could be held to be unenforceable. Such results or the
inability of the Company to restructure its contractual relationships 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 when 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 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 (when it
only applied to clinical laboratories). Draft regulations for the provisions of
the Stark Law applicable to MR and other radiology services were issued in
January, 1998. Submission of a claim that a provider knows, or should know, is
for 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 service arrangements and
contractual relationships. The Company continues to review all aspects of its
operations and endeavors to comply in all material respects with applicable
provisions of the Stark Law. Due to the broad and sometimes vague nature of
this law, the ambiguity of related regulations, the absence of final
regulations, and the lack of interpretive case law, 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
making 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
Statute 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.
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 endeavors
to comply in all material respects with applicable provisions of the Anti-
Kickback Statute, the Stark Law and applicable state laws governing fraud and
abuse as well as licensing and certification. Due to the broad and sometimes
vague nature of these laws and requirements, the evolving interpretations of
these laws (as evidenced by the recent draft regulations for the Stark Law),
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
effect on the Company, or that Federal or state governments will not impose
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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 material 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 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 procedure required by the existence of government and private third
party payors as is the case with respect to the Company's diagnostic imaging
centers.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,277 full time
employees. This number does 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 nature of the services provided by the Company expose the Company to
risk that certain parties may attempt to recover from the Company for alleged
wrongful acts committed by others. As a result of this risk, the Company
maintains malpractice and professional liability insurance for both its Imaging
and Temporary Healthcare Staffing Divisons, as well as workmen's compensation
insurance, comprehensive and general liability coverage, fire, allied perils
coverage and professional liability insurance in amounts deemed adequate by
management to cover all potential risk. There can be 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 36,133 square foot principal and executive offices
pursuant to two leases with terms of five years and four years, respectively,
remaining. The building also houses the Company's Hackensack imaging center.
The Company's 98 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. The Company owns the real property in which certain of its
centers operate, and leases its remaining centers under leases which expire from
December 1997 through October 2002 and, in certain instances, contain options to
renew. StarMed's 35 per diem staffing offices lease approximately 14,000 square
feet of office space in the aggregate under various lease terms expiring through
December 1999. The Company believes that if it were unable to renew the lease
on any of these facilities, other suitable facilities would be available to meet
the Company's needs.
ITEM 3. LITIGATION
As described below under ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, the Company and certain of its officers and directors have been
named as defendants in several actions filed in state and federal court arising
out of the events also described below under Item 13 and in the Company's
Current Report on Form 8-K filed by the Company on November 10, 1997, involving,
among other matters, allegations against the Company with respect to related-
party transactions and securities fraud.
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 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 legal proceedings described above are in their preliminary stages.
Although the Company believes it has meritorious defenses to all claims against
it, the Company is unable to predict with any certainty the ultimate outcome of
those proceedings.
In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that the such
other litigation will not have an material adverse effect on the Company's
financial position, cash flows or results of operations.
-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 of the year ended December 31, 1997.
-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. Since April 20, 1998, the Company's Common Stock has traded under the
symbol MRIIE to reflect the fact that Nasdaq had commenced proceedings to
determine whether or not the Company's Common Stock should continue to be traded
on the Nasdaq Stock Market as a result of the Company's failure to file its
Annual Report on Form 10-K for the year ended December 31, 1997 in a timely
manner. On May 14, 1998, representatives of the Company attended a hearing
before a Nasdaq Qualifications Hearing Panel to review the Company's failure to
comply with NASDAQ's ongoing listing requirements. On May 29, 1998, the Company
was advised that the Panel determined to continue the listing of the Company's
Common Stock on The Nasdaq Stock Market subject to certain conditions. The
Company must file its Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 on or before June 12, 1998 and must evidence compliance with either
Nasdaq's minimum net tangible assets test or one of Nasdaq's alternative
requirements by July 24, 1998. Regarding the filing of the Form 10-Q, management
intends for the Company to be in a position to file the Quarterly Report by June
12th in order to satisfy the date-of-filing condition set by the Panel for
continuing listing. Notwithstanding the foregoing, no assurance can be given at
this time that this filing deadline will be met.
Based on the closing price for the Company's Common Stock on May 26, 1998
($3-1/16) and the Company's net tangible assets as of December 31, 1997, the
Company does not currently satisfy either Nasdaq's minimum net tangible assets
requirement or one of the alternative requirements for continued listing, which
include, among other things, a minimum bid price for the Common Stock of $5.00
per share. In order to satisfy the continued listing requirements, on or before
July 24, 1998, the Company intends to submit for shareholder approval a reverse
stock split, if necessary, in order to meet or exceed the $5.00 minimum bid
price. In event the Company does not satisfy either the minimum net tangible
assets requirement or is unable to effect a reverse stock split sufficient to
meet or exceed the $5.00 per share requirement, the Panel will consider moving
the Common Stock to The Nasdaq SmallCap Market, provided the Company is able to
demonstrate compliance with the applicable maintenance criteria. There can be
no assurance that the Common Stock will meet the continued listed requirements
for the Nasdaq Stock Market.
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
---- ---
1996
<S> <C> <C>
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
1997
First Quarter....................................... $12 1/8 $ 9 5/8
Second Quarter...................................... $17 1/8 $10 3/8
Third Quarter....................................... $20 $15 1/8
Fourth Quarter...................................... $20 5/8 $ 8 5/32
1998
First Quarter....................................... $11 1/16 $ 4 7/8
Second Quarter (through May 26, 1998)............... $ 6 1/4 $ 2 1/4
</TABLE>
As of the close of business on May 26, 1998, the last reported sales price
per share of the Company's Common Stock was $3 1/16.
There were 433 holders of record of the Company's Common Stock at the close
of business on May 26, 1998. Such number does not include persons, whose 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 issuance of 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 not previously included in the Company's
Quarterly Reports 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 November 5, 1997, the Company granted to Jay Alix & Associates ("Jay
Alix") warrants to purchase 25,000 shares of Common Stock with an exercise price
of $18.125 per share, 25,000 shares of Common Stock with an exercise price of
$21.00 per share and 25,000 shares of Common Stock with an exercise price of
$25.00 per
-16-
<PAGE>
share. The Warrants have an 18-month term and were granted in connection with
the execution by Jay Alix of an interim management services agreement with the
Company.
On December 29, 1997, the Company entered into a $15 million credit
facility with DVI Financial Services Inc. (the "Facility"). The Facility
provides for two advances to the Company, one for $8 million and the other for
$7 million. In consideration for making the Facility available to the Company,
the lender received warrants to purchase an aggregate of 100,000 shares of
Common Stock at a exercise price based upon 110% of the average market prices
over a period prior to the issuance of the warrants. In the event that the
lender refuses to make the second advance, warrants to purchase 46,667 shares of
Common Stock will be canceled.
On December 30, 1997, the Company issued warrants to acquire 817,000 shares
of Common Stock at an exercise price equal to $11.62 per share to RGC
International, LDC. The warrants were issued in lieu of certain monetary
penalties incurred by the Company as a result of its failure to comply with the
provisions of a registration rights agreement entered into in connection with
the sale by the Company of $18,000,000 of Series C Convertible Preferred Stock
to RGC International, LDC. See ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL
RESOURCES."
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 and, as such, reflects the impact of acquired entities from the
effective dates of such transactions. The information in the table and the notes
thereto should be read in conjunction with "ITEM 7 -MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's
Consolidated Financial Statements and notes thereto.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
(in thousands except supplemental and per share data)
STATEMENT OF OPERATIONS DATA:
Net service revenues................................... $202,386 $ 93,785 $ 51,993 $ 45,178 $45,242
Operating income (loss)................................ (19,136) 14,693 7,507 1,036 287
Income (loss) from continuing operations
before extraordinary item............................. (31,239) 7,254 4,143 (1,093) (2,055)
Income (loss) from continuing operations
Per common share:
Basic.............................................. (1.62) 0.64 0.54 (0.15) (0.32)
Diluted............................................ (1.62) 0.59 0.53 (0.15) (0.32)
SUPPLEMENTAL DATA:
Number of consolidating imaging
centers at end of period.............................. 98 39 11 8 8
Total procedures at consolidated
imaging centers....................................... 527,477 209,970 124,302 101,460 86,686
BALANCE SHEET DATA
Working capital surplus (deficit) $(58,174) $ 42,775 $ 10,738 $ 5,834 $ 3,365
Total assets........................................... 338,956 164,514 44,136 40,372 40,881
Long term debt and capital lease
obligations (excluding current
portion).............................................. 37,900 21,011 11,157 13,415 19,034
Convertible debentures................................. - 6,988 4,350 - -
Stockholders equity.................................... 126,904 106,384 16,966 11,872 12,939
</TABLE>
Earnings per share amounts for prior periods, including related quarters, have
been restated to conform to the requirements of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share."
-17-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue Recognition
- -------------------
At each of the Company's diagnostic imaging centers, all medical
services are performed exclusively by physician groups (the "Physician Group" or
the "Interpreting Physician"), generally consisting of radiologists with whom
the Company has entered into independent contractor agreements. Pursuant to
these agreements, the Company has agreed to provide equipment, premises,
comprehensive management and administration, including responsibility for
billing and collection of receivables, and technical imaging services to the
Interpreting Physician.
Net service revenues for the Diagnostic Imaging segment are reported,
when earned, at their estimated net realizable amounts from patients, third
party payors and others for services rendered at contractually established
billing rates which generally are at a discount from gross billing rates. Known
and estimated differences between contractually established billing rates and
gross billing rates (referred to as "contractual allowances") are recognized in
the determination of net service revenues at the time services are rendered.
Subject to the foregoing, the Company's diagnostic imaging centers recognize
revenue under one of the three following types of agreements with Interpreting
Physicians:
Type I - The Company receives a technical fee for each diagnostic
imaging procedure performed at a center, the amount of which is dependent upon
the type of procedure performed. The fee included in revenues is net of
contractual allowances. The Company and the Interpreting Physician
proportionally share in any losses due to uncollectible amounts from patients
and third party payors, and the Company has established reserves for its share
of the estimated uncollectible amount. Type I net service revenues for 1997
were $80,818,000, or 56% of Diagnostic Imaging segment revenues.
Type II - The Company bills patients and third party payors directly
for services provided and pays the Interpreting Physicians either (i) a fixed
percentage of fees collected at the center, or (ii) a contractually fixed amount
based upon the specific diagnostic imaging procedures performed. Revenues are
recorded net of contractual allowances and the Company accrues the Interpreting
Physicians fee as an expense on the Consolidated Statements of Operations. The
Company bears the risk of loss due to uncollectible amounts from patients and
third party payors, and the Company has established reserves for the estimated
uncollectible amount. Type II net service revenues for 1997 were $55,016,000,
or 38% of Diagnostic Imaging segment revenues.
Type III - The Company receives from an affiliated physician
association a fee for the use of the premises, a fee per procedure for acting as
billing and collection agent and a fee for administrative and technical services
performed at the centers. The affiliated physician association contracts with
and pays directly the Interpreting Physicians. The Company's fee, net of an
allowance based upon the affiliated physician association's ability to pay after
the association has fulfilled its obligations (i.e., estimated future net
collections from patients and third party payors less facility lease expense and
Interpreting Physicians fees), constitutes the Company's net service revenues.
Since the Company's net service revenues are dependent upon the amount
ultimately realized from patient and third party receivables, the Company's
revenue and receivables have been reduced by an estimate of patient and third
party payor contractual allowances, as well as an estimated provision for
uncollectible amounts from patients and third party payors. Type III net
service revenues for 1997 were $8,342,000, or 6% of Diagnostic Imaging segment
revenues.
-18-
<PAGE>
Revenues derived from Medicare and Medicaid are subject to audit by
such agencies. The Company is not aware of any pending audits.
The fees received or retained by the Company under the three types of
agreements with Interpreting Physicians described above, expressed as a
percentage of gross billings net of contractual allowances for the imaging
services provided, range from 78% to 93% for the Type I agreements, 80% to 93%
for the Type II agreements and 80% to 89% for the Type III agreements. These
agreements generally have terms ranging from one to ten years.
The Company also recognizes revenue from temporary nurse staffing and
radiology information systems. Such revenues are recognized on an accrual basis
as earned.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
- ---------------------------------------------------------------------
For the year ended December 31, 1997, total Company net service revenues
were $202,386,000 versus $93,785,000 for the year ended December 31, 1996, an
increase of $108,601,000 or 116%.
Net service revenues for the Diagnostic Imaging segment increased
$79,650,000, or 123%, to $144,412,000 in 1997 from $64,762,000 in 1996, due
primarily to revenues of $60,849,000 contributed by centers acquired during
1997. Revenues at imaging centers acquired during 1996 increased $20,585,000,
or 93%, to $42,617,000 in 1997 from $22,032,000 in 1996 primarily as a result of
the timing of the 1996 acquisitions, partially offset by an increase of
$5,896,000 in the estimated provision for uncollectible amounts related to Type
III centers. Revenues at imaging centers that were operated by the Company for
all of 1997 and 1996 decreased $1,784,000, or 4%, to $40,946,000 in 1997 from
$42,730,000 in 1996, primarily as a result of higher contractual allowances in
1997 and relatively constant procedure volumes.
Diagnostic Imaging segment revenues in 1997 were adversely affected by
higher contractual allowance estimates, including a component related to the
ultimate collectibility of amounts related to the Company's Type III revenue.
These contractual allowance estimates are largely dependent upon reimbursement
rates from third party payors, including Medicare, Medicaid and managed care
providers. Management believes that the Company's overall reimbursement rates
will continue to gradually decline for some period of time, due to factors such
as the expansion of managed care organizations and continued national healthcare
reform efforts. The Company will endeavor to mitigate the impact of any decline
in reimbursement rates by decreasing costs and increasing referral volume. If
the rate of decline in reimbursement rates were to increase materially, or if
the Company is unsuccessful in reducing its costs or increasing its volume, the
Company's results could be materially and adversely affected.
Diagnostic Imaging segment revenue derived from personal injury
claims, mainly involving automobile accidents, represented approximately 24% of
the Diagnostic Imaging business net service revenues for 1997. Automobile
insurance carriers generally pay the non-deductible non-co-pay portion of the
charge, with the remaining balance payable by the individual. The timing of
collection from the individual is partially dependent upon the outcome and
timing of any settlement or judgment of the injury claim. Accordingly, such
receivables typically require a longer period of time to collect compared to the
Company's other receivables, and in the experience of the Company incur a higher
bad debt expense. If the Company were to become less successful in its efforts
in collecting these receivables, the Company's results could be materially and
adversely affected.
Net service revenues for the Temporary Staffing segment increased to
$57,974,000 in 1997 from $29,023,000 in 1996, an increase of $28,951,000 or
100%. Internal growth in the staffing business, consisting primarily of the
opening of new per diem offices, accounted for $5,442,000 of the increase in
revenues. Increased revenues at per diem offices opened or acquired during 1996
accounted for
-19-
<PAGE>
$16,861,000 of revenues and revenues of $6,648,000 were contributed by per diem
offices acquired during 1997.
Imaging center and staffing operating costs for the year ended December 31,
1997 were $136,065,000 compared to $59,064,000 for the year ended December 31,
1996, an increase of $77,001,000 or 130%.
Imaging center operating costs for the Diagnostic Imaging segment increased
$55,400,000, or 164%, to $89,234,000 in 1997 from $33,834,000 in 1996, due
primarily to operating costs of $35,079,000 related to centers acquired during
1997. Operating costs at imaging centers acquired during 1996 increased
$18,155,000, or 149%, to $30,325,000 in 1997 from $12,170,000 in 1996, primarily
as a result of the timing of the 1996 acquisitions. Operating costs at imaging
centers that were operated by the Company for all of 1997 and 1996 increased
$2,166,000, or 10%, to $23,830,000 in 1997 from $21,664,000 in 1996, primarily
as a result of higher payroll and related costs.
Operating costs for the Temporary Staffing segment in 1997 were $46,831,000
compared to $25,230,000 for the year ended December 31, 1996, an increase of
$21,601,000 or 86%. Internal growth in the staffing business, accounted for
$4,143,000 of the increase in operating costs. Increased costs at per diem
offices opened or acquired during 1996 accounted for $11,812,000 of the higher
operating costs and operating costs of $5,646,000 were contributed by per diem
offices acquired during 1997.
Center operating margins, which represent net service revenue less imaging
center and staffing operating costs as a percent of net revenue, decreased in
1997 to 33% from 37% in 1996. Center operating margins for the Diagnostic
Imaging segment decreased in 1997 to 38% from 48% in 1996 due primarily to
higher contractual allowance estimates, including a component related to the
ultimate collectibility of amounts related to the Company's Type III revenue, as
described above, and generally higher costs. Center operating margins in the
Temporary Staffing business increased in 1997 to 19% from 13% due primarily to
improved profitability of per diem offices opened or acquired prior to 1997.
The provision for uncollectible accounts receivable in 1997 was
$20,656,000, an increase of $15,873,000 from the 1996 provision of $4,783,000.
This increase was essentially entirely attributable to the Company's Diagnostic
Imaging segment. The Company's Diagnostic Imaging segment provision for
uncollectible accounts receivable in 1997 was $20,364,000, or 14% of related net
service revenues, compared to the 1996 provision of $4,704,000 or 7% of related
net service revenues. The increase in the provision for uncollectible accounts
receivable was due to the deterioration during 1997 in the aging of the
Company's accounts receivable and a reassessment by the Company of its expected
future collections based upon 1997 collection activity, including analyzing
collection experience of its personal injury receivables. Accounts receivable
before allowances for uncollectibles aged over one-year increased to
$21,485,000, or 25% of total receivables in 1997, from $7,016,000, or 14% of
total receivables in 1996.
Management expects its provision for uncollectible accounts receivable as a
percentage of Diagnostic Imaging segment revenues to approximate 7% for 1998.
An additional reserve of approximately 1% of net imaging revenues for
uncollectible patient and third party payors related to the Company's Type III
centers is expected to be reflected as a reduction in net revenues for 1998.
Corporate general and administrative expense in 1997 was $20,246,000, an
increase of $12,467,000 from the $7,779,000 recorded in 1996. This increase was
primarily due to higher payroll and related costs as a result of the expanded
business development activities and the resulting growth experienced during the
year in the Diagnostic Imaging segment. In March 1998, the Company announced a
workforce reduction and follow-on attrition program that is expected to result
in reduced payroll costs of approximately $5,000,000 per annum.
-20-
<PAGE>
During 1997, the Company recorded $2,536,000 of stock-option based
compensation expense. This non-cash charge was related to stock option grants
to employees and directors during 1996 and early 1997 that were subsequently
approved by the Company's stockholders in May, 1997.
Depreciation and amortization expense in 1997 was $19,334,000, compared to
$7,466,000 in 1996, or an increase of $11,868,000 attributable almost entirely
to the Company's Diagnostic Imaging business. The increase was due primarily
to higher equipment depreciation of $6,585,000 resulting from 1997 acquisitions
and increased goodwill amortization of $4,638,000.
During 1997, the Company recorded a $12,962,000 loss from the impairment of
goodwill and other long-lived assets. This loss consists of the write-off of
goodwill of $10,425,000, covenants not to compete of $118,000 and fixed assets
of $2,419,000. Substantially all of the impairment relates to eight of the
Company's diagnostic imaging centers which were under performing. The Company
has recorded impairment losses for these centers because the sum of the expected
future cash flows, determined based on an assumed continuation of current
operating methods and structures, does not cover the carrying value of the
related long-lived assets. The Company is, however, investigating the
underlying causes of such under-performance to determine what actions, if any,
may be taken to improve the future operating performance of such centers.
During 1997, the Company also recorded $9,723,000 of other unusual charges
consisting of (i) $3,256,000 for the estimated net costs associated with the
resolution of the shareholder and employee lawsuits, (ii) $2,243,000 for higher
than normal professional fees, (iii) $2,169,000 ($2,051,000 of which was a non-
cash charge related to the issuance of 817,000 common stock warrants) for
penalties associated with delays in the registration of the Company's common
stock issued in connection with acquisitions or issuable upon conversion of
convertible preferred stock, (iv) $1,150,000 for the loss on investment related
to a potential acquisition not consummated, (v) $469,000 for costs associated
with the investigation of related party transactions and (vi) $436,000 for
management termination benefits and related costs.
The Company expects to incur additional unusual charges of at least
$4,500,000 during 1998 primarily related to the estimated net costs associated
with the resolution of the shareholder and employee lawsuits, penalties
associated with delays in the registration of the Company's Common Stock, and
costs associated with the investigation of related party transactions which was
concluded in April 1998. Such additional amounts could be substantially higher
depending upon the outcome of current negotiations regarding penalties
associated with the failure to register the Company's common stock and the
outcome of certain litigation.
Net interest expense for 1997 was $9,167,000 as compared to $2,969,000 for
1996, an increase of $6,198,000. This increase was primarily attributable to
higher outstanding debt, including the issuance of $78,000,000 of Senior Notes
during 1997, notes payable of $36,505,000 and capital lease obligations totaling
$26,612,000 assumed in connection with the Company's acquisitions.
The Company's earnings in 1997 were reduced by $636,000 attributable to
minority interests, as compared to $308,000 in 1996. The increase of $328,000
is primarily due to the acquisition of entities during 1997 that operate limited
partnerships with minority holdings.
The provision for income taxes in 1997 was $2,300,000, as compared to
$4,162,000 in 1996. During 1997, the income tax benefit calculated based upon
the Company's pre-tax loss was reduced by an income tax valuation allowance of
$10,700,000. This valuation allowance was recorded due to uncertainty regarding
the realization of the full amount of the Company's net deferred income tax
assets.
-21-
<PAGE>
The Company's net loss for 1997 was $31,239,000 compared to net income for
1996 of $7,254,000. The net loss applicable to common stockholders (used in
computing loss per common share) in 1997 includes charges of $1,938,000 related
to Common Stock subject to redemption and convertible preferred stock. These
charges relate to price protection agreements provided in connection with the
Company's 1997 acquisitions of $1,696,000 and the accretion of the Company's
preferred stock of $242,000.
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 $51,993,000 for the year ended December 31, 1995, an increase
of $41,792,000 or 80.4%. Management fee and use revenues for diagnostic imaging
services increased $8,270,000 from $31,174,000 for the year ended December 31,
1995 to $39,445,000 for the year ended December 31, 1996. This increase is
primarily attributable to an increase of $1,326,000 (4.5%) at centers which were
included in revenue for all of 1996 and 1995; $2,752,000 (169%) in revenue at a
center acquired during 1995 and $4,192,000 of revenue contributed by imaging
centers acquired during 1996.
Diagnostic imaging patient service revenues increased $20,631,000 for the
year ended December 31, 1996 to $25,317,000 from $4,686,000 for the year ended
December 31, 1995. This increase is attributable to an increase of $615,000
(19%) at centers which were included in revenue for all of 1995 and 1996;
$2,670,000 (183%) at centers acquired during 1995 and; $22,032,000 of revenue
was contributed by centers acquired during 1996. Staffing segment revenues
increased $12,890,000 (80.3%) primarily due to internal growth and acquisitions.
Internal growth in the staffing segment consisting of the opening of new per
diem offices accounted for approximately $3,200,000 of the increase in staffing
revenue. Increased revenues at per diem offices opened during 1995, related
primarily to improved volume as these offices matured from their start up phase,
accounted for approximately $3,400,000 of the increase in staffing revenues. Per
diem staffing businesses acquired during 1996 contributed approximately
$6,300,000 in revenues during the year.
Technical services payroll and related costs for the year ended December
31, 1996 amounted to $35,073,000 compared to $19,526,000 for the year ended
December 31, 1995, an increase of $15,547,000 or 80%. Of this increase
$6,356,000 or 41% is attributable to costs incurred at imaging centers acquired
during 1995 and 1996. $6,569,000 or 42% is attributable to the opening of new
per Diem offices and the staffing acquisitions. The remaining $2,622,000
increase is due to the maturation of per diem offices opened in 1995.
Medical supplies amounted to $4,223,000 for the year ended December 31,
1996 as compared to $2,440,000 for the year ended December 31, 1995, an increase
of $1,783,000 or 73%. Of this increase $1,725,000 or 97% is attributable to
centers acquired during 1995 and 1996.
For the year ended December 31, 1996 diagnostic equipment maintenance
increased $1,626,000 or 99% to $3,274,000 from $1,648,000 for the year ended
December 31, 1995. This increase is primarily due to centers acquired during
1995 and 1996.
Independent contractor fees amounted to $1,202,000 for the year ended
December 31, 1996 as compared to $437,000, for the year ended 1995. This
increase of $765,000 or 175% is attributable to the Type II (see Note 1) centers
acquired during 1995 and 1996.
Administrative costs which include facilities rent, marketing costs and
personnel costs of employees whose activities relate to the operations of
multiple centers increased approximately
-22-
<PAGE>
$5,853,000 or 96% from $6,084,000 for the year ended December 31, 1995 to
$11,937,000. This increase is primarily due to costs incurred at imaging centers
acquired during 1995 and 1996.
Other costs increased by $1,924,000 or 134% for the year ended December 31,
1996 to $3,354,000 as compared to $1,430,000 in the prior year primarily due to
an increase in accounting, legal and professional fees for the centers.
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
$28,276,000 increase in imaging revenues that have higher bad debt experience
than the Company's staffing revenues. 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 in the provision for
uncollectible accounts 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 segment provision for
uncollectibles for both 1996 and 1995 was not material.
Corporate general and administrative expense increased by $2,801,000 or
56.3% from $4,978,000 for the year ended December 31, 1995 to $7,779,000 for the
year ended December 31, 1996. 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
acquisition of NMR of America, Inc. ("NMR").
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 acquisition of NMR.
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 scheduled
reductions in outstanding principal balances.
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 348.4% 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).
The provisions for income taxes increased $2,503,000 or 150.9% 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 an increase in the Company's effective
income tax rate. 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 primarily due 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
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the statutory rate primarily due 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
year 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.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company's primary source of cash flow was from
financing activities, largely as a result of net proceeds from the Senior Notes
of $76,523,000, net proceeds from the issuance of convertible preferred stock of
$16,965,000, and other financing activities. The primary use of cash was to fund
acquisitions which totaled $73,121,000 and to fund the repayment of certain
notes and capital lease obligations of $13,764,000. Operating activities
resulted in a net use of cash of $5,322,000 during 1997 due primarily to
increases in accounts receivable.
Net cash provided by operating activities for 1996 and 1995 was
$1,450,000 and $2,335,000, respectively, representing a decrease of $885,000 in
1996. The decrease was due primarily 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) $8,569,000 expended for the purchase of diagnostic imaging
centers, offset by $2,157,000 of cash acquired in the acquisition of NMR, (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 the Company's Common Stock, $6,533,000 of net proceeds from the
issuance of subordinated debentures, $1,229,000 proceeds from
borrowings 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 has never declared a dividend on its Common Stock and under the
Company's Senior Note agreement, the payments of such dividends is not
permitted.
As a result of the 1997 net loss, the Company is currently in default of
certain financial covenants under the Company's $78,000,000 of Senior Notes.
Management and the Senior Note lenders are engaged in discussions to resolve
this matter. In the event the parties are unable to reach agreement, the
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. There can be no assurance that the Senior
Note lenders will provide the Company with an amendment or waiver of the
defaults. In addition, certain medical equipment notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek certain
other remedies if the Company is in default under the terms of agreements such
as the Senior Notes.
In the event that the Senior Note lenders or the other creditors or lessors
elect to exercise their right to accelerate the obligations under the Senior
Notes or the other loans and leases, such acceleration
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would have a material adverse effect on the Company, its operations and its
financial condition. Furthermore, if such obligations were to be accelerated, in
whole or in part, there can be no assurance that the Company would be successful
in identifying or consummating financing necessary to satisfy the obligations
which would become immediately due and payable. As a result of the uncertainty
related to the defaults and corresponding remedies described above, the Senior
Notes and the other loans and capital leases are shown as current liabilities on
the Company's Consolidated Balance Sheets at December 31, 1997 and the Company
has a deficit in working capital more fully described below. These matters raise
substantial doubt about the Company's ability to continue as a going concern. In
addition to continuing to negotiate with the Senior Note lenders in an attempt
to obtain waivers or amendments of the aforementioned defaults, the Company has
taken various actions in response to this situation, including the following:
(i) it effected a workforce reduction in March 1998 aimed at reducing the
Company's overall expense levels, and (ii) it has retained the investment
banking firm of SBC Warburg Dillon Read to assist the Company in exploring a
possible sale of the Company's StarMed temporary staffing subsidiary. The
financial statements do not include any further adjustments reflecting the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty.
The Company has a working capital deficit of $58,174,000 at December
31, 1997 compared to a working capital surplus of $42,775,000 at December 31,
1996. The deficit is primarily due to $78,000,000 of Senior Notes due 2001
through 2005 and other debt and capital leases shown as current liabilities as a
result of financial covenant defaults under such agreements.
The Company's average days sales outstanding (on an annualized basis) in
accounts receivable was 120 days for both December 31, 1997 and 1996. Days sales
outstanding was unchanged in 1997 as compared to 1996 due primarily to the
increase in reserves and write-offs during 1997.
In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as consideration, the Company agreed
to register such shares for resale pursuant to the federal securities laws. In
certain of such acquisitions, the Company has granted specific remedies to the
sellers in the event that a registration statement covering the relevant shares
is not declared effective by the SEC within an agreed-upon period of time,
including the right to require the Company to repurchase the shares issued to
such seller. In the event the Company is unable to register such shares by the
required dates, the Company would become obligated to repurchase the shares
issued in connection with such acquisition. As of May 26, 1998, the Company had
not registered any shares of Common Stock issued in connection with the
Company's 1997 acquisitions under a registration statement declared effective by
the SEC. As of December 31, 1997, the Company had reflected $9,734,000 of Common
Stock subject to redemption on its Consolidated Balance Sheets related to shares
that the Company may be required to repurchase. From January 1, 1998 through May
26, 1998, the Company paid $3,275,000 to sellers who exercised their rights to
have 179,000 shares of Common Stock repurchased. In addition, the Company
expects to become obligated to pay an additional $5,763,000 during the remainder
of 1998 in connection with the settlement of certain repurchase obligations of
the Company subject, under certain circumstances, to the consent of the Senior
Note holders.
In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay to the sellers (in
additional shares and/or cash) an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or, in
other cases, as of the execution of the relevant acquisition agreement (referred
to as "Price Protection"). Based upon the closing sales price of the Company's
Common Stock on May 26, 1998 ($3 1/16 per share), such shortfall would be
approximately $9,634,000, which amount may be reduced by up to $5,977,000 to the
extent certain sellers exercise their repurchase rights referred to above.
In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differ for each acquisition. In connection with
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<PAGE>
certain acquisitions, the Company and the relevant sellers have agreed to a
maximum amount of contingent consideration and in other cases the parties have
agreed that any payment of such contingent consideration may be paid in cash or
shares of Common Stock, or a combination of both.
Although the Company has the option, in certain cases, to pay certain of
such amounts in shares of Common Stock, payment of significant cash funds to
sellers in the event such remedies or earnout provisions are triggered could
have a material adverse effect on the Company's cash flow and financial
condition. In addition, the Company may be required to finance all or a portion
of any such cash payments from third-party sources. No assurance can be given
that such capital will be available on terms acceptable to the Company. In
addition, the issuance by the Company of shares of Common Stock in payment of
any such owed amounts could be dilutive to the Company's stockholders.
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement (the "Series C Preferred Stock Purchase Agreement"), dated July 21,
1997, between the Company and RGC International, LDC ("RGC"), and the
Registration Rights Agreement, dated July 21, 1997, 1997 (the "Series C
Registration Rights Agreement"), between the Company and RGC (the Series C
Stock Purchase Agreement and the RGC Registration Rights Agreement are
hereinafter referred to as the "RGC Agreements"), the Company issued 18,000
shares of Series C Convertible Preferred Stock, $1,000 stated value per share
(the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the Company
was required to use its best efforts to include the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock (the "RGC Conversion
Shares") in an effective Registration Statement on Form S-3 not later than
October 1997. The RGC Agreements provide for monthly penalties ("RGC
Registration Penalties") in the event that the Company fails to register the
Conversion Shares prior to October 1997 with such penalties continuing until
such time as the Conversion Shares are registered as required by the RGC
Agreements.
As a result of the Company's failure to register the RGC Conversion Shares,
at various dates on or after December 31,1997, the Company: (i) in lieu of RGC
Registration Penalties accruing on or before December 31, 1997, issued warrants
to RGC to acquire 817,000 shares of Common Stock at an exercise price of $11.62
per share (such warrants having an estimated value, for accounting purposes
only, of $2,051,000); (ii) in lieu of RGC Registration Penalties accruing during
the month of Januuary 1998, issued warrants, to RGC to acquire 350,000 shares of
Common Stock at an exercise price of $12.95 per share (such warrants having an
estimated value, for accounting purposes only, of $1,194,000); and (iii) in lieu
of RGC Registration Penalties accruing from February 1, 1998 to April 30, 1998,
issued to RGC interest bearing promissory notes, due May 1, 1998 (the "RGC
Penalty Notes"), in the aggregate principal amount of $1,440,000. On May 1,
1998, as a result of the Company's failure to register the Conversion Shares on
or before such date, RGC was entitled under the RGC Agreements to demand a one-
time penalty of $1,800,000 (the "May 1998 Penalty") payable, at the option of
RGC, in cash or additional shares of Common Stock. As of May 26, 1998, RGC had
not demanded payment or other satisfaction of the May 1998 Penalty.
On May 1, 1998, the Company did not pay RGC the $1,440,000 that was then
due and payable under the RGC Penalty Notes. Additionally, as a result the
Company's continuing failure to register the Conversion Shares, RGC is entitled
to additional penalties of $540,000 per month (payable at the option of RGC in
cash or additional shares of Common Stock). The Company and RGC are currently in
discussions regarding the restructuring of the Penalty Notes, the May 1998
Penalty and the on-going monthly penalties, but there can be no assurance that
the Company will be successful in restructuring such obligations on terms
favorable to the Company or its shareholders.
In addition to matters discussed above, the Company will incur certain
unusual charges in 1998 (of at least $4,500,000) and is subject to litigation
that may require additional future cash outlays.
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On May 14, 1998, management appeared before the Nasdaq Qualifications
Hearing Panel. This hearing resulted from the Company's failure to file timely
its Form 10-K for 1997 and was held to determine if the Company's Common Stock
should continue to be listed on The Nasdaq Stock Market. On May 29, 1998, the
Company was advised that the Panel determined to continue the listing of the
Company's Common Stock on The Nasdaq Stock Market subject to certain conditions.
The Company must file its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 on or before June 12, 1998 and must evidence compliance with
either Nasdaq's minimum net tangible assets test or one of Nasdaq's alternative
requirements by July 24, 1998. Regarding the filing of the Form 10-Q, management
intends for the Company to be in a position to file the Quarterly Report by June
12 in order to satisfy the date-of-filing condition set by the Panel for
continued listing. Notwithstanding the foregoing, no assurance can be given at
this time that this filing deadline will be met.
Based on the closing price for the Company's Common Stock on May 26, 1998
($3-1/16) and the Company's net tangible assets as of December 31, 1997, the
Company does not currently satisfy either Nasdaq's minimum net tangible assets
requirement or one of the alternative requirements for continued listing, which
include, among other things, a minimum bid price for the Common Stock of $5.00
per share. In order to satisfy the continued listing requirements, on or before
July 24, 1998, the Company intends to submit for shareholder approval a reverse
stock split, if necessary, in order to meet or exceed the $5.00 minimum bid
price. In the event the Company does not satisfy either the minimum net tangible
assets requirement or is unable to effect a reverse stock split sufficient to
meet or exceed the $5.00 per share requirement, the Panel will consider moving
the Common Stock to The Nasdaq SmallCap Market, provided the Company is able to
demonstrate compliance with the applicable maintenance criteria. There can be no
assurance that the Common Stock will meet the continued listing requirements for
The Nasdaq Stock Market.
The Company's sources of liquidity consist of its cash balances and its
ability to enter into operating leases to fund expansions and equipment
replacement at its centers. At December 31, 1997 and April 30, 1998, the
Company's cash and cash equivalents were $23,198,000 and $8,406,000,
respectively. In addition, in March of 1998, the Company announced its intention
to explore strategic alternatives for (and the possible sale of) its StarMed
temporary staffing subsidiary, which the Company expects may result in cash
proceeds to Medical Resources, Inc. Assuming that the Company (i) reaches
satisfactory resolution with the Senior Note lenders regarding the financial
covenant defaults, and (ii) sells its Temporary Staffing and Per Diem business
over the next several months, while no assurance can be given, the Company
believes that it will have sufficient funds available to finance its working
capital requirements through 1998.
In addition, management believes that there are and will continue to be
opportunities to acquire additional diagnostic imaging centers, as well as
companies which own multiple centers. However, due to the Company's defaults
under its Senior Note agreement and its 1997 net loss, management is not
currently pursuing additional acquisitions. Until such time as the Company has
access to additional financing, it will not be in a position to make such
acquisitions.
Seasonality and Inflation
- -------------------------
The Company believes that its imaging business is generally unaffected by
seasonality. The Company's temporary staffing business usually experiences lower
revenues during the third quarter 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 general inflationary expectations and growing health care cost containment
pressures, and believes that the Company may not be able to raise the prices for
its diagnostic imaging procedures by an amount sufficient to offset such
negative effects. While the Company has responded to these concerns in the past
by increasing the volume of its business there can be no assurance that the
Company will be able to increase its volume of business in the future. In
addition, current discussions within the 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.
Impact of Year 2000 On Company's Computer Software
- --------------------------------------------------
The Computer programming code utilized in the Company's financial,
billing and imaging equipment systems were generally written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using 00's as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations resulting in disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities.
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<PAGE>
The Company has completed an assessment of its material financial and
billing computer systems. The Company is in the process of upgrading these
systems to be Year 2000 compliant and expects to complete this process by late
1998 to early 1999. The cost to be incurred related to Year 2000 compliance for
these systems is currently not expected to be material.
The Company has initiated a program to determine whether the computer
applications of its significant payors and suppliers will be upgraded in a
timely manner. The Company has also initiated a program to determine whether
embedded applications that control certain medical and other equipment will be
affected. The Company has not yet completed these reviews. The nature of the
Company's business is such that any failure to these types of applications may
have a material adverse effect on its business.
Because of the many uncertainties associated with Year 2000 compliance
issues, and because the Company's assessment is necessarily based on information
from third party-vendors, payors and suppliers, there can be no assurance that
the Company's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct.
Software sold by the Company's wholly-owned subsidiary, Dalcon
Technologies, Inc., is expected to be fully year 2000 compliant in connection
with the annual upgrade planned for late 1998.
Recently Issued Accounting Pronouncements
- -----------------------------------------
SFAS No. 130, "Reporting Comprehensive Income", requires an entity to
report comprehensive income and its components for fiscal years beginning after
December 15, 1997. This new standard increases financial reporting disclosures,
but will have no impact on the Company's financial position or results of
operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments for fiscal years beginning after
December 15, 1997. This new standard increases financial reporting disclosures,
but will have no impact on the Company's financial position or results of
operations.
Statement Of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", requires an entity to expense all
software development costs incurred in the preliminary project state training
costs and data conversion costs for fiscal years beginning after December, 15,
1998. The Company believes that this statement will not have a material effect
on the Company's accounting for computer software acquisition cost.
Statement Of Position 97-2, "Consolidation of Physicians' Practice
Entities", requires an entity to consolidate Physicians' Practice Entities in
circumstances in which substantial control is exercised by the Company. The
Company believes that this statement will not have a material effect on the
Company's financial position or results of operations.
Disclosure Regarding Forward Looking Statements
- -----------------------------------------------
Statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results may differ materially from that projected or suggested herein due to
certain risks and uncertainties including, without limitation: the ability of
the Company to effectively integrate the operations and information systems of
businesses acquired in 1997 and earlier; the ability of the
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Company to generate net positive cash flows from operations; the payment timing
and ultimate collectibility of accounts receivable (including purchased accounts
receivable) from different payor groups (including Personal Injury-type); the
economic impact of involuntary share repurchases and other payments (including
price protection payments and penalty payments) caused by the delay in the
effectiveness of the Company's pending Registration Statement and by the recent
decline in the Company's share price; the ability of the Company to cure any
defaults under its debt agreements and/or other obligations, in general, and in
a manner that avoids significant common stock dilution; the impact of a changing
and increasing mix of managed care and personal injury claim business on
contractual allowance provisions, net revenues and bad debt provisions; the
ultimate economic impact of recent litigation including shareholder and former
management lawsuits against the Company and certain of its Directors; the
availability of debt and/or equity capital, on reasonable terms, to finance
operations as needed and to finance growth; and the effects of federal and state
laws and regulations on the Company's business over time. Additional
information concerning certain risks and uncertainties that could cause actual
results to differ materially from that projected or suggested may be identified
from time to time in the Company's Securities and Exchange Commission filings
and the Company's public announcements.
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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
schedule and the reports thereon of independent auditors, listed in Item
14(a)(l) and (2) and appearing after the signature page to this Annual Report on
Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On December 4, 1997, Coopers & Lybrand LLP ("Coopers & Lybrand") resigned
as auditor of the Company.
In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 1996 and in the subsequent interim period (the
"Reporting Period"), there were no matters of disagreement with Coopers &
Lybrand on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures which, if not resolved to
the satisfaction of Coopers & Lybrand, would have caused Coopers & Lybrand to
make reference thereto in their report. During the Reporting Period, Coopers &
Lybrand's report on the Company's financial statements did not contain an
adverse opinion or a disclaimer of opinion nor was it qualified or modified as
to uncertainty, audit scope, or accounting principles.
On December 8, 1997, the Company engaged Ernst & Young, LLP ("Ernst &
Young") to audit the financial statements of the Company. Ernst & Young had
previously served as the Company's independent auditors for the fiscal years
ended December 31, 1994 and 1995.
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PART III
<TABLE>
<CAPTION>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and certain key employees of the
Company as of May 26, 1998 are as follows:
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gary N. Siegler............. 36 Chairman of the Board and Director
D. Gordon Strickland........ 51 Chairman of the Executive Committee and Director
Duane C. Montopoli.......... 49 Chief Executive Officer, President and Director *
Geoffrey A. Whynot .. 39 Chief Financial Officer and Senior Vice
President-Finance *
Christopher J. Joyce 34 Senior Vice President-Legal Affairs and
Administration and Secretary *
Gregory Mikkelsen .......... 50 President and Chief Operating Officer of StarMed *
Gerald H. Allen............. 50 President of Company's Imaging Division *
Carl Larsen................. 43 Senior Vice President-Operations
Daniel F. Bafia............. 38 Senior Vice President-Operations
Michael J. Drumgoole ....... 50 Senior Vice President-Sales and Marketing
Stephen M. Davis............ 43 Director
Gary L. Fuhrman ............ 36 Director
John H. Josephson........... 36 Director
Neil H. Koffler............. 31 Director
</TABLE>
* Executive Officer
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 principal member 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 managing partner of the investment advisor
to an offshore 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 motor homes and other recreational vehicles.
D. Gordon Strickland has been a director of the Company since December 1997
and was appointed Chairman of the Board's Executive Committee in January 1998.
Mr. Strickland is also a member of the Board's Nominating Committee. Mr.
Strickland was President and Chief Executive Officer of Kerr Group, Inc. ("Kerr
Group") a NYSE-listed manufacturer of plastic packaging products, from 1996 to
September 1997. From 1986 to 1996, he served as Senior Vice President, Finance
and Chief Financial Officer of Kerr Group.
Duane C. Montopoli was appointed President and Chief Executive Officer of
the Company effective January 30, 1998. Previously, Mr. Montopoli was President
and Chief Executive Officer of Chemfab Corporation (NYSE:CFA) which he joined in
1986. Until January 1990, he was also a partner in Oak Grove Ventures which he
joined in December 1983. Prior to that time, Mr. Montopoli was employed by
Arthur Young & Company (now Ernst & Young LLP) where he was a general partner
from October 1982 through December 1983.
Geoffrey A. Whynot was appointed Senior Vice President and Chief Financial
Officer of the Company in March 1998. Previously, he was Chief Financial Officer
of Kerr Group. During his tenure with Kerr Group, Mr. Whynot served as
Assistant Controller, Corporate Vice President and Treasurer, prior to becoming
CFO. A Certified Public Accountant, Mr. Whynot was employed by Arthur Andersen
& Company from 1980 to 1987.
Christopher J. Joyce was appointed Senior Vice President-Legal Affairs and
Administration and Secretary in April 1998. Previously, he was Executive Vice
President and General Counsel of Alliance Entertainment Corp., a publicly-traded
entertainment and music distribution company which filed for protection under
Chapter 11 of the United States Bankruptcy Code in July 1997. From February
1992 to July 1995, Mr. Joyce served as Executive
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<PAGE>
Vice President of Business Affairs and General Counsel of Independent National
Distributors, Inc., a privately-held independent music distribution company.
From September 1988 to February 1992, Mr. Joyce was an associate at the law firm
of Willkie Farr & Gallagher.
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 also held senior
executive positions with Baxter Health Care and the Norrell Corporation.
Gerald H. Allen was appointed in March 1998 as President of the Imaging
Division 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 March 1995, Mr. Allen was the
Executive Vice President and Chief Financial Officer of Prime Capital
Corporation, a merchant banking company.
Carl Larsen is Senior Vice President--Operations of the Company. Prior to
Mr. Larsen's employment by the Company, Mr. Larsen managed a 13-site privately
operated radiology practice in New York from 1990 to 1996. Mr. Larsen 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--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.
Michael J. Drumgoole is Senior 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 of the Company since 1992. 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 Board's Executive and Audit Committees. 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 thereto.
John H. Josephson has been a director of the Company since July 1994 and is
a member of the Board's Executive, Nominating and Compensation Committees. 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.
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 a member of the general partner of
Fundamental Value Fund and an executive officer of Fundamental Value BVI. Mr.
Koffler is a director of National R.V. Holdings, Inc.
Peter J. Powers was appointed as a director of the Company in December 1997
and served as a member of the Board's Executive, Compensation and Audit
Committees. On May 13, 1998, Mr. Powers notified the Company that due to
constraints on his time, he was resigning as a director of the Company effective
on such date. Mr. Powers is the Chairman of High View Capital, which serves as a
parent company to High View Horizon, a joint venture with Horizon Asset
Management, a financial research firm. Prior to joining High View, Mr. Powers
served as the First Deputy Mayor of New York City under Mayor Rudolph Giuliani.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by or paid
for the fiscal years specified below to certain individuals serving as executive
officers of the Company (the "Named Officers") during the fiscal year ended
December 31, 1997:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION Awards
----------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Name Securities
and Other Annual Restricted Underlying All Other
Principal Compensation Stock Options Compensation($) (/3/)
Position Year Salary($) Bonus($) (/1/) Awards SARs(#)(/2/)
Lawrence J. Ramaekers 1997 $119,510(/5/) -0- ___ -0- 75,000(6) -0-
Former Acting
President
and Chief
Executive
Officer(/4/)
William D. Farrell 1997 $247,342 $150,000 ___ -0- -0- $6,016
Former President 1996 $152,415 $150,000 ___ -0- 140,000 $4,093
and 1995 $131,643 $ 60,000 ___ -0- 135,000 $3,245
Chief Operating
Officer(/7/)
John P. O'Malley, 1997 $626,550 -0- ___ -0- -0- -0-
III 1996 $183,333 -0- ___ -0- 203,438 -0-
Former Executive
Vice
President
Finance and
and Chief
Financial
Officer(/8/)
Gary I. Fields 1997 $106,542 $ ___ ___ -0- 60,000 -0-
Former Senior Vice;
President and General
Counsel (/7/)
Gregory Mikkelsen 1997 $179,867 $ 10,000 ___ -0- -0- -0-
President and 1996 $ 68,955 -0- ___ -0- 50,000 -0-
Chief Executive
Officer of
StarMed
</TABLE>
___________________
(/1/) The aggregate amount of all perquisites and other personal benefits
paid to each Named Individual is not greater than either $50,000 or
10% of the total of the annual salary and bonus reported for either
such executive.
(/2/) Due to the fact that the 1997 Plan was not presented to the Company's
shareholders for approval within one year of the plan's adoption by
the Company, all options granted pursuant to the 1997 Plan have
lapsed and such grants are not deemed to be outstanding.
(/3/) Represents matching contributions under the Company's 401(k) plan.
(/4/) J. Alix & Associates ("J. Alix") was retained by the Company on November
2, 1997 to provide interim management services to the Company. Mr.
Ramaekers, a principal of J. Alix, was appointed Acting President and
Chief Executive Officer of the Company on November 2, 1997 and served in
such capacity until February 2, 1998.
(/5/) Represents the portion of the fees paid to J. Alix for Mr. Ramaekers'
services during the year ended December 31, 1997.
(/6/) Represents warrants to purchase 75,000 shares of Common Stock issued to J.
Alix in connection with its engagement by the Company to provide interim
management services to the Company.
(/7/) On November 7, 1997, Mr. Farrell and Mr. Fields resigned from their
respective positions.
(/8/) Mr. O'Malley was appointed Executive Vice President - Finance and Chief
Financial Officer in September 1996 and removed from such position on
November 8, 199 7.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company is a party to an employment agreement with Mr. Duane C.
Montopoli (the "Montopoli Employment Agreement"). The term of the Montopoli
Employment Agreement shall continue until terminated by either the Company or
Mr. Montopoli. Pursuant to such Montopoli Employment Agreement, Mr. Montopoli
acts as President and Chief Executive Officer of the Company, and is entitled to
receive an annual base salary of $275,000. Such annual salary may be increased
from time to time in the discretion of the Company's Board of Directors. Mr.
Montopoli is also entitled to receive a bonus for each calendar year during his
term of employment provided he is employed on the last day of the calendar year.
The bonus' target amount for any year shall be equal to 50% of Mr. Montopoli's
base salary for such year and the actual amount of the bonus shall be determined
by the Company's Board of Directors within 60 days following the end of such
year. In connection with the execution of the Montopoli Employment Agreement,
the Company granted to Mr. Montopoli ten-year options to purchase 600,000 shares
of Common Stock, 400,000 of which have an exercise price of $10.625 and 200,000
of which have an exercise price of $14.50. Such options vest in five equal
annual installments beginning January 30, 1998, unless sooner accelerated by
certain "change of control" events. The Montopoli Employment Agreement also
entitles Mr. Montopoli to receive a $1.0 million life insurance policy payable
to Mr. Montopoli's named beneficiaries. Mr. Montopoli is prohibited from
competing with the Company for a period of 18 months following the termination
of the Montopoli Employment Agreement.
The Company is a party to an employment agreement with Mr. William D.
Farrell dated January 1, 1997, which was scheduled to expire on December 31,
1999. Pursuant to such employment agreement, Mr. Farrell acted as President and
Chief Operating Officer of the Company, for which he received an annual salary
of $225,000. In addition, pursuant to such agreement, Mr. Farrell is prohibited
from competing with the Company for a period of one year following the
termination of the agreement. On November 7, 1997, Mr. Farrell resigned from
his position as President and Chief Operating Officer of the Company. The
Company is in litigation with Mr. Farrell relating, in part, to Mr. Farrell's
employment agreement. See "Item 3 - Litigation" and "Item 13 - Certain
Relationships and Related Transactions."
The Company is party to a non-competition and consulting agreement with Mr.
John P. O'Malley III which expires on August 30, 1998 entered into in connection
with the acquisition of NMR in August 1996 (the "NMR Acquisition"). Pursuant to
such consulting agreement, Mr. O'Malley receives $550,000 annually, and the
Company issued to Mr. O'Malley at the closing of the NMR Acquisition (i) five-
year warrants to purchase 50,000 shares of 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 stock purchase warrants to purchase 10,313; 27,500; 41,250;
and 34,375 shares of Common Stock at exercise prices of $4.00, $3.36, $4.18 and
$4.73, respectively. Subsequent to the closing of the NMR Acquisition, Mr.
O'Malley was appointed Senior Vice President - Finance and Chief Financial
Officer of the Company in September 1996 and he was removed from such position
on November 8, 1997 for failure to perform certain of his functions as Chief
Financial Officer. The Company is in litigation with Mr. O'Malley relating, in
part, to Mr. O'Malley's consulting agreement. See "ITEM 3 - LITIGATION" AND
"ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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<PAGE>
STOCK OPTION PLANS
1992 Stock Option Plan
- ----------------------
In July 1992, the Company adopted and approved the 1992 Stock Option Plan
(the "1992 Plan"). The 1992 Plan is designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. The
1992 Plan provides for the award of options to purchase up to 240,000 shares of
Common Stock, of which 142,003 were subject to outstanding options as of April
1, 1998. The 1992 Plan is administered by the Stock Option Committee of the
Board of Directors. The Stock Option Committee has, subject to the provisions
of the 1992 Plan, full authority to select Company individuals eligible to
participate in the 1992 Plan, including officers, directors (whether or not
employees) and consultants. The 1992 Plan provides for the awarding of
incentive stock options (as defined in Section 422 of the Internal Revenue Code
of 1986) and non-incentive stock options. Options granted pursuant to the 1992
Plan have such vesting schedules and expiration dates as the Stock Option
Committee has established or shall establish in connection with each participant
in the 1992 Plan, which terms shall be reflected in an option agreement executed
in connection with the granting of the option. In fiscal 1997, no options were
granted under the 1992 Plan.
1995 Stock Option Plan
- ----------------------
In March 1995, the Company adopted and approved the 1995 Stock Option Plan
(the "1995 Plan"). The 1995 Plan is designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. The
1995 Plan provides for the award of options to purchase up to 400,000 shares of
Common Stock, of which 130,232 were subject to outstanding options as of April
1, 1998. The 1995 Plan is administered by the Stock Option Committee of the
Board of Directors. The Stock Option Committee has, subject to the provisions
of the 1995 Plan, full authority to select Company individuals eligible to
participate in the 1995 Plan, including officers, directors (whether or not
employees) and consultants. The 1995 Plan provides for the awarding of
incentive stock options (as defined in Section 422 of the Internal Revenue Code
of 1986) and non-incentive stock options. Options granted pursuant to the 1995
Plan have such vesting schedules and expiration dates as the Stock Option
Committee has established or shall establish in connection with each participant
in the 1995 Plan, which terms shall be reflected in an option agreement executed
in connection with the granting of the option. In fiscal 1997, no options were
granted to under the 1995 Plan.
1996 Stock Option Plan
- ----------------------
In February 1996, the Company adopted and approved the 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan is designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. The 1996
Plan provides for the award of options to purchase up to 224,000 shares of
Common Stock, of which 155,165 were subject to outstanding options as of April
1, 1998. The 1996 Plan is administered by the Stock Option Committee of the
Board of Directors. The Stock Option Committee has, subject to the provisions of
the 1996 Plan, full authority to select Company individuals eligible to
participate in the 1996 Plan, including officers, directors (whether or not
employees) and consultants. The 1996 Plan provides for the awarding of incentive
stock options (as defined in Section 422 of the Internal Revenue Code of 1986)
and non-incentive stock options. Options granted pursuant to the 1996 Plan have
such vesting schedules and expiration dates as the Stock Option Committee has
established or shall establish in connection with each participant in the 1996
Plan, which terms shall be reflected in an option agreement executed in
connection with the granting of the option. In fiscal 1997, no options were
granted under the 1996 Plan.
1996 Stock Option Plan B
- ------------------------
In February 1996, the Company adopted and approved the 1996 Stock Option
Plan B (the "1996 B Plan"). The 1996 B Plan is designed to serve as an
incentive for retaining qualified and competent directors, employees and
consultants. The 1996 B Plan provides for the award of options to purchase up
to 1,000,000 shares of Common Stock, of which 480,328 were subject to
outstanding options as of April 1, 1998. The 1996 B Plan is administered by the
Stock Option Committee of the Board of Directors. The Stock Option Committee
has, subject to the provisions of the 1996 B Plan, full authority to select
Company individuals eligible to participate in the 1996 B Plan, including
officers, directors (whether or not employees) and consultants. The 1996 B Plan
provides for the awarding of incentive stock options (as defined in Section 422
of the Internal Revenue Code of 1986) and non-incentive stock options. Options
granted pursuant to the 1996 B Plan have such vesting schedules and expiration
dates as the Stock Option Committee has established or shall establish in
connection with each participant in the 1996 B Plan, which terms shall be
reflected in an option agreement executed in connection with the granting of the
option. In fiscal 1997, 15,000 options were granted under the 1996 B Plan.
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<PAGE>
1997 Stock Option Plan
- ----------------------
On May 27, 1997, the Company adopted and approved the 1997 Stock Option
Plan (the "1997 Plan"). The 1997 Plan was designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. As of
April 1, 1998, there were 1,741,000 shares of Common Stock subject to
outstanding options granted under the 1997 Plan. Due to the fact that the 1997
Plan was not presented to the Company's shareholders for approval within one
year of the plan's adoption by the Company, all options granted pursuant to the
1997 Plan have lapsed and such grants are not deemed to be outstanding.
OPTIONS AND WARRANTS GRANTED IN LAST FISCAL YEAR
The following table sets forth certain information concerning options and
warrants granted during fiscal 1997 to the Named Officers.
<TABLE>
<CAPTION>
Potential
realizable
value at
assumed annual
rates of stock
price
appreciation
Individual Grants for
(1) option term (2)
------------------ ---------------
Percent of total
options/SARs
granted to Exercise or
Options employees in base price Expiration
Name Granted fiscal year ($/Sh) date 5% ($) 10% ($)
---- ------- ------------ ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Ramaekers 25,000(/3/) (/4/) $18.125 5/2/99 $ 7,507 $ 40,798
25,000(/3/) (/4/) $ 21.00 5/2/99 $ 0 $ 0
25,000(/3/) (/4/) $ 25.00 5/2/99 $ 0 $ 0
William D. Farrell ___ ___ ___ ___ --- ___
John P. O'Malley, III ___ ___ ___ ___ ___ ___
Gary I. Fields 25,000 (/4/) $ 12.00 5/19/02 $82,884 $183,153
35,000 (/4/) $ 14.00 5/19/02 $46,038 $186,414
Gregory Mikkelsen ___ ___ ___ ___ ___ ___
</TABLE>
__________________
(1) Due to the fact that the 1997 Plan was not presented to the Company's
shareholders for approval within one year of the plan's adoption by the
Company, all options granted pursuant to the 1997 Plan have lapsed and
such grants are not deemed to be outstanding.
(2) The 5% and 10% assumed annual rates of appreciation of the grant date
market prices are mandated by rules of the Securities and Exchange
Commission ("SEC") and do not reflect estimates or projections of future
Common Stock prices. There can be no assurance that the amounts reflected
in this table will be achieved.
(3) Represents warrants to purchase 75,000 shares of Common Stock issued to
J. Alix in connection with its engagement by the Company to provide
interim management services to the Company. Mr. Ramaekers, a principal of
J. Alix, was appointed Acting President and Chief Executive Officer of
the Company on November 2, 1997 and served in such capacity until
February 2, 1998.
(4) After giving effect to the termination of all conditional options granted
during 1997 under the Company's 1997 Stock Option Plan, no options or
warrants were granted in 1997 to any of the Company's Named Officers,
except Mr. Fields. Warrants were granted to J. Alix as described in
footnote 3 above.
-36-
<PAGE>
-37-
<PAGE>
Option/Warrant Values
The following table sets forth, as of December 31, 1997 the number of options
and warrants and the value of unexercised options and warrants held by the Named
Officers.
<TABLE>
<CAPTION>
Value of unexercised
Number of unexercised in-the-money options at
options at December 31, 1997 December 31, 1997 ($)(1)
--------------------------- ------------------------
Shares
Acquired
in Value
Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence J. ___ ___ 75,000(/2/) ___ $0 ___
Ramaekers
William D. 52,500 $891,065 23,332 ___ $113,744 ___
Farrell
John P. 10,313(3) $192,197 166,458(/4/) 26,667 $619,796 $23,334
O'Malley,
III
Gary I. ___ ___ ___ ___ ___ ___
Fields
Gregory 8,100 $136,513 8,566 33,334 $0 $0
Mikkelsen
</TABLE>
________________________
(1) On December 31, 1997 the last reported sales price for the Common Stock on
the Nasdaq Market was $9.375.
(2) Represents warrants to purchase 75,000 shares of Common Stock issued to J.
Alix in connection with its engagement by the Company to provide interim
management services to the Company. Mr. Ramaekers, a principal of J. Alix,
was appointed Acting President and Chief Executive Officer of the Company
on November 2, 1997 and served in such capacity until February 2, 1998.
(3) Represents shares underlying warrants issued to Mr. O'Malley, the former
Executive Vice-President - Finance and Chief Financial Officer of NMR, in
connection with the NMR Acquisition. See "Executive Compensation -
Employment Agreements."
(4) Of such total amount of shares, 153,125 shares represent shares underlying
warrants issued to Mr. O'Malley, the former Executive Vice-President -
Finance and Chief Financial Officer of NMR, in connection with the NMR
Acquisition. See "Executive Compensation -Employment Agreements."
-38-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth as of May 26, 1998 the number and
percentage of shares of Common Stock held by (i) each of the Named Officers and
directors of the Company, (ii) all persons who are known by the Company to be
the beneficial owners of, or who otherwise exercise voting or dispositive
control over, five percent or more of the Company's outstanding Common Stock and
(iii) all of the Company's present executive officers and directors as a group:
Beneficial Common Stock Percentage of
Owner Owned(1) Outstanding
---------- ------------ -------------
Gary N. Siegler (2)(3) 4,328,117 18.0%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
Duane C. Montopoli (4) 120,000 *
Neil H. Koffler (5) 965,980 4.1%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
Gary L. Fuhrman (6) 177,591 *
John H. Josephson (7) 44,375 *
Stephen M. Davis (8) 48,387 *
D. Gordon Strickland 0 0%
Peter M. Collery (2)(9) 3,092,002 13.5%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
Fir Tree Partners (10) 2,861,000 13.0%
1211 Avenue of the Americas
29th Floor
New York, New York 10036
StarMed Investors, L.P. (2) 1,441,087 6.3%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
HHH Investments 1,330,000 5.8%
Limited Partnership (11)
920 King Street
Wilmington, DE 19801
William D. Farrell 24,832 *
John P. O'Malley, III (12) 170,981 *
All executive officers and 5,087,050 20.6%
Directors as a group (9 in number)
(2)(3)(4)(5)(6)(7)(8)
- ------------------
* Less than one percent.
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them.
-39-
<PAGE>
(2) Messrs. Siegler and Collery, due to their joint ownership of Siegler
Collery and other affiliates which control StarMed Investors, L.P. (which
is included in the table), and certain other entities which beneficially
own an aggregate of 1,444,216 shares of Common Stock are each deemed to
beneficially own all of the shares of Common Stock owned of record by all
such entities.
(3) Includes 608,666 shares underlying outstanding options which are
exercisable immediately or within 60 days, 202,898 shares owned by The Gary
N. Siegler Foundation, a charitable foundation, and warrants to acquire
525,000 shares of Common Stock held by 712 Advisory Services, Inc. Mr.
Siegler is deemed to beneficially own all of the shares of Common Stock
owned of record by such entities.
(4) Includes 120,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(5) Includes 95,000 shares underlying outstanding options which are exercisable
immediately or within 60 days, warrants to acquire 270,000 shares of Common
Stock and an aggregate of 597,400 shares of Common Stock owned by
Fundamental Value Fundand Fundamental Value BVI, Ltd., which shares Mr.
Koffler (together with Messrs. Siegler and Collery) is deemed to
beneficially own.
(6) Includes 101,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(7) Includes 40,000 shares underlying outstanding options which are exercisable
immediately or within 60 days.
(8) Includes 46,000 shares underlying outstanding options which are exercisable
immediately or within 60 days.
(9) Includes 51,000 shares underlying outstanding options which are exercisable
immediately or within 60 days.
(10) Based solely upon information contained in a Schedule 13D, filed with the
SEC.
(11) Based solely upon information contained in a Schedule 13D, as amended by
Amendments Nos. 1, 2 and 3 thereto, filed with the SEC. As disclosed in
Amendment No. 3 to such Schedule 13D filed with the SEC on December 16,
1997, the total in the table excludes (i) an aggregate of 382,524 shares of
Common Stock owned by three corporations, the sole shareholders of which
are the limited partners of HHH Investments Limited Partnership ("HHH"),
(ii) 40,000 shares of Common Stock owned by The Francis D. Hussey, Jr.
Pension Plan (the "Pension Plan") and (iii) 10,000 shares of Common Stock
owned by Francis D. Hussey, Jr. Mr. Hussey is the president of the general
partner of HHH and is the trustee and a beneficiary of the Pension Plan.
(12) Includes 13,333 shares underlying outstanding options which are exercisable
immediately or within 60 days and warrants to acquire 153,125 shares of
Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, in connection with the placement of the Series C Convertible
Preferred Stock, the Company paid $967,000 in fees and expenses to Arnhold & S.
Bleichroeder, Inc., of which Gary Fuhrman, a director of the Company, is an
executive officer and director. Also during 1997, for legal services rendered
to the Company, the Company paid legal fees in the amount of $971,000 to Werbel
& Carnelutti, of which Stephen Davis, a director of the Company, is a partner.
In addition, during 1997, the Company reimbursed the managing underwriter of the
Company's October 1996 public offering $84,000 in charter fees (which rates were
at or below market rates) for the use by the managing underwriter and the
Company of an airplane owned by an affiliate of the Chairman of the Board during
the public offering roadshow.
In 1997 and previous years, the Company paid an annual financial advisory
fee to 712 Advisory Services, Inc., a financial advisory firm and affiliate of
the Company's Chairman of the Board (the "Affiliate"). Mr. Neil
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<PAGE>
H. Koffler, a director of the Company, is also an employee of the Affiliate.
Such fees amounted to $112,500, $102,000 and $225,000 in the years ended
December 31, 1997, 1996, and 1995, respectively. During the year ended December
31, 1997, the Company also paid transaction related advisory fees and expenses
(including fees associated with the issuance of the Senior Notes) to the
Affiliate of $1,761,000 and issued to the Affiliate warrants to purchase 675,000
shares of the Company's Common stock exercisable at prices ranging from $10.31
to $12.59 per share for financial advisory services rendered to the Company in
connection with such transactions. As discussed below, pursuant to
recommendations made by a special committee of the Board of Directors, the
Affiliate has reimbursed to the Company $1,536,000 of the fees paid to the
Affiliate for services rendered in 1997 and waived $112,500 of fees payable for
1997.
In order to incentivize officers, directors, employees and consultants to
the Company, the Company from time to time has granted options at fair market
value to such individuals. As of December 31, 1997, stock options to purchase
1,468,666 shares of the Company's Common Stock have been issued to the Chairman
and Mr. Koffler. Included in this amount are stock options to purchase 750,000
shares and 15,000 shares of the Company's Common Stock which were granted to the
Chairman and Mr. Koffler, respectively, under the 1997 Plan. As discussed below,
the Chairman and Mr. Koffler have voluntarily agreed to relinquish the stock
options that were granted to them under the 1997 Plan and to permit the Board's
Compensation Committee, with the assistance of compensation experts, to
determine the appropriate director compensation for them for 1997.
Additionally, in September 1997, the Company acquired, for $3.25 million, a
limited partnership interest in Dune Jet Services, L.P. (the "Partnership"), a
Delaware limited partnership formed for the purposes of acquiring and operating
an airplane for the partners' business uses and for third-party charter flights.
The general partner of the Partnership is Dune Jet Services, Inc., a Delaware
corporation, the sole stockholder of which is the Company's Chairman. In October
1997, the Company's interest in the Partnership was repurchased by the
Partnership at cost plus interest following discussions among management
(members of which expressed objections to such acquisition), a special committee
of the Company's Board of Directors (the "Committee"), and other members of the
Board of Directors (including the Chairman).
In October 1997, members of the Company's management communicated to the
Board that certain Company stockholders had questioned them regarding the manner
in which related-party transactions were being scrutinized by the Company and
its Board. Management stated that it shared the concerns of these stockholders
and had engaged counsel to conduct a review of such transactions.
In order to address and satisfy the concerns management had communicated,
the Company authorized a review of its practices regarding related-party
transactions, as well as the fairness of all such transactions and the adequacy
of the disclosure of the same, including but not limited to transactions as to
which fees already had been paid and warrants and options to purchase shares had
been issued, and public disclosure had been made in prior periods. The review
also was to seek to develop recommendations as to what changes, if any, should
be made to the Company's procedures regarding related-party transactions.
To oversee the review, the Board formed the Committee consisting of
directors who were not officers, directors, employees, stockholders or otherwise
affiliates of the Affiliate. The Committee retained, on behalf of the Company,
outside counsel with which neither the Company nor any of its directors has or
had any current or prior relationship, to assist and advise the Committee in the
conduct of the review. The Chairman, on behalf of the Affiliate, expressed its
position that the related-party transactions and fees are and were proper, but
nevertheless advised the Committee that the Affiliate would return to the
Company any sums that the Committee deemed improper.
Thereafter, in response to expressions of dissatisfaction with the
Committee and its ongoing review, as well as disclosure related thereto, by
certain members of management who questioned, among other things, the
Committee's ability to conduct an independent review, the Board determined, and
the Company announced, that it was seeking to add to the Board two new
independent directors. The new directors, who would retain other independent
counsel of their choice, would assume ultimate responsibility for the review.
The Company's Chairman and the Affiliate thereafter restated that although they
believe that all related-party transactions and financial advisory fees are and
were proper, they nevertheless agreed to abide by the findings of the Company's
independent review and to return to the Company any sums that the Committee
deemed improper. On December 8, 1997, D. Gordon Strickland and Peter J. Powers
were appointed to the Board of Directors of the Company and to serve as the
members of the Committee that was formed to examine the related-party
-41-
<PAGE>
transactions. The Committee engaged the law firm of Kaye, Scholer, Fierman,
Hays & Handler to advise and assist its examination.
The Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April 6,
1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report.
The Committee responded to the directors that it had determined that:
(i) there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings. (iii) the Affiliate
performed acquisition advisory services fully consistent with the expectations
and understanding of the committee of outside directors that had approved the
Affiliate's acquisition fees; and (iv) the acquisition advisory fees paid to the
Affiliate in connection with the Company's acquisitions in 1997 were within the
range of customary acquisition advisory fees paid to investment bankers on
transactions of similar size.
The Committee also recommended and the Board of Directors has adopted a
number of measures to improve corporate governance, including new procedures
that sharply limit the circumstances in which related party transactions are
permissible, and expand the chief executive officer's role in selecting outside
advisors. In addition, the Committee recommended and the Board of Directors has
determined to endeavor to reconfigure the Board to give outside directors a
majority of its seats and select a new chairman from the outside directors.
The Committee understood that in late 1996, the Board of Directors had
turned to the Affiliate to supervise an extensive acquisition program of 59
diagnostic imaging centers and one staffing company because of the Board's
perceptions that former senior management was still relatively inexperienced and
did not yet have the formal training and necessary skills to manage an extensive
acquisition program, former senior management was not directly supervising nor
providing sufficient input with respect to the acquisition program, and there
was a limited window of time within which the acquisition program could take
place, given the increasingly competitive marketplace. The Committee expressed
their view that given the Board's perceptions, the Board should have acted
sooner to bring any additional needed skills in-house, rather than continue to
rely upon, and pay fees to, the Affiliate to provide such services.
Accordingly, the Committee recommended and the Affiliate agreed to
reimburse the Company approximately $1,424,000 in fees for acquisition
transactions completed after June 1, 1997, to reimburse $112,500 of the retainer
paid to the Affiliate for 1997, to waive payment of an additional $112,500 of
fees accrued by the Company for the third and fourth quarters of 1997, and to
pay a substantial amount of the expenses associated with the Committee's
investigation. All such amounts have been reimbursed or paid to the Company. In
addition, in light of the subsequent hiring of Duane C. Montopoli as President
and Chief Executive Officer, Geoffrey Whynot as Chief Financial Officer and SBC
Warburg Dillon Read as Financial Advisor, the Committee recommended and the
Affiliate agreed to allow the Company to terminate its relationship with the
Affiliate.
The Chairman and Mr. Koffler also agreed voluntarily to relinquish 765,000
stock options that were granted to them in May 1997 and permit the Board's
Compensation Committee, with the assistance of compensation experts, to
determine the appropriate director compensation for them for 1997.
On November 5, 1997, ZPR Investments, Inc., ZP Investments, Inc., Wyoming
Valley Physicians Imaging Center, L.P., Camp Hill Physicians Imaging Center,
L.P., Wexford Radiology, P.C., Sanoy Medical Group, Ltd., Reading Open Imaging,
P.A., Yonas Zegeye, M.D., and Hirut Seleshi, parties who had agreed to sell to
the Company five related imaging centers located in Pennsylvania, brought action
in the Court of Chancery of the State of Delaware, New Castle County, against
the Company and five recently formed subsidiaries of the Company, seeking
specific performance of the acquisition agreements and unspecified breach of
contract damages. The plaintiffs alleged that the Company and the subsidiaries
failed to consummate the acquisition in accordance with the terms of the
acquisitions agreements. The aggregate purchase price for the acquisitions is
$8.4 million in cash and $5.6 million payable in shares of Company Common Stock
based upon the average price for the five business days preceding September 21,
1997 (approximately 320,000 shares). Pursuant to the acquisition agreement, the
shares of Common Stock issued in connection with such acquisition are subject to
price protection of the issuance price compared to the market price at
effectiveness of the registration statement. In December 1997, the Company
entered into an amended agreement to settle such action and therein agreed to
purchase the centers for $1 million in cash, a promissory note for $7.4 million,
plus interest, $5.6 million payable in shares of Company Common Stock, and the
payment of certain fees. The plaintiffs have announced that they do not intend
to go forward with the sale, although they continue to claim that the Company is
in breach of the acquisition agreements. The litigation in the Court of
Chancery remains stayed.
-42-
<PAGE>
On November 7, 1997, William D. Farrell resigned from his position as
President and Chief Operating Officer of the Company and as Director and Gary I.
Fields resigned from his position as Senior Vice President and General Counsel.
On the same date, Messrs. Farrell and Fields, filed a Complaint in the Superior
Court of New Jersey, Law Division, Essex County, against the Company and the
members of the Company's Board of Directors, claiming retaliatory discharge
under the New Jersey Conscientious Employee Protection Act and breach of
contract. On December 17, 1997, the plaintiffs amended their complaint to add a
claim for violation of public policy. The plaintiffs allege that they were
constructively terminated as a result of their objection to certain related-
party transactions, the purported failure of the defendants to adequately
disclose the circumstances surrounding such transactions, and the Company's
public issuance of allegedly false and misleading accounts concerning or
relating to such related-party transactions. The plaintiffs seek unspecified
compensatory and punitive damages, interest and costs and reinstatement of the
plaintiffs to their positions with the Company. On April 8, 1998, the Company
filed its Answer to the Amended Complaint, and asserted a counterclaim against
Messrs. Farrell and Fields for breach of fiduciary duties. The Company intends
to defend vigorously against the allegations.
On November 12, 1997, Mr. Gerald Broder, who claims to be a company
stockholder, filed a derivative suit in the Court of Chancery of the State of
Delaware, New Castle County, naming the Company and Stephen M. Davis, Gary L.
Fuhrman, John H. Josephson, Neil H. Koffler, and Gary N. Siegler as defendants.
The complaint alleges that members of the Company's Board of Directors breached
their fiduciary duties owed to the Company and its stockholders by allegedly
engaging in self-dealing transactions that caused the Company financial harm.
The complaint seeks injunctive relief directing such directors to account to the
Company for its damages and their profits from the wrongs complained of therein,
enjoining them from continuing to engage in self-dealing transactions harmful to
the Company and its shareholders, and awarding plaintiff the costs and expenses
incurred in bringing the lawsuit. The Company intends to defend vigorously
against the allegations.
On November 14, 1997, Mr. John P. O'Malley III filed a complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and Gary N. Siegler, Neil H. Koffler, Stephen M. Davis, Gary L. Fuhrman, John H.
Josephson and Lawrence Ramaekers, as defendants, claiming retaliatory discharge
under the New Jersey Conscientious Employee Protection Act and defamation. Mr.
O'Malley alleges that the Company terminated his employment in retaliation for
voicing the concerns of shareholders and senior management regarding related-
party transactions and because the Company did not want to make full and
adequate disclosure of the facts and circumstances surrounding such
transactions. In addition, the plaintiff alleges that the Company published
false and defamatory statements about him. Mr. O'Malley seeks unspecified
compensatory and punitive damages, interest and costs of bringing the action.
On April 8, 1998, the Company filed its Answer to the Complaint, and asserted a
counterclaim against Mr. O'Malley for breach of fiduciary duties. The Company
intends to defend vigorously against the allegations.
Between November 14, 1997 and January 9, 1998, seven class action lawsuits
were filed in the United States District Court for the District of New Jersey
against the Company and certain of the Company's directors and/or officers. On
November 14, 1997, Joan D. Ferrari, who claims to be a Company stockholder,
filed a lawsuit on behalf of all persons who purchased Common Stock during the
period between May 15, 1997 and November 7, 1997. The Ferrari complaint names
as defendants the Company and Gary N. Siegler, Stephen M. Davis, Gary L.
Fuhrman, John H. Josephson and Neil H. Koffler. On November 18, 1997, Tri-
Masonry Company, who claims to be a Company stockholder, filed a complaint on
behalf of all persons who purchased Common Stock during the period between March
19, 1997 and November 10, 1997. On November 19, 1997, Yaakov Prager, who claims
to be a Company stockholder, filed a complaint on behalf of all persons who
purchased Common Stock during the period between May 16, 1997 and November 10,
1997. The Tri-Masonry and Prager complaints name as defendants the Company,
William D. Farrell, John P. O'Malley and Gary N. Siegler. On November 20, 1997,
Albert Schonert, who claims to be a Company stockholder, filed a complaint on
behalf of all persons who purchased Common Stock during the period between May
15, 1997 and November 7, 1997. The Schonert complaint names as defendants the
Company and Gary N. Siegler, Stephen M . Davis, Gary L. Fuhrman, John H.
Josephson, Neil H. Koffler and William D. Farrell. On December 12, 1997, Anne
Benjamin, Scott L. Benjamin, Maxine Benjamin, Donald Benjamin and Andrew M.
Schreiber, who claim to be Company stockholders, filed a complaint on behalf of
all persons who purchased Common Stock during the period between March 31, 1997
and November 10, 1997. The Benjamin complaint names as defendants the Company
-43-
<PAGE>
and Gary N. Siegler, John P. O'Malley and William D. Farrell. On December 31,
1997, Allen H. Weingarten, who claims to be a Company stockholder, filed a
complaint on behalf of all persons who purchased Common Stock during the period
between March 19, 1997 and November 10, 1997. The Weingarten complaint names as
defendants the Company and William D. Farrell, John P. O'Malley and Gary N.
Siegler. On January 9, 1998, Roselle Sachs, who claims to be a Company
stockholder, filed a complaint on behalf of all persons who purchased Common
Stock during the period between May 15, 1997 and November 10, 1997. The Sachs
complaint names as defendants the Company and Gary N. Siegler, Stephen M. Davis,
Gary L. Fuhrman, Neil H. Koffler and William D. Farrell.
The complaints in each action assert that the Company and the named
defendants violated Section 10(b), and that certain named defendants violated
Section 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
alleging that the Company omitted and/or misrepresented material information in
its public filings, including that the Company failed to disclose that it had
entered into acquisitions that were not in the best interest of the Company,
that it had paid unreasonable and unearned acquisition and financial advisory
fees to related parties, and that it concealed or failed to disclose adverse
material information about the Company. The complaints each seek unspecified
compensatory damages, with interest , and the costs and expenses incurred in
bringing the action. On February 9, 1998, the Honorable Joel Pisano, United
States Magistrate Judge, entered an Order consolidating the above-mentioned
class actions for all purposes. On March 31, 1998, the lead plaintiffs in the
consolidated class actions served their Consolidated Class Action Complaint,
asserting that the Company and the named defendants violated Section 10(b) of
the Exchange Act, and that certain named defendants violated Sections 20(a) and
20A of the Exchange Act. The Company intends to defend vigorously against the
allegations.
The legal proceedings described above are in their preliminary stages.
Although the Company believes it has meritorious defenses to all claims against
it, the Company is unable to predict with any certainty the ultimate outcome of
these proceedings.
As previously disclosed by the Company, the U.S. Attorney for the District
of New Jersey commenced an investigation in connection with the disclosures
regarding the related-party transactions referenced above. In addition as
previously disclosed, the Company has received an inquiry from the SEC, but no
formal proceedings have been commenced by the SEC. The Company has cooperated
fully with these authorities and provided all information requested by them.
-44-
<PAGE>
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 reports thereon of
independent auditors are filed as part of this Annual Report on Form 10-K and
are incorporated by reference in Item 8.
(i) Reports of Independent Auditors.
(ii) Consolidated Balance Sheets as of December 31, 1997 and 1996.
(iii) Consolidated Statements of Operations for the years ended December
31, 1997, 1996 and 1995.
(iv) Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
(v) Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.
(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 November 10, 1997, the Company filed a Current Report on Form 8-K reporting
(i) under Item 5, that on November 5, 1997, parties that had agreed to sell five
related imaging centers located in Pennsylvania to the Company brought action
against the Company and five subsidiaries seeking specific performance of
acquisition agreements and breach of contract damages and (ii) under Item 6,
William D. Farrell's resignation as Director of the Company.
On December 11, 1997, the Company filed a Current Report on Form 8-K reporting
(i) under Item 4, Coopers & Lybrand LLP's resignation as auditor of the Company
and the engagement of Ernst & Young, LLP to audit the financial statements of
the Company, and (ii) under Item 6, that D. Gordon Strickland and Peter J.
Powers were appointed to the Board of Directors of the Company.
On December 24, 1997, the Company filed a Current Report on Form 8-K/A
reporting, amending Item 4 of the Current Report on Form 8-K dated December 4,
1997 and filed on December 11, 1997, Coopers & Lybrand LLP's resignation as
auditor of the Company and the engagement of Ernst & Young, LLP, filing as an
exhibit
-45-
<PAGE>
Coopers & Lybrand LLP's letter addressed to the Securities and Exchange
Commission stating that it agrees with the statements made by the Company in
such Form 8-K.
On January 7, 1998, the Company filed a Current Report on Form 8-K/A amending
Items 5 and 7 of the Current Report on Form 8-K dated May 30, 1997 and filed on
June 16, 1997, as amended on Form 8-K/A filed on August 13, 1997, relating to
the Company's acquisition of certain entities and including the related
financial statements with respect to such entities.
On January 12, 1998, the Company filed a Current Report in Form 8-K, reporting
under Item 5 the creation of the Board of Director's Executive, Nominating and
Compensation Committees and the election of new directors to the Audit
Committee.
On January 16, 1998, the Company filed a Current Report on Form 8-K/A amending
Items 5 and 7 of the Current Report on Form 8-K dated May 30, 1997 and filed on
June 16, 1997, as amended on Forms 8-K/A filed on August 13, 1997 and January 7,
1998.
On February 23, 1998, the Company filed a Current Report on Form 8-K/A
amending Items 5 and 7 of the Current Report on Form 8-K dated May 30, 1997 and
filed on June 16, 1997, as amended on Forms 8-K/A filed on August 13, 1997,
January 7, 1998 and January 16, 1998.
On April 8, 1998, the Company filed a Current Report on Form 8-K, reporting
under Item 5 that the Company's Board of Directors voted to adopt the
recommendations contained in the report of a Special Committee of two outside
directors elected to the Board in December 1997 and appointed to investigate
certain events and review the Company's policies regarding related party
transactions.
On April 16, 1998, the Company filed a Current Report on Form 8-K, reporting
under Item 5 that the Company was unable to file its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 by the April 15, 1998 extended due
date for such filing.
On May 20, 1998, the Company filed a Current Report on Form 8-K, reporting
under Item 5 that (i) Peter J. Powers had resigned as a director of the Company
effective May 13, 1998 and (ii) the Company would report a loss for the year
ended December 31, 1997 and that it expected to report a loss for the quarter
ended March 31, 1998.
-46-
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Company's Certificate of Incorporation, as amended to date.*
3.2 Company's By-Laws, as amended.*
3.3 Certificate of Designations, Preferences and Rights of the Company's Series C Convertible Preferred
Stock.**
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), dated as of February 20, 1997, between the
Company and the Purchasers listed therein.****
10.2 Note Purchase Agreement ($20,000,000 8.10% and $6,000,000 8.01% Senior Notes), dated as of June 26,
1997, between the Company and the Purchasers listed therein.*****
10.3 Securities Purchase Agreement, dated as of July 21, 1997, between the Company and RGC International
Investors, LDC.**
10.4 Registration Rights Agreement, dated as of July 21, 1997, between the Company and RGC International
Investors, LDC.**
10.5 $15,000,000 Promissory Note, dated December 29, 1997, payable to DVI Financial Services Inc. together
with Warrant, dated 1997 to purchase 100,000 shares of Common Stock#
10.6 1992 Stock Option Plan.*
10.7 1995 Stock Option Plan of the Company.******
10.8 1996 Stock Option Plan of the Company.*******
10.9 1996 Stock Option Plan B of the Company. *******
10.10 Warrant, dated December 30, 1997, to purchase 817,000 shares of Common Stock issued to RGC
International, LDC.#
10.11 Employment Agreement, dated January 30, 1998, between the Company and Duane C. Montopoli.
10.12 Employment Agreement, dated March 23, 1998, between the Company and Geoffrey A. Whynot.
10.13 Employment Agreement, dated April 6, 1998, between the Company and Christopher J. Joyce
16 Letter re: Change in Certifying Accountants.********
21.1 List of Subsidiaries.#
23.1 Consent of Independent Auditors - Ernst & Young LLP.#
23.2 Consent of Independent Accountants - Coopers & Lybrand LLP.#
27.1 Financial Data Schedule.#
</TABLE>
____________________
<TABLE>
<S> <C>
* Incorporated herein by reference from the Company's Registration Statement on Form S-1 (File No.
33-48848).
** Incorporated herein by reference from the Company's Current Report on Form 8-K dated July 21, 1997.
*** 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 Current Report on Form 8-K dated March 4, 1997.
***** Incorporated herein by reference from the Company's Current Report on Form 8-K dated June 26, 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 Annual Report on Form 10-K for the year ended
December 31, 1996.
******** Incorporated herein by reference from the Company's Current Report on Form 8-K/A filed on December
24, 1997, amending the Company's Current Report on Form 8-K dated December 4, 1997.
# Filed herewith.
</TABLE>
-47-
<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/ DUANE C. MONTOPOLI
---------------------------
CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
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 SET FORTH BELOW AND ON JUNE 1, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED
--------- ------------------------
<S> <C>
/s/ GARY N. SIEGLER Chairman of the Board of Directors
- -----------------------------------------------------------------
GARY N. SIEGLER
/s/ D. GORDON STICKLAND Chairman of the Executive Committee
- -----------------------------------------------------------------
D. GORDON STRICKLAND
/S/ DUANE C. MONTOPOLI Chief Executive Officer (Principal Executive
- ----------------------------------------------------------------- Officer)
DUANE C. MONTOPOLI
/S/ GEOFFREY A. WHYNOT Chief Financial Officer and Senior Vice
- ----------------------------------------------------------------- President - Finance (Principal Accounting
GEOFFREY A. WHYNOT 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
</TABLE>
-48-
<PAGE>
Report of Independent Auditors
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, 1997 and the
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1997 and 1995. Our audits also included the
financial statement schedule listed in the index at Item 14(a) for the years
then ended. These 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 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Medical
Resources, Inc. and Subsidiaries at December 31, 1997 and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1995, 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 set forth therein for
1997 and 1995.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2,
the Company incurred a net loss in 1997 and has a working capital deficiency at
December 31, 1997. In addition, the Company has not complied with certain
covenants of loan agreements. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
May 26, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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 schedule 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.
/s/Coopers & Lybrand L.L.P.
Parsippany, New Jersey
March 28, 1997
F-2
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- -------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,198 $ 15,346
Short-term investments - 1,663
Cash and short-term investments, restricted 600 4,500
Accounts receivable, net 65,887 39,878
Other receivables 5,430 2,291
Prepaid expenses 7,027 3,715
Income taxes recoverable 6,504 -
Deferred tax assets, net 2,492 3,354
----------- ----------
Total current assets 111,138 70,747
----------- ----------
Property and equipment, net 64,343 24,397
Goodwill, net 149,624 62,639
Other intangible assets, net 6,836 2,119
Other assets 4,189 1,216
Deferred tax assets, net 2,353 2,351
Restricted cash 473 1,045
----------- ----------
Total assets $ 338,956 $ 164,514
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
F-3
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior Notes due 2001 through 2005, classified as current $ 78,000 $ -
Notes and mortgages payable, classified as current 3,206 -
Capital lease obligations, classified as current 9,555 -
Current portion of notes and mortgages payable 13,313 6,729
Current portion of capital lease obligations 10,311 5,992
Borrowings under line of credit 3,744 -
Accounts payable 13,141 10,903
Accrued expenses 28,018 2,167
Income taxes payable - 2,064
Common stock subject to redemption 9,734 -
Other current liabilities 290 117
----------- ----------
Total current liabilities 169,312 27,972
Notes and mortgages payable, less current portion 21,539 12,638
Obligations under capital leases, less current portion 16,361 8,373
Convertible debentures - 6,988
Other long term liabilities 178 108
----------- ----------
Total liabilities 207,390 56,079
Minority interest 4,662 2,051
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000 shares,
21,889 issued and outstanding at December 31, 1997 and
18,594 issued and 18,326 outstanding at December 31, 1996 219 186
Common stock to be issued; 600 shares - 1,721
Series C Convertible Preferred Stock, $1,000 per share stated
value; 18 shares issued and outstanding (liquidation
preference of 3% per annum) 18,242 -
Additional paid-in capital 138,664 102,928
Unrealized appreciation of investments - 26
Retained earnings (deficit) (30,221) 2,956
Less 268 common shares in Treasury, at cost - (1,433)
----------- ----------
Total stockholders' equity 126,904 106,384
----------- ----------
Total liabilities and stockholders' equity $ 338,956 $ 164,514
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net service revenues $ 202,386 $ 93,785 $ 51,993
Imaging center and staffing operating costs:
Technical services payroll and related expenses 80,359 35,074 19,526
Medical supplies 9,286 4,223 2,439
Diagnostic equipment maintenance 7,761 3,274 1,647
Independent contractor fees 6,810 1,202 437
Administrative expenses 22,902 11,937 6,084
Other center level costs 8,947 3,354 1,430
Provision for uncollectible accounts receivable 20,656 4,783 3,378
Corporate general and administrative 20,246 7,779 4,978
Depreciation and amortization 19,334 7,466 4,567
Stock-option based compensation 2,536 - -
Loss on impairment of goodwill and other long lived assets 12,962 - -
Other unusual charges 9,723 - -
------- ------ --------
Operating income (loss) (19,136) 14,693 7,507
Interest expense, net 9,167 2,969 1,829
------- ------ --------
Income (loss) from continuing operations before
minority interest and income taxes (28,303) 11,724 5,678
Minority interest (loss) 636 308 (124)
------- ------ --------
Income (loss) from continuing operations before
income taxes (28,939) 11,416 5,802
Provision for income taxes 2,300 4,162 1,659
------- ------ --------
Income (loss) from continuing operations (31,239) 7,254 4,143
Discontinued operations, net of tax:
Loss from operations of discontinued operations - - (1,077)
Loss on sale of discontinued business - - (1,376)
------- ------ --------
Loss from discontinued operations - - (2,453)
------- ------ --------
Net income (loss) (31,239) 7,254 1,690
Charges related to restricted common stock and
convertible preferred stock (1,938) - -
------- ------ --------
Net income (loss) applicable to common
stockholders $ (33,177) $ 7,254 $ 1,690
------- ------ --------
Income (loss) per common share applicable to common
stockholders:
Basic -
Net income (loss) per share before discontinued
operations $ (1.62) $ 0.64 $ 0.54
Discontinued operations - - (0.32)
------- ------ --------
Net income (loss) per share $ (1.62) $ 0.64 $ 0.22
------- ------ --------
Diluted -
Net income (loss) per share before discontinued
operations $ (1.62) $ 0.59 $ 0.53
Discontinued operations - - (0.31)
------- ------ --------
Net income (loss) per share $ (1.62) $ 0.59 $ 0.22
======= ====== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (31,239) $ 7,254 $ 1,690
Adjustments to reconcile net income to net cash ---------- --------- ----------
provided by (used in) operating activities:
Depreciation and amortization 19,334 7,466 4,567
Provision for uncollectible accounts receivable 20,656 4,784 3,378
Deferred income tax provision (836) (841) (2,161)
Stock-option based compensation expense 2,536 - -
Expense incurred in connection with warrants
issued to preferred stockholders 2,051 - -
Loss on impairment of goodwill and other long lived assets 12,962 - -
Loss on sale of discontinued business - - 1,376
Other, net 112 94 149
Changes in operating assets and liabilities:
Accounts receivable (30,270) (14,386) (6,309)
Other receivables (2,219) (1,814) (171)
Prepaid expenses (2,403) (1,502) (614)
Income taxes recoverable or payable (7,568) 2,186 (323)
Other assets (3,253) (1,495) (27)
Accounts payable and accrued expenses 16,560 2,081 4
Other current liabilities (315) (1,510) 568
Other long-term liabilities (1,430) (867) 208
--------- ---------- ---------
Total adjustments 25,917 (5,804) 645
--------- ---------- ---------
Net cash provided by (used in) operating activities (5,322) 1,450 2,335
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,429) (1,070) (877)
Acquisition of diagnostic imaging centers, net of cash acquired (57,883) (6,411) (1,764)
Acquisition of temporary staffing offices, net of cash acquired 176 (2,314) -
Acquisition of Dalcon Technologies, Inc., net of cash acquired (615) - -
Investment in diagnostic imaging center joint venture (1,000)
Costs associated with refinancing of assets under capital leases (1,461) - -
Sale (purchase) of short-term investments, net 6,109 (1,637) 600
Purchase of restricted short-term investments - (4,500) -
Increase in restricted cash - (600) -
Change in net assets of discontinued business - - 1,396
Other, net - (171) -
--------- ---------- ---------
Net cash used in investing activities (60,103) (16,703) (645)
--------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs 76,523 - -
Proceeds from issuance of preferred stock, net 16,965 - -
Proceeds from sale/leaseback transactions 9,866 - -
Proceeds from borrowings under notes payable 7,850 1,229 -
Borrowings under line of credit 3,744 - -
Proceeds from common stock offering - 25,944 -
Common stock issuance cost - (780) -
Proceeds from exercise of options and warrants 2,696 2,020 -
Note and capital lease repayments in connection with
acquisitions (13,799) - -
Note and capital lease repayments in connection with
Senior Notes transaction (13,764) - -
Note and capital lease repayments in connection with
sale/leaseback transactions (4,822) - -
Principal payments under capital lease obligations (6,651) (4,805) (3,043)
Principal payments on notes and mortgages payable (5,312) (2,968) (1,119)
Proceeds from (redemption of) convertible debentures (19) 6,533 4,103
Purchase of treasury stock - (64) (1,368)
Purchase of Maternity preferred stock - - (269)
--------- ---------- -----------
Net cash provided by (used in) financing activities 73,277 27,109 (1,696)
--------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 7,852 11,856 (6)
Cash and cash equivalents at beginning of year 15,346 3,935 3,941
Reclassification of prior year restricted cash - (445) -
--------- ---------- -----------
Cash and cash equivalents at end of year $ 23,198 $ 15,346 $ 3,935
--------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for -
Income taxes $ 11,091 $ 3,440 $ 1,982
Interest 7,201 2,639 1,894
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Capital lease obligations and notes payable incurred for
diagnostic imaging and computer equipment 13,654 2,469 1,159
Capital lease obligations assumed in connection with
acquisitions 26,612 6,749 -
Notes payable obligations assumed in connection with
acquisitions 36,505 13,850 -
Conversion of subordinated debentures to Common
Stock, net of issuance costs 6,636 5,735 -
Issuance of Common Stock in connection with
acquisitions 17,281 47,938 3,448
Common stock subject to redemption 9,734
Issuance of warrants in connection with acquisitions 3,853 975 -
Issuance of warrants to convertible preferred stockholders 2,051 - -
Issuance of notes payable in connection with acquisitions 4,250 1,848 -
Tax benefit from exercise of stock options 1,000 - -
Maternity debt forgiveness treated as capital contribution - - 1,022
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Additional Retained Treasury Unrealized
Common Stock to Preferred Paid-In Earnings Shares Apprec. On
Total Stock be Issued Stock Capital (Deficit) at Cost Investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 11,873 $ 71 $ 18,360 $ (6,558)
Issuance of Common Stock related to
acquisition of diagnostic imaging
centers 3,448 6 1,721 1,721
Maternity debt forgiveness treated as
a capital contribution 1,022 1,022
Maternity short period (1/1-1/31/95) 570 570
Redemption by Maternity of its
preferred stock (269) (269)
Preferred stock buyout 1 1
Purchase of treasury shares (1,368) (1,368)
Net income 1,690 1,690
-------- -------- --------- -------- -------- -------- ------- ----------
Balance at December 31, 1995 16,967 77 1,721 20,835 (4,298) (1,368)
Issuance of Common Stock related to
acquisition of diagnostic imaging
centers 47,938 56 47,882
Warrants issued related to acquisition
of diagnostic imaging centers 975 975
Net proceeds from public offering of
3,680,000 shares of Common Stock 25,944 37 25,907
Public offering issuance costs (780) (780)
Conversion of subordinated
debentures into Common Stock. 5,735 12 5,723
Exercise of stock options 2,022 4 2,018
Tax benefit from exercise of stock
options 368 368
Unrealized appreciation on investment 26 26
Purchase of treasury shares (65) (65)
Net income 7,254 7,254
-------- -------- --------- -------- -------- -------- ------- ----------
Balance at December 31,1996 106,384 186 1,721 102,928 2,956 (1,433) 26
Issuance of Common Stock related to
acquisition of diagnostic imaging
centers 10,673 12 (1,721) 10,949 1,433
Issuance of Common Stock related to
acquisition of staffing offices 2,000 1 1,999
Issuance of Common Stock related to
acquisition of Dalcon Technologies 1,934 1 1,933
Warrants issued related to acquisition
of diagnostic imaging centers 3,853 3,853
Warrants issued in connection
with preferred stock 2,051 2,051
Warrants issued in connection
with long-term borrowings 337 337
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Additional Retained Treasury Unrealized
Common Stock to Preferred Paid-In Earnings Shares Apprec. On
Total Stock be Issued Stock Capital (Deficit) at Cost Investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conversion of debentures 6,636 13 6,623
Exercise of stock options and warrants 2,696 4 2,692
Stock-option based compensation
expense 2,536 2,536
Tax benefit from exercise of stock
options 1,000 1,000
Common Stock issued in connection
with acquisition earnout 2,676 3 2,673
Issuance of Convertible Preferred
Stock 16,965 18,000 (1,035)
Accretion of Convertible Preferred
Stock - 242 (242)
Increase in price protection related
to certain restricted common stock (1,696) (1,696)
Other, net 99 125 (26)
Net loss (31,239) (31,239)
-------- -------- ------- -------- --------- -------- ------- ----------
Balance at December 31,1997 126,904 219 - 18,242 138,664 (30,221) - -
======== ======== ======= ======== ========= ======== ======= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
MEDICAL RESOURCES, INC.
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. DESCRIPTION OF THE COMPANY AND 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 operating segments: diagnostic imaging and
temporary staffing services. The Company's diagnostic imaging segment operates
and manages primarily fixed-site, free-standing outpatient diagnostic imaging
centers (herein referred to as "centers"), and provides diagnostic imaging
network management services to managed care providers. The Company's diagnostic
imaging segment also develops and sells radiology industry information systems
through its subsidiary, Dalcon Technologies, Inc. The Company provides
temporary staffing services 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, 1997, is entitled to share in partnership profits, losses and
distributable cash as provided in the partnership agreements. The limited
partnership interests are shown in the accompanying financial statements as
minority interest. Under certain of the partnerships, the Company also is paid
a monthly management fee based on patient cash collections and/or patient volume
under management agreements. Partnership losses allocable to limited partners
in excess of their respective capital accounts are charged to the Company as
general partner. Future income related to such partnerships will be allocated
to the Company as general partner until such time as the Company has recovered
the excess losses. Certain of the limited partnership agreements require
limited partners to make cash contributions in the event their respective
capital accounts are reduced below zero due to partnership operating losses.
The Company has not reflected this potential recovery from the limited partners
due to uncertainty regarding the ultimate receipt of the cash contributions.
Revenue Recognition
At each of the Company's diagnostic imaging centers, all medical services are
performed exclusively by physician groups (the "Physician Group" or the
"Interpreting Physician"), generally consisting of radiologists with whom the
Company has entered into independent contractor agreements. Pursuant to these
agreements, the Company has agreed to provide equipment, premises, comprehensive
management and administration, including responsibility for billing and
collection of receivables, and technical imaging services to the Interpreting
Physician.
Net service revenues are reported, when earned, at their estimated net
realizable amounts from patients, third party payors and others for services
rendered at contractually established billing rates which generally are at a
discount from gross billing rates. Known and estimated differences between
contractually established billing rates and gross billing rates ("contractual
allowances") are recognized in the determination of net service revenues at the
time services are rendered. Subject to the foregoing, the Company's imaging
centers recognize revenue under one of the three following types of agreements
with Interpreting Physicians:
F-11
<PAGE>
Type I - The Company receives a technical fee for each diagnostic imaging
procedure performed at a center, the amount of which is dependent upon the
type of procedure performed. The fee included in revenues is net of
contractual allowances. The Company and the Interpreting Physician
proportionally share in any losses due to uncollectible amounts from
patients and third party payors, and the Company has established reserves
for its share of the estimated uncollectible amount.
Type II - The Company bills patients and third party payors directly for
services provided and pays the Interpreting Physicians either (i) a fixed
percentage of fees collected at the center, or (ii) a contractually fixed
amount based upon the specific diagnostic imaging procedures performed.
Revenues are recorded net of contractual allowances and the Company accrues
the Interpreting Physicians fee as an expense on the Consolidated
Statements of Operations. The Company bears the risk of loss due to
uncollectible amounts from patients and third party payors, and the Company
has established reserves for the estimated uncollectible amount.
Type III - The Company receives from an affiliated physician association a
fee for the use of the premises, a fee per procedure for acting as billing
and collection agent and a fee for administrative and technical services
performed at the centers. The affiliated physician association contracts
with and pays directly the Interpreting Physicians. The Company's fee, net
of an allowance based upon the affiliated physician association's ability
to pay after the association has fulfilled its obligations (i.e., estimated
future net collections from patients and third party payors less facility
lease expense and Interpreting Physicians fees), constitutes the Company's
net service revenues. Since the Company's net service revenues are
dependent upon the amount ultimately realized from patient and third party
receivables, the Company's revenue and receivables have been reduced by an
estimate of patient and third party payor contractual allowances, as well
as an estimated provision for uncollectible amounts from patients and third
party payors.
Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.
The Company also recognizes revenue from temporary nurse staffing and
radiology information systems. Such revenues are recognized on an accrual basis
as earned.
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 revenues, expenses, assets
and liabilities, and the disclosure of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The most significant
estimates relate to contractual allowances, the allowance for doubtful accounts
receivable, 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 management's
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.
F-12
<PAGE>
Short-Term Investments
At December 31, 1996 the Company's short-term investments, consist of
certificates of deposits and treasury bills with maturities between three and
twelve months. Such securities 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.
Restricted short-term investments at December 31, 1996 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 issued to the seller were not
registered within 60 days of the closing of the sale. During 1997, the shares
were registered within the specified timeframe of the agreement, and as such,
the restriction of the investment was removed.
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 venture or
limited partnership.
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 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. Expenditures for maintenance and repairs are charged to
operations as incurred. Renewals and betterments are capitalized.
Goodwill and other intangible assets
The excess of purchase price of businesses over the fair value of assets
acquired is recorded as goodwill and is amortized on a straight line basis
generally over twenty years. Other intangible assets consist of covenants not
to compete, value of managed care contracts, organizational costs and
capitalized lease costs related to acquired businesses and are amortized on a
straight line basis over their respective initial estimated lives of three to
ten years. Gross intangible assets and related accumulated amortization are as
follows (in thousands):
December 31,
-------------------
1997 1996
-------- ---------
Goodwill
Gross intangible $157,362 $65,666
Less accumulated amortization (7,738) (3,027)
-------- -------
Net $149,624 $62,639
======== =======
Other intangibles
Gross intangibles $ 9,484 $ 3,996
Less accumulated amortization (2,648) (1,877)
-------- -------
Net $ 6,836 $ 2,119
========== ==========
F-13
<PAGE>
Amortization expense for goodwill was $6,135,000, $1,497,000 and $386,000
in 1997, 1996 and 1995, respectively. Amortization expense for other
intangibles was $1,151,000, $506,000 and $337,000 in 1997, 1996 and 1995,
respectively.
The Company periodically reviews goodwill to assess recoverability based
upon expectations of undiscounted cash flows and operating income of each entity
having a material goodwill balance. An impairment would be recognized in
operating results, if the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying value of the related
costs in excess of net assets acquired. The amount of the impairment would be
measured by comparing the carrying value of intangible and other long-lived
assets to their fair values. See discussion of 1997 impairment loss in Note 3
of the Notes to Consolidated Financial Statements.
Earnings Per Share
Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128,"Earnings per Share."
The adoption of SFAS No. 128 requires the presentation of Basic Earnings per
Share and Diluted Earnings per Share. Basic earnings per share is based on the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is based on the weighted average number of common shares
outstanding during the year plus the potentially issuable common shares related
to outstanding stock options, warrants and convertible debt. Earnings per share
amounts for prior periods, including related quarters, have been restated to
conform to the requirements of SFAS No. 128. The computations of basic earning
per share and diluted earnings per share were as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share information
- ------------------------------------
Income (loss) from continuing operations ($31,239) $ 7,254 $4,143
Loss from discontinued operations -- -- (2,453)
--------- -------- -------
Net income (loss) (31,239) 7,254 1,690
Charges related to restricted common stock and
convertible preferred stock (1,938) - -
-------- ------- ------
Net income (loss) applicable to common
Stockholders ($33,177) $ 7,254 $1,690
======== ======= ======
Weighted average number of common shares 20,495 11,296 7,730
Net income (loss) per share before
discontinued operations ($1.62) $0.64 $0.54
Discontinued operations -- -- (0.32)
-------- ------- ------
Basic earnings per share ($1.62) $0.64 $0.22
Diluted earnings per share information
- --------------------------------------
Income (loss) from continuing operations ($31,239) $ 7,254 $4,143
Loss from discontinued operations -- -- (2,453)
--------- -------- -------
Net income (loss) (31,239) 7,254 1,690
Interest savings from conversion of convertible
subordinated debentures - 405 -
Charges related to restricted common stock and
convertible preferred stock (1,938) - -
-------- ------- ------
Net income (loss) applicable to common
Stockholders after assumed conversions ($33,177) $ 7,659 $1,690
========= ======= ======
Weighted average number of common shares 20,495 11,296 7,730
Incremental shares issuable on exercise of warrants
and options - 417 51
Incremental shares issuable on conversion
of convertible subordinated debentures - 1,213 -
--------- ------- ------
Weighted average number of diluted
common shares 20,495 12,926 7,781
========= ======= ======
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net Income (loss) per share
before discontinued operations ($1.62) $ 0.59 $ 0.53
Discontinued operations - - (0.31)
------- ------- ------
Diluted earnings (loss) per share ($1.62) $ 0.59 $ 0.22
======= ======= ======
</TABLE>
Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation requires the Company
to choose between two different methods of accounting for stock options. The
Statement defines a fair-value-based method of accounting for stock options but
allows an entity to continue to measure compensation cost for stock options
using the accounting prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25). The Company has elected to continue using the
accounting methods prescribed by APB No. 25 and will disclose the amount of the
proforma compensation expense, required to be disclosed under the SFAS No. 123.
See disclosure in Note 9 of the Notes to the Consolidated Financial Statements.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. As of December 31, 1997, the Company has
provided a valuation reserve against a portion of its net deferred income tax
assets due to uncertainty regarding the ultimate recovery of such deferred
income tax assets. See further discussion in Note 10 of the Notes to the
Consolidated Financial Statements.
Recent Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income", requires an entity to
report comprehensive income and its components for fiscal years beginning after
December 15, 1997. This new standard increases financial reporting disclosures,
but will have no impact on the Company's financial position, cash flows or
results of operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments for fiscal years beginning after
December 15, 1997. This new standard increases financial reporting disclosures,
but will have no impact on the Company's financial position, cash flows or
results of operations.
Statement Of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", requires an entity to expense all
software development costs incurred in the preliminary project state, training
costs and data conversion costs for fiscal years beginning after December, 15,
1998. The Company believes that this statement will not have a material effect
on the Company's accounting for computer software acquisition cost.
Statement Of Position 97-2, "Consolidation of Physicians' Practice
Entities", requires an entity to consolidate Physicians' Practice Entities in
circumstances in which substantial control is exercised by the Company. The
Company believes that this statement will not have a material effect on the
Company's financial position, cash flows or results of operations.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
As a result of the 1997 net loss, the Company is currently in default of
certain financial covenants under the Company's $78,000,000 of Senior Notes.
Management and the Senior Note lenders are engaged in discussions to resolve
this matter. In the event the parties are unable to reach agreement, the
F-15
<PAGE>
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. There can be no assurance that the Senior
Note lenders will provide the Company with an amendment or waiver of the
defaults. In addition, certain medical equipment notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek certain
other remedies if the Company is in default under the terms of agreements such
as the Senior Notes.
In the event that the Senior Note holders or the other creditors or lessors
elect to exercise their right to accelerate the obligations under the Senior
Notes or the other loans and leases, such acceleration would have a material
adverse effect on the Company, its operations and its financial condition.
Furthermore, if such obligations were to be accelerated, in whole or in part,
there can be no assurance that the Company would be successful in identifying or
consummating financing necessary to satisfy the obligations which would become
immediately due and payable. As a result of the uncertainty related to the
defaults and corresponding remedies described above, the Senior Notes and the
other loans and capital leases are shown as current liabilities on the Company's
Consolidated Balance Sheets at December 31, 1997 and the Company has a deficit
in working capital of $58,174,000. These matters raise substantial doubt about
the Company's ability to continue as a going concern. In addition to continuing
to negotiate with the Senior Note lenders in an attempt to obtain waivers or
amendments of the aforementioned defaults, the Company has taken various actions
in response to this situation, including the following: (i) it effected a
workforce reduction in March 1998 aimed at reducing the Company's overall
expense levels, and (ii) it has retained the investment banking firm of SBC
Warburg Dillon Read to assist the Company in exploring a possible sale of the
Company's StarMed temporary staffing subsidiary.
The financial statements, however, do not include any further adjustments
reflecting the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of this uncertainty.
3. LOSS ON IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
AND OTHER UNUSUAL CHARGES
During the fourth quarter of 1997, the Company recorded a $12,962,000 loss
on the impairment of goodwill and other long-lived assets. This loss consists
of the write-off of goodwill of $10,425,000, covenants not to compete of
$118,000 and fixed assets of $2,419,000. Primarily the entire impairment
relates to eight of the Company's diagnostic imaging centers that are under-
performing. The Company has recorded impairment losses for these centers
because the sum of the expected future cash flows, determined based on an
assumed continuation of current operating methods and structures, does not cover
the carrying value of the related long-lived assets.
During the fourth quarter of 1997, the Company also recorded $9,723,000 of
other unusual charges consisting of (i) $3,256,000 for the estimated net costs
associated with the resolution of the shareholder and employee lawsuits, (ii)
$2,243,000 for higher than normal professional fees, (iii) $2,169,000
($2,051,000 of which was a non-cash charge related to the issuance of 817,000
warrants) for penalties associated with delays in the registration of the
Company's common stock issued in connection with acquisitions or issuable upon
conversion of convertible preferred stock, (iv) $1,150,000 for the loss on
investment related to a potential acquisition not consummated, (v) $469,000 for
costs associated with the investigation of related party transactions which was
concluded in April 1998 and vi) $436,000 for management termination benefits and
related costs.
The Company expects to incur additional unusual charges of at least
$4,500,000 during 1998 primarily related to the estimated net costs associated
with the resolution of the shareholder and employee lawsuits, penalties
associated with delays in the registration of the Company's Common Stock and
costs associated with the investigation of related party transactions. Such
additional unusual charges could be substantially higher depending upon the
ultimate outcome of current negotiations regarding penalties associated with
failure to register the Company's Common Stock and the outcome of certain
litigation. See further discussion in Note 11 of the Notes to the Consolidated
Financial Statements.
F-16
<PAGE>
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- -----------------
<S> <C> <C>
Management fee receivables (net of contractual allowances)
Due from unaffiliated physicians (Type I revenues) $ 35,540 $23,188
Due from affiliated physicians (Type III revenues) 8,585 9,195
Patient and third party payor accounts receivable (Type II
revenues) 27,284 10,757
Temporary staffing service accounts receivable 13,400 6,335
Less: Allowance for doubtful accounts (18,922) (9,597)
-------- -------
$ 65,887 $39,878
======== =======
</TABLE>
Accounts receivable is net of contractual allowances which represent
standard fee reductions negotiated with certain third party payors. Contractual
allowances amounted to approximately $93,490,000, $25,270,000 and $13,375,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's receivables relate to a variety of different structures (see
discussion of revenue recognition in Note 1 of the Notes to Consolidated
Financial Statements) as well as a variety of payor classes, including third
party medical reimbursement organizations, principally insurance companies.
Approximately 24.2% and 19.5% of the Company's 1997 and 1996 imaging revenues
was derived from the delivery of services with respect to the timing of payment
is substantially contingent upon the timing of settlement of pending litigation
involving the recipient of services and third parties (Personal Injury 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 the 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 Personal Injury Type 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. For Personal Injury Type accounts receivables, the Company
provides for uncollectible accounts at substantially higher rates than any other
revenue source.
5. SHORT-TERM INVESTMENTS
The following is a summary of the investments in debt securities
classified as current assets, and which are available for sale (in thousands):
<TABLE>
<CAPTION>
Unrealized Fair
Cost Gains Value
----------- ----- --------
<S> <C> <C> <C>
December 31, 1996
Available-for-sale:
US Government obligations $ 5,361 $26 $ 5,387
Certificates of deposit 776 - 776
------- --- -------
Total 6,137 26 6,163
Less: Restricted Investments (4,500) - (4,500)
------- --- -------
$ 1,637 $26 $ 1,663
======= === =======
</TABLE>
As of December 31, 1997, there were no short-term investments available-
for- sale.
F-17
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment stated at cost are set forth below (in
thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------- -------------------
<S> <C> <C>
Diagnostic equipment $ 63,186 $ 33,938
Leasehold improvements 18,684 9,352
Furniture and fixtures 10,571 2,997
Land and buildings 4,987 632
Construction in progress - 270
-------- --------
97,428 47,189
Less: accumulated depreciation and amortization (33,085) (22,792)
-------- --------
$ 64,343 $ 24,397
======== ========
</TABLE>
Depreciation and amortization expense related to property and equipment
amounted to $12,048,000, $5,463,000 and $3,844,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
7. ACCRUED EXPENSES
Accrued expenses are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1996
------- -----
<S> <C> <C>
Accrued professional fees $ 5,875 $ 354
Accrued payroll and bonuses 4,242 792
Accrued interest 2,749 323
Accrued radiologist fees 3,398 629
Other accrued expenses 11,754 69
------- -------
$28,018 $ 2,167
======= =======
</TABLE>
8. DEBT
Outstanding debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
------------------- ----------------
<S> <C> <C>
Senior Notes due 2001 through 2005, classified as current due to
financial covenant defaults $78,000 $ -
======= =======
Revolving line of credit $ 3,744 $ -
======= =======
Convertible debentures $ - $ 6,988
======= =======
Other notes and mortgages payable:
- ----------------------------------
Debt issued or assumed in connection with 1997 acquisitions $19,809 $ -
Debt issued or assumed in connection with 1996 acquisitions 6,785 13,748
10.25% unsecured promissory note, monthly payments of $171
including interest through December, 2002 8,000 -
Other debt 3,464 5,619
-------- -------
</TABLE>
F-18
<PAGE>
<TABLE>
<S> <C> <C>
Total other notes and mortgages payable 38,058 19,367
-------- -------
Less current installments (13,313) (6,729)
Less debt shown as current due to financial covenant default (3,206) -
-------- -------
Total other notes and mortgages payable shown as long-term $ 21,539 $12,638
======== =======
</TABLE>
During 1997, the Company borrowed $78,000,000 of Senior Notes (the "Senior
Notes") from a group of insurance companies led by the John Hancock Mutual Life
Insurance Company ("John Hancock"). The notes bear interest at an average
annual rate of 7.87%, 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, including restrictions on the payment of
dividends. The Company used a portion of the proceeds from the Senior Notes to
retire capital lease obligations totaling $8,274,000 and notes payable totaling
$5,490,000. 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, not to exceed the fair value of the assets,
which will be amortized over the remaining useful lives of the assets. In
connection with the Senior Note transaction, the Company paid $337,000 to 712
Advisory Services, Inc., an affiliate (the "Affiliate") of the Company's
Chairman of the Board, for financial advisory services.
The Company is currently in default of certain financial covenants under
the Senior Notes. See Note 2 of the Notes to the Consolidated Financial
Statements, Basis Of Financial Statement Presentation And Issues Affecting
Liquidity.
Debt issued or assumed in connection with 1997 acquisitions bear interest
at rates ranging from 8.6% to 13.75% and mature from 1998 through 2010. Such
debt includes the following convertible notes:
In August 1997, as part of the purchase price for the acquisition of the
business assets of the Presgar centers, the Company issued up to $3,700,000
in notes convertible into the Company's Common Stock, of which, $1,200,000
in principal amount is contingent upon the occurrence of certain events.
The notes ($2,500,000 outstanding at December 31, 1997) bear interest at
prime plus 1% (9.5% at December 31, 1997) and mature on August 21, 1998.
In October 1997, as part of the purchase price of the acquisition of the
Ohio centers, the Company issued $1,750,000 in notes convertible into the
Company's Common Stock. The notes bear interest at 12% and mature on
October 3, 1998.
Debt issued or assumed in connection with 1996 acquisitions includes the
following:
In January 1996, as part of the purchase price for the acquisition of the
business assets of MRI-CT, Inc., the Company issued an $88,000 note payable
bearing interest at prime (8.5% at December 31, 1997) 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 (9.5% at December
31, 1997) 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 (9.5% at
December 31, 1997) and is due August 1998.
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
F-19
<PAGE>
from 7.0% to 11.5% and require monthly payments ranging from $623 to
$38,095 including interest (an aggregate of $172,539 per month). The notes
are payable over varying terms with the last note due in December 2000. The
foregoing notes are collateralized by the respective centers' imaging
equipment. As of December 31, 1997, the outstanding balance declined to
$4,108,000 primarily as a result of the application of proceeds from the
issuance of the Senior Notes.
Other debt includes the following:
In 1994, StarMed and a creditor renegotiated a note payable. 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 and is due in 2000.
The balance of such note at December 31, 1997 was $3,042,000.
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 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 December 31, 1997, all of the 1996 Debentures have been converted.
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 automatically converted to Common Stock when, on June 20, 1997
the market price of the Stock exceeded $6.00 per share for a 15 consecutive day
period. Under the terms of the merger agreement with NMR, the Company assumed
the obligations 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 December 31, 1997, all of the NMR
Debentures had either been redeemed or converted into Common Stock of the
Company. During 1997 and 1996, debentures of $6,988,000 and $5,735,000,
respectively, were converted into Common Stock.
In connection with the private placements of the 1995 Debentures and the
1996 Debentures, the Company paid $248,000 and $357,000, respectively, in
placement agent fees and expenses to an investment banking firm. Mr. Gary L.
Fuhrman, a director of the Company, is an executive officer and director of such
investment banking firm.
Aggregate originally scheduled maturities (prior to classification of
certain amounts as current due to the financial covenant defaults) of the
Company's Senior Notes and other notes and mortgages payable for years 1998
through 2002 and thereafter are as follows (in thousands):
1998 $13,313
1999 7,209
2000 9,285
2001 20,795
2002 18,061
thereafter 47,395
The Company has three revolving lines of credit from a third party
financing corporation totaling $12,000,000. The lines bear interest at prime
plus 1.5% (10% at December 31, 1997) and have a two-year term. As of December
31, 1997 and 1996, no amounts were outstanding under these lines of credit.
On December 29, 1997, the Company entered into a $15 million credit
facility with DVI Financial Services Inc. (the "Facility"). The Facility
provides for two advances to the Company, one for $8 million and the other for
$7 million. In consideration for making the Facility available to the Company,
the lender received warrants to purchase an aggregate of 100,000 shares of
Common Stock at an exercise price based upon 110% of the average market prices
over a period prior to the issuance of the warrants. In the event that the
lender refuses to make the second advance, warrants to purchase 46,667 shares of
Common Stock will be canceled. As of December 31, 1997, $8,000,000 had been
borrowed under the Facility.
During 1997, StarMed obtained a revolving line of credit from a third party
financing corporation. The $6,000,000 line bears interest at a rate of prime
plus 1.5% (10% at December 31, 1997), has a two year term and is collateralized
by substantially all of StarMed's accounts receivable. At December 31, 1997,
$3,744,000 was outstanding under the line. In early 1998, StarMed increased the
availability under the revolving line of credit by $1,000,000.
F-20
<PAGE>
9. STOCKHOLDERS' 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 per share ("Preferred Stock"). The Company has a
Shareholders' Rights Plan (described below) which requires the issuance of
Series C Junior Participating Preferred Stock, in connection with the exercise
of certain stock purchase rights. At December 31, 1997, there was (i)
21,889,000 shares of Common Stock issued and outstanding and, (ii) 18,000 shares
of Series C Convertible Preferred Stock outstanding (the "Convertible Preferred
Shares").
Shareholders' Rights Plan
Pursuant to the Shareholders' Rights Plan, in August 1996 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.
Convertible Preferred Stock
In July 1997, the Company issued 18,000 shares of $1,000 Series C
Convertible Preferred Stock, $.01 par value, to RGC International, LDC ("RGC").
The Convertible Preferred Shares are convertible into Common Stock of the
Company at the option of RGC beginning on the date on which a registration
statement relating to the Common Stock underlying the Convertible Preferred
Shares (the "Conversion Shares") is declared effective by the Securities and
Exchange Commission, provided that, beginning 180 days from the effectiveness of
such registration statement, the Company may require the conversion of all or a
portion of the Convertible Preferred Shares.
The Convertible Preferred Shares convert into the Company's Common Stock at
the lesser of (i) $20.70 per Common Share or (ii) the value per Common Share
determined by dividing the Stated Value of the Convertible Preferred Shares,
plus 3% per annum to the date of conversion, by the average of the daily closing
bid prices for the Company's Common Stock for the five (5) consecutive trading
day period ending five (5) trading days prior to the date of conversion. If the
average closing price of the Company's Common Stock (the "Closing Price") for
any ten (10) consecutive trading days does not exceed $12.25 (the "Floor
Price"), the Company has the right to block conversion of the Convertible
Preferred Shares by RGC for up to thirty (30) days in the aggregate. If the
Closing Price does not exceed the Floor Price for 30 consecutive calendar days,
the Convertible Preferred Shares are redeemable, in whole or in part, at the
option of the Company for 110% of the stated value plus 3% per annum. RGC is
subject to volume restrictions which prohibit the sale of more than 25% of the
daily or weekly trading volume in any such period, unless certain circumstances
exist. The liquidation preference of each Convertible Preferred Share
F-21
<PAGE>
is $1,000 plus 3% per annum. The holder of the Convertible Preferred Shares is
entitled to limited voting rights.
As of December 31, 1997, based upon the current market price of the
Company's Common Stock, the Convertible Preferred Shares would be convertible
into 1,944,000 shares of Company Common Stock, representing 8% of the
outstanding shares of Common Stock as of such date after giving effect to the
conversion of the Convertible Preferred Shares. Under the terms of the
Convertible Preferred Shares, RGC is not permitted to convert Shares of the
Convertible Preferred Shares which would result in RGC owning in excess
of 5% of the outstanding shares of Common Stock. As discussed above, the
Company can limit the conversion of the Preferred Stock for up to thirty (30)
days and has the option to repurchase the shares at 110% of stated value plus 3%
per annum.
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement (the "Series C Preferred Stock Purchase Agreement"), dated July 21,
1997, between the Company and RGC, and the Registration Rights Agreement, dated
July 21, 1997, (the "Series C Registration Rights Agreement"), between the
Company and RGC (the Series C Stock Purchase Agreement and the RGC Registration
Rights Agreement are hereinafter referred to as the "RGC Agreements"), the
Company was required to use its best efforts to include the shares of Common
Stock issuable upon conversion of the Convertible Preferred Stock (the "RGC
Conversion Shares") in an effective Registration Statement on Form S-3 not later
than October 1997. The RGC Agreements provide for monthly penalties ("RGC
Registration Penalties") in the event that the Company fails to register the
Conversion Shares prior to October 1997 with such penalties continuing until
such time as the Conversion Shares are registered as required by the RGC
Agreements.
As a result of the Company's failure to register the RGC Conversion Shares
at various dates on or after December 31,1997, the Company: (i) in lieu of RGC
Registration Penalties accruing on or before December 31, 1997, issued warrants
to RGC to acquire 817,000 shares of Common Stock at an exercise price of $11.62
per share (such warrants having an estimated value for accounting purposes
only of $2,051,000); (ii) in lieu of RGC Registration Penalties accruing during
the month of Januuary 1998, issued warrants, to RGC to acquire 350,000 shares of
Common Stock at an exercise price of $12.95 per share (such warrants having an
estimated value for accounting purposes only of $1,194,000); and (iii) in lieu
of RGC Registration Penalties accruing from February 1, 1998 to April 30, 1998,
issued to RGC interest bearing promissory notes, due May 1, 1998 (the "RGC
Penalty Notes"), in the aggregate principal amount of $1,440,000. On May 1,
1998, as a result of the Company's failure to register the Conversion Shares on
or before such date, RGC was entitled under the RGC Agreements to demand a one-
time penalty of $1,800,000 (the "May 1998 Penalty") payable, at the option of
RGC, in cash or additional shares of Common Stock. As of May 26, 1998, RGC had
not demanded payment or other satisfaction of the May 1998 Penalty.
On May 1, 1998, the Company did not pay RGC the $1,440,000 that was then
due and payable under the RGC Penalty Notes. Additionally, as a result the
Company's continuing failure to register the Conversion Shares, RGC is entitled
to additionally penalties of $540,000 per month (payable at the option of RGC in
cash or additional shares of Common Stock). The Company and RGC are currently in
discussions regarding the restructuring of the Penalty Notes, the May 1998
Penalty and the on-going monthly penalties, but there can be no assurance that
the Company will be successful in restructuring such obligations on terms
favorable to the Company or its shareholders.
F-22
<PAGE>
Stock Options and Employee Stock Grants
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 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 No. 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. Options granted to consultants are accounted
for based on the fair value of the options issued.
During 1996 and the first quarter of 1997, options were granted to
employees under stock option plans which were approved by the Company's
Shareholders in May 1997. The difference between the exercise price of the
options and the market price of the Company's Common Stock on the date of plan
approval resulted in compensation aggregating $3,381,000. The 1997 expense of
$2,536,000 representing the portion of such options vested in 1997 is included
as stock based compensation expense in the accompanying Consolidated Statements
of Operations. The remaining balance of $845,000 will be recognized ratably over
the remaining vesting period of the options. In the following tables, these
options are treated as if they were granted on the date of the plan approvals in
May 1997.
Options to purchase 1,740,938 shares of the Company's Common Stock granted
to employees of the Company in 1997 under an option plan (the "1997 Plan") have
lapsed and are not deemed to have been granted due to the fact that the 1997
Plan was not presented for approval to the Company's Stockholders within one
year of such plan's approval by the Board of Directors of the Company.
Had the fair-value based method of accounting been adopted to recognize
compensation expense for the above plans (excluding the 1997 Plan), the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts for the years ended December 31, 1997, 1996 and 1995 as indicated
below (in thousands except per share amounts):
1997 1996 1995
---- ---- ----
Net income (loss) applicable to
common stockholders:
As reported $(33,177) $7,254 $1,690
Pro forma (34,049) 6,732 1,652
Basic income (loss) per share:
As reported (1.62) 0.64 0.22
Pro forma (1.66) 0.59 0.21
Diluted income (loss) per share:
As reported (1.62) 0.59 0.22
Pro forma (1.66) 0.55 0.21
F-23
<PAGE>
The fair value of each option granted under all plans is estimated on the date
of grant using the Black-Scholes option-pricing model based on the following
assumptions:
1997 1996 1995
---- ---- ----
All Plans:
Dividend yield 0% 0% 0%
Expected volatility 70% 52% 52%
Expected life (years) 2 2 2
The risk-free interest rates for 1997, 1996 and 1995 were based upon rates with
maturities equal to the expected term of the option. The weighted average
interest rate in 1997, 1996 and 1995 amounted to 5.52%, 5.93% and 6.41%,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1997, 1996 and 1995 amounted to $4.20, $2.34 and $1.15,
respectively.
Stock option share activity and weighted average exercise price under these
plans and grants for the years ended December 31, 1997, 1996 and 1995, were as
follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Outstanding, January 1, 1995.......... 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
Granted............................. 399,000 8.46
Exercised........................... (234,855) 5.17
Forfeited........................... (315,500) 7.33
---------
Outstanding, December 31, 1997........ 1,480,363 7.51
=========
Exercisable at:
December 31, 1995................... 301,209 5.31
December 31, 1996................... 909,710 6.40
December 31, 1997................... 1,129,641 6.98
The exercise price for options outstanding as of December 31, 1997 ranged from
$4.00 to $12.00. The following table summarizes information about stock options
outstanding and exercisable at December 31, 1997:
F-24
<PAGE>
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Number of Average Life Average Price Number of Average Price
Exercise Price Range Shares Shares
- ---------------------- --------- --- --- ------ ---
<S> <C> <C> <C> <C> <C>
$4.00 to 5.00 203,978 6 years $ 4.64 196,144 $ 4.70
$5.50 305,000 5 years $ 5.50 305,000 $ 5.50
$6.50 to 6.55 215,272 6 years $ 6.50 131,268 $ 6.51
$7.51 to 8.50 413,213 9 years $ 8.42 361,666 $ 8.50
$9.00 to 10.00 91,900 8 years $ 9.46 58,566 $ 9.15
$10.38 to 11.13 176,000 4 years $10.44 68,664 $10.54
$11.63 to 12.00 75,000 4 years $11.88 8,333 $12.00
--------- ---------
$4.00 to 12.00 1,480,363 1,129,641
========= =========
</TABLE>
Stock Purchase Warrants
The Company does not have a formal stock warrant plan. The Company's Board
of Directors authorizes the issuance of stock purchase warrants at its
discretion. The Company's Board of Directors have generally granted warrants in
connection with purchase and financing transactions. The number of warrants
issued and related terms are determined by a committee of independent directors.
As of December 31, 1997, the Company had granted warrants, which are
currently outstanding, to purchase its Common Stock with the following terms:
<TABLE>
<CAPTION>
Warrants
--------
Expiring In Number of Shares Range of Exercise Price
- ------------ ---------------- -----------------------
<S> <C> <C>
1998 - -
1999 93,188 $ 4.50 to $25.00
2000 -
2001 651,374 3.36 to 12.00
2002 1,660,000 9.50 to 12.59
2003 51,563 4.63
2004 73,959 5.70 to 9.54
---------
2,530,084
=========
</TABLE>
For services rendered by a financial advisory company owned by the Chairman
of the Board (the "Affiliate")in connection with several acquisitions, the
Company issued warrants (the "Acquisition Warrants") to purchase shares of the
Company's Common Stock at exercise prices equal to the market price of the
Company's Common Stock on the date of issuance. The fair value of such warrants
was considered part of the purchase price of the related acquisition, and was
determined (for accounting purposes only) using the Black-Scholes option
pricing model using the following assumptions: Dividend yield 0%; expected
volatility 62%; Expected life three to five years and a risk free interest rate
of 5.6% as set forth below. The Acquisition Warrants are exercisable at prices
ranging from $10.31 to $12.59 per share. As of May 26, 1998, none of the
Acquisition Warrants had been exercised, and the closing sale price of the
Common Stock was $3 1/16.
Warrants issued in connection with the acquisition of a diagnostic imaging
center located in Jacksonville, Florida to purchase 32,000 shares of the
Company's Common Stock at an exercise price of $10.31 per share. The
warrants have a term of three years, are exercisable from the date of grant
and have an estimated fair value (for accounting purposes only) of
$150,000.
Warrants issued in connection with the acquisition of Advanced Diagnostic
Imaging, Inc. to purchase 137,000 shares of the Company's Common Stock at
an exercise price of $10.60 per share. The warrants have a term of three
years, are exercisable from the date of grant and have an estimated fair
value (for accounting purposes only) of $662,000.
Warrants issued in connection with the acquisition of a diagnostic center
located in West Palm Beach, Florida to purchase 57,000 shares of the
Company's Common Stock at an exercise price of $10.64 per share. The
warrants have a term of three years, are exercisable from the date of
grant, and have an estimated fair value (for accounting purposes only) of
$276,000.
F-25
<PAGE>
Warrants issued in connection with the acquisition of ATI Centers, Inc. to
purchase 168,000 shares of the Company's Common Stock at an exercise price
of $11.06 per share. The warrants have a term of three years, are
exercisable from the date of grant and have an estimated fair value (for
accounting purposes only) of $847,000.
Warrants issued in connection with the acquisition of a diagnostic imaging
center located in Rancho Cucamonga, California to purchase 55,000 shares of
the Company's Common Stock at an exercise price of $11.25 per share. The
warrants have a term of three years, are exercisable from the date of
grant, and have an estimated fair value (for accounting purposes only) of
$282,000.
Warrants to purchase 66,000 and 160,000 of the Company's Common Stock at an
exercise price of $12.59 per share were granted in connection with the
acquisition of diagnostic imaging centers in Maryland, and from Capstone
Management, Inc., respectively. The warrants have a term of five years and
are exercisable from the date of grant. The estimated fair value (for
accounting purposes only) of $478,000 and $1,158,000, respectively.
In December 1997, the Company issued warrants to RGC to purchase 817,000
shares of the Company's Common Stock with an exercise price of $11.62 per share.
These warrants have a term of five years and are exercisable from the date of
grant. The warrants had an estimated fair value of $2,051,000. The fair value of
such warrants was estimated using the Black-Scholes option pricing model using
the following assumptions: Dividend yield 0%, Expected volatility 62%, Expected
life one year and a risk free interest rate of 5.50% based upon the expected
life of the warrants.
In December 1997, the Company granted warrants to a financing company in
connection with a line of credit entered into by the Company. The warrants to
purchase 53,334 shares of the Company's Common Stock at an exercise price of
$9.54 per share have a term of seven years and are exercisable from the date of
grant. The warrants had an estimated fair value of $337,000 which was recorded
as a deferred financing expense and is being amortized as additional interest
over the term of the facility. The fair value of each warrant was estimated
using the Black-Scholes option pricing model using the following assumptions:
Dividend yield 0%, Expected volatility 62%, Expected life seven years and a risk
free interest rate of 5.63% based on the expected life of the warrants.
For warrants granted during 1996, the fair value of each stock purchase
warrant issued has been accounted for as a component of each transaction's
purchase price and the value has been estimated on the date of grant using the
Black-Scholes option pricing model based on the following assumptions: dividend
yield - 0%, expected volatility - 52% and an expected life of 2 years, unless
otherwise noted.
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. The number of such
warrants was subsequently increased by 4,687 with an exercise price of $8.00 per
share and 4,687 warrants with an exercise price of $12.00 per share. As of
December 31, 1997, warrants to purchase 42,187 shares of the Company's Common
Stock at $8.00 a share and 42,187 at $12.00 per share were outstanding. The
warrants had an estimated fair value of $60,000. The fair value of each warrant
was estimated using the Black-Scholes option pricing model using the following
assumptions: Dividend yield 0%, Expected volatility 52%, Expected life 5 years
and a risk free interest rate of 5.93% based upon the expected term of the
warrants.
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
F-26
<PAGE>
have received in the NMR Acquisition, had the holder exercised the NMR warrant
prior to the NMR Acquisition. As such, in connection with the NMR Acquisition
the Company assumed the following warrants:
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. As of December 31, 1997, none of the
warrants to purchase 17,188 shares of the Company's Common Stock had been
exercised.
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. As of December 31, 1997, the
warrants to purchase 4,813 shares of the Company's Common Stock have been
cancelled and are no longer outstanding.
Warrants issued to acquire 68,750 shares of the Company's Common Stock at
$11.64 per share to a financial consulting firm. As of December 31, 1997,
the warrants to purchase 68,750 shares of the Company's Common Stock have
been cancelled and are no longer outstanding.
Warrants granted to non-employee directors of NMR to purchase 130,625
shares of the Company's Common Stock at $9.27 per share. As of December 31,
1997, warrants to purchase 55,000 shares of the Company's Common Stock
remain outstanding.
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. As
of December 31, 1997, warrants to purchase 1,000 shares of the Company's
Common Stock remain outstanding.
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. As of December 31, 1997, all of the
warrants to purchase 17,188 shares of the Company's Common Stock have been
exercised and are no longer outstanding.
Warrants granted to an 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. As of December 31,
1997, none of the warrants to purchase 51,563 and 20,625 shares of the
Company's Common Stock have been exercised.
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 of December 31, 1997,
none of the warrants to purchase 120,000 shares of the Company's Common Stock
have been exercised.
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 (the "$8.00 Warrants") and (ii)
six year warrants to purchase 200,000 shares of the Company's Common
F-27
<PAGE>
Stock at an exercise price of $9.50 per share (the "$9.50 Warrants), and (iii)
in exchange for his NMR employee stock options, three separate five year
warrants to purchase (A) 34,375 shares at $9.27, (B) 68,750 shares at $4.18 and
(C) 34,375 shares of the Company's Common Stock at $4.73. As of December 31,
1997, 40,000 of the $8.00 Warrants, 168,000 of the $9.50 Warrants, warrants to
purchase 68,750 shares at $4.18 and 34,375 shares of the Company's Common Stock
at $4.73 remain outstanding.
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 shares at $4.00, 27,500 shares at $3.36, 41,250
shares at $4.18 and 34,375 shares of the Company's Common Stock at $4.73. As of
December 31, 1997, the warrants to purchase 50,000 shares at $8.00 per share,
27,500 shares at $3.36 per share, 41,250 at $4.18 per share and 34,735 shares of
the Company's Common Stock at $4.73 per share remain outstanding.
The warrants the Company issued to the officers of NMR in connection with
the NMR Acquisition had an estimated fair value of approximately $650,000 and
were considered part of the consideration paid in connection with the NMR
Acquisition and such value is being amortized over the term of the officers'
covenant not to complete agreements. The 564,440 warrants the Company issued in
exchange for previously outstanding NMR options or warrants and the 120,000
warrants issued to the financial advisory company had an estimated fair value of
approximately $210,000 and $325,000 respectively, and were considered part of
the NMR Acquisition purchase price.
5,954,000 shares of Common Stock were reserved for the issuance related to
the above described stock options, warrants and preferred stock.
10. INCOME TAXES
The total income tax provisions (benefits) for the years ended December 31,
1997, 1996 and 1995 are allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax provision (benefit) from continuing operations before ($ 8,400) $ 4,162 $ 3,167
valuation allowances
Income tax valuation allowance related to
continuing operations 10,700 -0- (1,508)
--------- -------- -------
Income tax provision continuing operations $ 2,300 $ 4,162 $ 1,659
========= ======== =======
Tax (benefit) from discontinued
operations $ -0- $ -0- ($312)
========= ======== =======
Tax (benefit) related to sale of
discontinued business $ -0- $ -0- ($656)
========= ======== =======
Tax benefit associated with the exercise of employee
stock options which has been credited to stockholders'
equity ($1,000) ($368) $ -0-
========= ======== =======
The components of the Company's income tax provision (benefit) from continuing operations are as follows (in
thousands):
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------
FEDERAL STATE TOTAL
----------------- ------------------- -------------------
<S> <C> <C> <C>
Current provision $ 1,968 $1,168 $ 3,136
Deferred benefit (932) 96 (836)
--------- ------ -------
Income tax provision $ 1,036 $1,264 $ 2,300
========= ====== =======
DECEMBER 31, 1996
-----------------
FEDERAL STATE TOTAL
----------------- ------------------- -------------------
Current provision $ 3,764 $1,239 $ 5,003
Deferred benefit (704) (137) (841)
--------- ------ -------
Income tax provision $ 3,060 $1,102 $ 4,162
========= ====== =======
DECEMBER 31, 1995
-----------------
FEDERAL STATE TOTAL
----------------- ------------------- -------------------
Current provision $ 3,051 $ 769 $ 3,820
Deferred benefit (1,789) (372) (2,161)
--------- ------ -------
Income tax provision $ 1,262 $ 397 $ 1,659
========= ====== =======
</TABLE>
A reconciliation of the enacted federal statutory income tax to the Company's
recorded effective income tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
------------------ --------------------- ---------------------
<S> <C> <C> <C>
Statutory federal income tax at 34% (34.0%) 34.0% 34.0%
Effect of partnership status and amounts taxed to
parties other than the company -- (1.1%) 2.0%
State income tax expense (benefit) net of federal
benefit (3.8%) 6.1% 4.5%
Meals and entertainment 1.3% 1.9% 3.6%
Change in valuation allowance 37.0% --- (26.2%)
Goodwill amortization 3.4% 2.3% ---
Other 4.0% (6.6%) 10.7%
-------- ------- -----
Effective tax rate 7.9% 36.6% 28.6%
======== ======= =====
v</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
The significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Property and equipment ($841) ($857)
Deferred rent (37) (59)
Cash to accrual adjustment (41) (362)
-------- -------
Deferred tax liabilities (919) (1,278)
Deferred tax assets:
Net operating losses 2,956 2,956
Tax credit carryforwards 385 385
Accounts receivable reserves 5,225 3,354
Capital leases 110 135
Intangible assets 4,940 220
Accrued expenses 2,721 -
Capital loss carryforward 127 133
-------- -------
Deferred tax assets 16,464 7,183
-------- -------
Subtotal 15,545 5,905
-------- -------
Less: Valuation allowance (10,700) (200)
-------- -------
Net deferred tax asset $ 4,845 $ 5,705
======== =======
</TABLE>
The Company's existing deferred tax assets at December 31, 1997 have been
reduced by a valuation allowance of $10,700,000, due to the uncertainty
regarding the realization of the full amount of such deferred tax assets.
At December 31, 1997, the Company has available federal net operating loss
carryforwards of approximately $8,028,000 expiring in years 1999 through 2009.
Utilization of the Company's tax net operating losses is limited to the
separately determined taxable incomes of certain of its subsidiaries. In
addition, the Tax Reform Act of 1986 enacted a complex set of rules ("Section
382") limiting the utilization of net operating loss carryforwards in periods
following a corporate ownership change. In general, a corporate ownership
change is deemed to occur if the percentage of stock of a loss corporation owned
(actually, constructively and in certain cases deemed owned) by one or more "5%
shareholders" has increased by 50 percentage points over the lowest percentage
of such stock owned during a specified testing period (generally a three year
period). The utilization of the Company's available net operating loss
carryforwards is subject to such limitations. Should the company experience
further ownership changes, its ability to utilize the available federal net
operating loss carryforwards could be subject to further limitation.
The Company also has available tax credit carryforwards of approximately
$385,000 expiring between 1998 and 2011. The utilization of such credits is
also subject to a limitation similar to the net operating loss limitation
described above.
11. COMMITMENTS AND CONTINGENCIES
Leases
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.
F-30
<PAGE>
The following is a summary of assets under capital leases which amounts
are included in Property and Equipment (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- ---------
<S> <C> <C>
Diagnostic equipment and associated leaseholds $31,211 $ 23,036
Less: Accumulated amortization (5,221) (12,096)
------- --------
$25,990 $10,940
======= ========
</TABLE>
Amortization expense relating to property and equipment under capital
leases at December 31, 1997, 1996 and 1995 was $3,496,000, $3,377,000 and
$2,045,000, respectively.
The following analysis schedules the minimum future lease payments under
capital leases as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998............................................................................. $ 13,044
1999............................................................................. 11,263
2000............................................................................. 9,876
2001............................................................................. 5,611
2002............................................................................. 2,063
Thereafter....................................................................... 571
--------
Total minimum lease payments..................................................... 42,428
Less: amount representing interest (imputed at an average rate of 7 %)........... (6,201)
--------
Present value of minimum lease payments.......................................... 36,227
Less current installments........................................................ (10,311)
Less debt shown as current due to financial covenant default installments........ (9,555)
--------
Obligations under capital leases, shown as long-term............................. $ 16,361
========
</TABLE>
In connection with certain of the Company's acquisitions, the Company
entered into agreements for the sale and leaseback of medical diagnostic
equipment. Included in future minimum lease payments listed above are
$1,782,000 for each of the years 1998, 1999, 2000, 2001 and $803,000 for 2002,
relating to these transactions.
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 leases was approximately $6,585,000, $2,597,000 and $2,238,000 for the
years ended December 31, 1997, 1996 and 1995, 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, 1997, the Company has
subleased the operating sites to the Physicians for the base rental as
stipulated in the original lease. The related sublease income has been offset by
the lease rent expense. The Company also has operating leases for diagnostic
imaging equipment installed in certain of its imaging centers. In addition,
StarMed leases temporary housing for its per diem employees under operating
leases with terms of one to six months. Total rent expense for temporary housing
amounted to approximately $2,083,000, $1,744,000 and $1,757,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
F-31
<PAGE>
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, 1997, the aggregate future minimum lease
payments and sublease rentals are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------
Leases Original Net
----------- Subleases ---
---------
<S> <C> <C> <C>
1998 $11,900 $ 707 $11,193
1999 10,106 626 9,480
2000 9,069 643 8,426
2001 8,280 267 8,013
2002 5,874 96 5,778
thereafter 6,538 228 6,310
------- ------ -------
$51,767 $2,567 $49,200
======= ====== =======
</TABLE>
Contingencies
Between November 1997 and January 1998, several lawsuits were
commenced against the Company, certain of the Company's Directors and certain
officers concerning the related party transactions investigated by the Special
Committee of the Board of Directors ("Special Committee"). The complaints in
each action assert that the Company and the named defendants violated Section
10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the
Company omitted and/or misrepresented material information in its public
filings, including that the Company failed to disclose that it had entered into
acquisitions that were not in the best interest of the Company, that it had paid
unreasonable and unearned acquisition and financial advisory fees to related
parties, and that it concealed or failed to disclose adverse material
information about the Company. Each action seeks unspecified compensatory
damages, with interest, and the costs and expenses incurred in bringing the
action. On February 9, 1998, the above-mentioned class actions were consolidated
for all purposes in federal district in New Jersey. On March 31, 1998, the lead
plaintiffs in the consolidated class actions served their Consolidated Class
Action Complaint, asserting that the Company and the named defendants violated
Section 10(b) of the Exchange Act, and that certain named defendants violated
Sections 20(a) and 20A of the Exchange Act. The Company intends to defend
vigorously against the allegations.
As previously announced by the Company the U.S. Attorney for the
District of New Jersey commenced an investigation in connection with the
disclosures regarding the related party transactions referred to above. In
addition, as previously disclosed, the Company has also received an inquiry from
the SEC, but no formal proceedings have been commenced by the SEC. The Company
has cooperated fully with these authorities and provided all information
requested by them.
On November 7, 1997, the Company accepted the resignations of William
D. Farrell, as President and Chief Operating Officer of the Company and as
Director, and Gary I. Fields, as Senior Vice President and General Counsel. On
the same date, Messrs. Farrell and Fields filed a complaint in the Superior
Court of New Jersey, Law Division, Essex County, against the Company and the
members of the Company's Board of Directors, claiming retaliatory discharge
under the New Jersey Conscientious Employee Protection Act and breach of
contract. On December 17, 1997, the plaintiffs amended their complaint to add a
claim for violation of public policy. The plaintiffs allege that they were
constructively terminated as a result of their objection to certain related-
party transactions, the purported failure of the defendants to adequately
disclose the circumstances surrounding such transactions, and the Company's
public issuance of alleged false and misleading accounts concerning or relating
to such related-party transactions. The plaintiffs seek unspecified compensatory
and punitive damages, interest and costs and reinstatement of the plaintiffs to
their positions with the Company. On April 8, 1998, the Company filed its Answer
to the Amended Complaint, and asserted a counterclaim against Messrs. Farrell
and Fields for breach of fiduciary duties. The Company intends to defend
vigorously against the allegations.
On November 8, 1997, the Company removed John P. O'Malley III, the
Company's Chief Financial Officer, for failure to fulfill certain of his
functions as Chief Financial Officer. Mr. O'Malley has filed a complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and members of the Board of Directors, as defendants, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and
defamation. Mr. O'Malley alleges that the Company terminated his employment in
retaliation for voicing the concerns of shareholders and senior management
F-32
<PAGE>
regarding related-party transactions and because the Company did not want to
make full and adequate disclosure of the facts and circumstances surrounding
such transactions. In addition, Mr. O'Malley alleges that the Company published
false and defamatory statements about him. Mr. O'Malley seeks unspecified
compensatory and punitive damages, interest and costs of bringing the action. On
April 8, 1998, the Company filed its Answer to the Complaint, and asserted a
counterclaim against Mr. O'Malley for breach of fiduciary duties. The Company
intends to defend vigorously against the allegations.
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 $12,500,000 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 legal proceedings described above are in their preliminary stages.
Although the Company believes it has meritorious defenses to all claims against
it, the Company is unable to predict with any certainty the ultimate outcome of
these proceedings.
In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that the such
other litigation will not have an material adverse effect on the Company's
financial position, cash flows or results of operations.
In connection with certain of the Company's 1997 acquisitions in which
the Company issued shares of its Common Stock as partial consideration, the
Company granted rights to have such shares registered for resale pursuant to the
federal securities laws. In certain of such acquisitions, the Company has
granted specific remedies to the sellers in the event that the registration
statement covering the relevant shares is not declared effective by the
Securities and Exchange Commission within an agreed-upon period of time,
including the right to require the Company to repurchase the shares issued to
such seller. In the event the Company is unable to register such shares by the
required dates, the Company would become obligated to repurchase the shares
issued in connection with such acquisition. As of December 31, 1997, the Company
had reflected $9,734,000 of Common Stock subject to redemption on its
Consolidated Balance Sheet related to shares that the Company may be required to
repurchase. During January 1, 1998 through May 26, 1998, the Company paid
$3,275,000 to sellers who exercised their rights to have 179,000 shares of
Common Stock repurchased. In addition, the Company expects to pay an additional
$5,763,000 during the remainder of 1998 in connection with the settlement of
certain repurchase obligations of the Company, (representing 414,000 shares of
Common Stock) subject under certain circumstances, to the consent of the Senior
Notes holders.
In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay (in additional shares
and/or cash) to the sellers an amount equal to the shortfall in the value of the
issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or, in
other cases, as of the execution of the relevant acquisition agreement (referred
to as "Price Protection"). Based upon the closing sales price of the Company's
Common Stock on May 26, 1998 ($3 1/16 per share), such shortfall would be
approximately $9,634,000, which amount may be reduced by up to $5,977,000 to the
extent certain sellers exercise their repurchase rights referred to above.
In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differs for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration, and in other cases, the parties have agreed
that any payment of such contingent
F-33
<PAGE>
consideration may be paid in cash or shares of Common Stock, or a combination of
both.
12. RELATED PARTY TRANSACTIONS
During 1997, in connection with the placement of the Preferred Stock, the
Company paid $967,000 in fees and expenses to Arnhold & S. Bleichroeder, Inc.,
of which Gary Fuhrman, a director of the Company, is an executive officer and
director. Also during 1997, for legal services rendered to the Company, the
Company paid legal fees in the amount of $971,000 to Werbel & Carnelutti, of
which Stephen Davis, a director of the Company, is a partner. In addition,
during 1997, the Company reimbursed the managing underwriter of the Company's
October public offering $84,000 in charter fees for the use by the managing
underwriter and the Company of an airplane owned by an affiliate of the Chairman
of the Board during the public offering roadshow.
In 1997 and previous years, the Company paid an annual financial
advisory fee to 712 Advisory Services, Inc., a financial advisory firm and
affiliate of the Company's Chairman of the Board (the "Affiliate"). Mr. Neil H.
Koffler, a director of the Company, is also an employee of the Affiliate. Such
fees amounted to $112,500, $102,000 and $225,000 in the years ended December 31,
1997, 1996 and 1995, respectively. During the year ended December 31, 1997, the
Company also paid transaction related advisory fees and expenses (including fees
associated with the issuance of the Senior Notes) to the Affiliate of $1,761,000
and issued to the Affiliate warrants to purchase 675,000 shares of the Company's
Common Stock exercisable at between $10.31 and $12.59 per share for financial
advisory services rendered to the Company in connection with such transactions.
As discussed below, pursuant to recommendations made by the Special Committee,
the Affiliate has reimbursed the Company $1,536,000 of the fees paid to the
Affiliate for services rendered in 1997 and waived $112,500 of fees payable in
1997.
In order to incentivize officers, directors, employees and consultants
to the Company, the Company from time to time has granted options at fair market
value to such individuals. As of December 31, 1997, stock options to purchase
1,468,666 shares of the Company's Common Stock have been issued to the Chairman
and Mr. Koffler. Included in this amount are stock options to purchase 750,000
shares and 15,000 shares of the Company's Common Stock which were granted to the
Chairman and Mr. Koffler, respectively, under the Company's 1997 Stock Option
Plan (the "1997 Plan"). As discussed below, the Chairman and Mr. Koffler have
agreed to relinquish the stock options that were granted to them under the 1997
Plan.
In September 1997, the Company acquired, for $3,250,000 , a limited
partnership interest in Dune Jet Services, L.P. (the "Partnership"), a Delaware
limited partnership formed for the purposes of acquiring and operating an
airplane for the partner's business uses and for third party charter flights.
The general partner of the Partnership is Dune Jet Services, Inc., a Delaware
corporation, the sole stockholder of which is the Company's Chairman. In October
1997, following discussions among management (members of which expressed
objections to such acquisition), the Special Committee, and other members of the
Board of Directors (including the Chairman), the Company's interest in the
partnership was repurchased by the partnership at cost plus interest.
In October 1997, members of the Company's management communicated to
the Board that certain Company stockholders had questioned them regarding the
manner in which related-party transactions are scrutinized by the Company and
its Board. Management stated that it shared the concerns of these stockholders
and had engaged counsel to conduct a review of such transactions.
In order to address and satisfy the concerns management had
communicated, the Company instituted a special investigation to review related-
party transactions and the adequacy of the disclosure of the same. The review
also was to seek to develop recommendations as to what changes, if any, should
be made to the Company's procedures regarding related-party transactions.
F-34
<PAGE>
The Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April 6,
1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report. Accordingly, the Committee recommended and the
Affiliate agreed to reimburse the Company approximately $1,424,000 in fees for
transactions completed after June 1, 1997, to reimburse $112,500 of the retainer
paid to the Affiliate for 1997, to waive payment of an additional $112,500 of
fees accrued by the Company for the third and fourth quarters of 1997, and to
pay a substantial amount of the expenses associated with the Committee's
investigations. In addition, the committee recommended and the Affiliate agreed
to allow the Company to terminate its relationship with the Affiliate.
The Committee responded to the directors that it had determined that:
(i) there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings. (iii) the Affiliate
performed acquisition advisory services fully consistent with the expectations
and understanding of the committee of outside directors that had approved the
Affiliate's acquisition fees; and (iv) the acquisition advisory fees paid to the
Affiliate in connection with the Company's acquisitions in 1997 were within the
range of customary acquisition advisory fees paid to investment bankers on
transactions of similar size.
The Chairman and Mr. Koffler also agreed voluntarily to relinquish
765,000 stock options that were granted to them in May 1997 and permit the
Board's Compensation Committee, with the assistance of compensation experts, to
determine the appropriate director compensation for 1997.
In addition, for the year ended December 31, 1996, the Company paid
transaction related advisory fees and expenses to the Affiliate of $363,000 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.
See Note 11 of notes to Consolidated Financial Statements for discussion of
litigation matters regarding related party transactions.
13. SEGMENT INFORMATION
The Company operates in two industry segments--diagnostic imaging
services and temporary staffing services. The operations of the diagnostic
imaging segment involves operating and managing diagnostic imaging centers. The
Company's diagnostic imaging segment also develops and sells radiology industry
information systems through its subsidiary, Dalcon Technologies, Inc. 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 shows net revenues, operating income (loss) and
other financial information by industry segment for the years ended December 31
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Net revenues:
Diagnostic imaging centers.... $ 144,412 $ 64,762 $35,860
Temporary staffing services... 57,974 29,023 16,133
--------- -------- -------
Total....................... $ 202,386 $ 93,785 $51,993
========= ======== =======
Operating income (loss):
Diagnostic imaging centers.... ($21,297) $ 13,700 $ 7,194
Temporary staffing services... 2,161 993 313
--------- -------- -------
Total....................... ($19,136) $ 14,693 $ 7,507
========= ======== =======
Identifiable assets:
Diagnostic imaging centers.... $ 314,477 $154,415 $36,550
Temporary staffing services... 24,479 10,099 7,586
--------- -------- -------
Total....................... $ 338,956 $164,514 $44,136
========= ======== =======
</TABLE>
F-35
<PAGE>
<TABLE>
<S> <C> <C> <C>
Depreciation and amortization:
Diagnostic imaging centers.... $ 18,733 $ 6,964 $ 4,274
Temporary staffing services... 601 502 293
--------- -------- -------
Total....................... $ 19,334 $ 7,466 $ 4,567
========= ======== =======
Capital expenditures:
Diagnostic imaging centers.... $ 5,245 $ 910 $ 771
Temporary staffing services... 184 160 106
--------- -------- -------
Total....................... $ 5,429 $ 1,070 $ 877
========= ======== =======
</TABLE>
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, 1997
-----------------------------------
(in thousands) Carrying Amount Fair Value
-------------------- -------------
Assets:
<S> <C> <C>
Cash and cash equivalents $ 23,198 $ 23,198
Restricted cash 1,073 1,073
Patient receivables and due from physician associations, net 65,887 65,887
Liabilities:
Notes payable, line of credit and mortgages 119,802 111,085
Capital lease obligations 36,227 35,281
Convertible debentures - -
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------
Carrying Amount Fair Value
-------------------- -------------
<S> <C> <C>
Assets:
Cash and cash equivalents $15,346 $15,346
Short-term investments 6,163 6,163
Restricted cash 1,045 1,045
Patient receivables and due from physician associations, net 39,878 39,878
Liabilities:
Notes Payable, line of credit and mortgages 19,367 19,093
Capital lease obligations 14,365 14,681
Convertible debentures 6,988 6,972
</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 and mortgage 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.
F-36
<PAGE>
15. ACQUISITIONS
1997 Acquisitions
- -----------------
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 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 $311,000 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 (the "Melbourne" center) for approximately
$1,125,000 in cash. The excess of the purchase price and direct acquisition
costs over the fair value of net liabilities assumed amounted to approximately
$1,311,000 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 (the "California" centers); a multi-modality
imaging center in San Clemente, California and an imaging facility in Oceanside,
California for approximately $1,030,000 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. Of the
contingent consideration payable, up to $2,600,000 of such consideration may be
payable in shares of the Company's Common Stock within 90 days of the end of the
measurement period. The measurement period ended February 28, 1998, and the
Company and the seller are currently in negotiations regarding the contingent
consideration due and payable. The excess of the purchase price and direct
acquisition costs over the fair value of net liabilities assumed amounted to
approximately $4,604,000 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 (the "Jacksonville" center) for 215,000 shares
of the Company's Common Stock valued at $2,333,000 and contingent consideration
based on the center achieving certain financial objectives during the one year
period subsequent to the closing of the transaction. The shares of the
Company's Common Stock issued in connection with the acquisition are subject to
registration rights. 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 (for
accounting purposes only) at $150,000 issued to the Affiliate for financial
advisory services, over the fair value of net assets acquired amounted to
approximately $2,245,000 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 $6,986,000 in cash, plus $825,000 of deferred
consideration which was paid in March 1998. 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. This option has not been exercised. The excess of the purchase
price and direct acquisition costs, including 137,000 warrants, with an exercise
price of $10.60, valued (for accounting purposes only) at $662,000 issued to the
Affiliate for financial advisory services, over the fair value of net
liabilities assumed amounted to approximately $14,299,000 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 (the "Palm Beach" center) for approximately
$3,459,000 in cash and 56,670 shares of the Company's Common Stock valued at
approximately $600,000. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection equal to the difference between the issuance price ($10.59 per share)
and the market price at effectiveness of the registration statement. The Company
may satisfy any deficiency in such price by the issuance of additional shares of
Common Stock. As of May 26, 1998, the shares of Common Stock issued in
connection with the acquisition had not been registered by the Company. The
excess of the purchase price and direct acquisition costs, including 57,000
warrants, with an exercise price of $10.64, valued (for accounting purposes
only) at $276,000 issued to the Affiliate for financial advisory services, over
the fair value of net assets acquired amounted to approximately $2,178,000 and
is being amortized on a straight-line basis over 20 years.
F-37
<PAGE>
On March 14, 1997, the Company acquired a diagnostic imaging center in
Rancho Cucamonga, California (the "Rancho Cucamonga" center) for approximately
$3,948,000 in cash and 44,016 shares of the Company's Common Stock valued at
$500,000. The shares of the Company's Common Stock are subject to registration
rights. The excess of the purchase price and direct acquisition costs, including
55,000 warrants with an exercise price of $11.25 valued (for accounting purposes
only) at $282,000 issued to the Affiliate for financial advisory services, over
the fair value of net assets acquired amounted to approximately $4,073,000 and
is being amortized on a straight-line basis over 20 years.
Effective May 1, 1997, the Company acquired Capstone Management Group, Inc.
("Capstone") for approximately $6,934,000 in cash and 397,204 shares of the
Company's Common Stock valued at $6,696,000 and contingent consideration based
on the centers achieving certain financial objectives during the one year period
beginning June 1997. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection equal to the issuance price, as adjusted ($17.925 per share). The
Company must satisfy any deficiency in cash. In November 1997, the Company and
the sellers agreed that the sellers would have the right to require the Company
to repurchase up to 317,763 shares of Common Stock (obligations related to
repurchase of 79,441 shares have expired) at various intervals in the event the
Company failed to register the shares of Common Stock prior to such intervals.
As of May 26, 1998, the Company had purchased 111,576 shares of Common Stock
from the sellers for aggregate consideration of $2,000,000 and will be required
on June 3, 1998 to repurchase the remaining 206,187 shares of Common Stock for
aggregate consideration of approximately $3,696,000. Contingent consideration
based upon future cash flow is payable within 90 days of the end of the
measurement period. Capstone owned and operated ten diagnostic imaging centers,
nine of which are located in the northeast and one located in Ohio. The excess
of the purchase price and direct acquisition costs, including 160,000 warrants,
with an exercise price of $12.59, valued (for accounting purposes only) at
$1,158,000 issued to the Affiliate for financial advisory services, over the
fair value of net liabilities assumed amounted to approximately $15,292,000 and
is being amortized on a straight-line basis over 20 years.
On May 7, 1997, the Company acquired ATI Centers, Inc. ("ATI") for
approximately $13,558,000 in cash consideration 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 $1,500,000 is payable within 90 days of the end of the measurement
period. ATI owned and operated eleven diagnostic imaging centers in New Jersey
and Pennsylvania. The excess of the purchase price and direct acquisition costs,
including 168,000 warrants, with an exercise price of $11.06, valued (for
accounting purposes only) at $847,000 issued to the Affiliate for financial
advisory services, over the fair value of net assets acquired amounted to
approximately $13,445,000 and is being amortized on a straight-line basis over
20 years.
On May 7, 1997, the Company acquired two diagnostic imaging centers located
in Maryland (the "Maryland" centers) for approximately $2,830,000 in cash and
119,166 shares of the Company's Common Stock valued at $1,500,000. The shares of
the Company's Common Stock issued in connection with the acquisition are subject
to registration rights and price protection equal to the difference between the
issuance price ($12.59 per share) and the market price at effectiveness of the
registration statement. The Company may satisfy any price deficiency by the
issuance of additional unregistered shares of Common Stock or by the payment of
cash. As of May 26, 1998, the shares of Common Stock issued in connection with
the acquisition had not been registered by the Company. The excess of the
purchase price and direct acquisition costs, including 66,000 warrants, with an
exercise price of $12.59, valued (for accounting purposes only) at $478,000
issued to the Affiliate for financial advisory services, over the fair value of
net assets acquired amounted to approximately $4,404,000 and is being amortized
on a straight-line basis over 20 years.
On June 24, 1997, the Company, acquired the assets of Wesley Medical
Resources, Inc. ("Wesley") a medical staffing company in San Francisco,
California for 137,222 shares of the Company's Common Stock valued at $2,000,000
and contingent consideration based on the company achieving certain financial
objectives during the three year period subsequent to the transaction. In the
event that substantially all of the capital stock or assets of Wesley are sold
by the Company prior to the completion of
F-38
<PAGE>
the measurement period, the measurement period shall be deemed to be completed
as of the date of such sale. The shares issued in connection with the
acquisition are subject to registration rights. Contingent consideration based
upon future cash flow is payable 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 $2,448,000 and is
being amortized on a straight-line basis over 20 years.
On June 24, 1997 the Company announced it had invested $1,000,000 in a
joint venture for a multi-modality imaging center located in Manhattan, New
York. The Company will own approximately 51% of the center which is expected to
open in June 1998.
On June 30, 1997, the Company acquired three diagnostic imaging centers in
New York (the "New York" centers) for approximately $4,338,000 in cash and
152,356 shares of the Company's Common Stock valued at $2,546,000. The shares
of the Company's Common Stock issued in connection with the acquisition are
subject to registration rights. In the event that the registration statement
was not declared effective by December 30, 1997, the sellers may sell the shares
back to the Company for $2,546,000. In March 1998, the Company issued an
interest bearing convertible promissory note in the amount of $2,546,000 payable
in ten monthly installments in exchange for the shares of Common Stock issued in
connection with the acquisition. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
approximately $6,709,000 and is being amortized on a straight-line basis over 20
years.
On July 31, 1997, the Company acquired a diagnostic imaging center in
Hollywood, Florida (the "Hollywood" center) for approximately $1,532,000 in cash
and 37,539 shares of the Company's stock valued at $674,000 plus the assumption
of indebtedness and additional consideration based on the center's performance
over a three year period subsequent to the closing of the transaction. The
shares of the Company's Common Stock issued in connection with the acquisition
are subject to registration rights and price protection equal to the difference
between the issuance price ($18.00 per share) and the market price at
effectiveness of the registration statement. The Company may satisfy any price
deficiency by the issuance of additional shares of Common Stock or by the
payment of cash. In the event that the registration statement is not declared
effective by February 1, 1998, the seller may sell the shares back to the
Company for $674,000. As of May 26, 1998, the shares of Common Stock issued in
connection with the acquisition had not been registered by the Company. The
excess of the purchase price and direct acquisition costs over the fair value of
net assets acquired amounted to approximately $1,071,000 and is being amortized
on a straight-line basis over 20 years.
On August 1, 1997, the Company acquired Coral Way MRI, Inc. ("Coral Way
MRI") a diagnostic imaging center in Miami, Florida for $684,000 in cash and
92,243 shares of the Company's stock valued at $1,650,000 plus the assumption
of indebtedness and additional consideration based on the center's performance
over a two year period subsequent to the closing of the transaction. The shares
of the Company's Common Stock issued in connection with any additional
consideration are subject to registration rights. The excess of the purchase
price and direct acquisition costs over the fair value of net assets acquired
amounted to approximately $2,062,000 and is being amortized on a straight-line
basis over 20 years.
On August 13, 1997, the Company acquired MRI of Jupiter, Inc. a
diagnostic imaging center in Jupiter, Florida for approximately $2,000,000 in
cash and 7,337 shares of the Company's stock valued at $125,000 plus additional
consideration based on the center's performance over the one year period
subsequent to the closing of the transaction. The shares of the Company's Common
Stock issued in connection with the acquisition are subject to registration
rights and price protection equal to the difference between the issuance price
($17.00 per share) and the market price at effectiveness of the registration
statement. The Company may satisfy any price deficiency by the issuance of
additional registered shares of Common Stock or by the payment of cash. As of
May 26, 1998, the shares of Common Stock issued in connection with the
acquisition had not been registered by the Company. The excess of the
purchase price and direct acquisition costs over
F-39
<PAGE>
the fair value of net assets acquired amounted to approximately $1,541,000 and
is being amortized on a straight-line basis over 20 years.
On August 21, 1997, the Company acquired four diagnostic imaging centers
(the "Presgar" centers) on the west coast of Florida for approximately
$5,575,000 in cash and up to $3,700,000 in promissory notes, due August 21, 1998
and convertible into the Company's Common Stock, of which $1,200,000 in
principal amount is contingent upon the occurrence of certain events, plus the
assumption of indebtedness. The excess of the purchase price and direct
acquisition costs over the fair value of net liabilities assumed amounted to
approximately $8,514,000 and is being amortized on a straight-line basis over 20
years.
On August 29, 1997, the Company acquired a controlling interest in a
limited partnership and a limited liability company which each operate an
imaging center located in San Jose, California (the "San Jose" centers) for
approximately $3,037,000 in cash and 43,415 shares of the Company's stock valued
at $693,000 plus the assumption of indebtedness and additional consideration
based on each center's performance over the one year period subsequent to the
closing of the transaction. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection equal to the difference between the issuance price ($15.96 per share)
and the market price at effectiveness of the registration statement. The Company
may satisfy any price deficiency by the issuance of additional shares of Common
Stock or by the payment of cash. As of May 26, 1998, the shares of Common Stock
issued in connection with the acquisition had not been registered by the
Company. As a result of the failure to have the registration statement declared
effective by February 28, 1998, the seller is entitled to sell the shares back
to the Company at their issuance price. The excess of the purchase price and
direct acquisition costs over the fair value of net liabilities assumed amounted
to approximately $4,198,000 and is being amortized on a straight-line basis over
20 years.
On September 4, 1997, the Company acquired Germantown MRI Center
("Germantown MRI") a diagnostic imaging center located in Germantown,
Pennsylvania for approximately $805,000 in cash plus the assumption of
indebtedness . The excess of the purchase price and direct acquisition costs
over the fair value of net assets acquired amounted to approximately $279,000
and is being amortized on a straight-line basis over 20 years.
On September 5, 1997, the Company acquired MRI Imaging Center of Charlotte
County a diagnostic imaging center in Port Charlotte, Florida (the "Port
Charlotte" center) for $1,293,000 in cash and 75,281 shares of the Company's
stock valued at $1,340,000 plus the assumption of indebtedness and contingent
consideration based on the center's performance over the two year period
subsequent to the closing of the transaction. The shares of the Company Common
Stock issued in connection with any contingent consideration are subject to
registration rights. The excess of the purchase price and direct acquisition
costs over the fair value of net assets acquired amounted to approximately
$1,608,000 and is being amortized on a straight-line basis over 20 years.
On September 16, 1997, the Company acquired one diagnostic imaging center
located in Bronx, New York and one diagnostic imaging center located in Queens,
New York (the "Bronx and Queens" centers) for approximately $1,750,000 in cash
and 102,715 shares of the Company's stock valued at $1,750,000 plus the
assumption of indebtedness. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection equal to the difference between the issuance price ($17.00 per share)
and the market price at effectiveness of the registration statement. The Company
may satisfy any price deficiency by the issuance of additional unregistered
shares of Common Stock or by the payment of cash. As of May 26, 1998, the shares
of Common Stock issued in connection with the acquisition had not been
registered by the Company. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
approximately $2,444,000 and is being amortized on a straight-line basis over 20
years.
F-40
<PAGE>
On September 24, 1997, the Company acquired Dalcon Technologies, Inc.
("Dalcon") located in Nashville, Tennessee a software developer and provider of
radiology information systems for $645,000 in cash and 107,166 shares of the
Company's stock valued at $1,934,000. The shares of the Company's Common Stock
issued at the closing are subject to registration rights. The excess of the
purchase price and direct acquisition costs over the fair value of net
liabilities assumed amounted to approximately $2,615,000 and is being amortized
on a straight-line basis over 5 years.
On October 4, 1997, the Company acquired six diagnostic imaging centers
located in Ohio (the "Ohio" centers) for approximately $8,018,000 in cash and a
$1,750,000 promissory note, due October 3, 1998 and convertible at the Company's
option into shares of Common Stock. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
$7,791,000 and is being amortized on a straight-line basis over 20 years.
Each of the above acquisitions consummated in 1997 (the "1997
Acquisitions") was accounted for under the purchase method of accounting. The
operations of these acquisitions are included in the Consolidated Financial
Statements from the date of purchase. With respect to the 1997 Acquisitions,
the fair value of the assets acquired and liabilities assumed, in the aggregate,
was approximately $64,759,000 and $64,908,000, respectively. Contingent
consideration associated with acquisitions is recorded as additional purchase
price.
As recommended by the Special Committee, the Affiliate has repaid to the
Company $1,424,000 representing all of the financial advisory fees paid by the
Company to the Affiliate with respect to the acquisition of Wesley, Manhattan,
New York, MRI of Jupiter, Presgar, San Jose, Germantown, Port Charlotte and
Bronx and Queens centers. See Note 12 of Notes to Consolidated Financial
Statements.
1996 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 New York City. 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 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.
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. ("StarMed") and NurseCare. Pursuant to the NurseCare agreement, StarMed
acquired from NurseCare all of the common stock of NurseCare for $2,514,000
payable $1,264,000 in 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
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 owns and operates 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 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.
F-41
<PAGE>
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 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 healthcare 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 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, the Company
acquired certain of the assets for approximately $3,100,000 in cash. 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.
On August 30, 1996, the Company consummated the NMR Acquisition. NMR was
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 excess of the purchase price
and direct acquisition costs (including $200,000 in fees and 120,000 warrants,
with an exercise price of $9.00, valued (for accounting purposes only) at
$325,000 for financial advisory services issued to the Affiliate) over the fair
value of net assets acquired amounted to approximately $35,286,000 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 (the "Long
Island" centers). Pursuant to the acquisition agreement, the Company acquired
certain assets and liabilities for a $4,500,000 convertible promissory note due
January 9, 1997 and $1,900,000 in cash. The convertible promissory note
converted into 533,175 shares of the Company's Common Stock upon registration
of the shares in accordance with its terms at a conversion price of $8.44. 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 (the "Ironbound" center) from TME, Inc. for
$216,000 in cash and 18,868 shares of Company 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 approximately $440,000 and is being
amortized on a straight line basis over 20 years.
Each of the above acquisitions consummated in 1996 (the "1996
Acquisitions") were accounted for under the purchase method of accounting. The
operations of these acquisitions are included in the Consolidated
F-42
<PAGE>
Financial Statements from the date of purchase. Contingent consideration
associated with acquisitions is recorded as additional purchase price.
F-43
<PAGE>
1995 Acquisitions
- -----------------
On February 24, 1995, the Company consummated a merger (the "Merger") with
Maternity Resources, Inc. ("Maternity Resources"), a Delaware corporation
engaged in the wholesale, manufacture and retail sale of maternity apparel. The
merger was consummated pursuant to a Stock Purchase Agreement (the "Agreement")
dated as of February 24, 1995 by and among the Company, Maternity Resources and
the other parties named therein (the "Sellers"). Maternity Resources was formed
on December 27, 1994 for the sole purpose of acquiring Maternity Retail
Partners, L.P. and Kik Kin, L.P. Pursuant to the Agreement, the Company acquired
(i) 100% of the issued and outstanding common stock of Maternity Resources from
the Sellers in exchange for an aggregate of 480,000 shares of the Company's
Common Stock, par value $0.01 and (ii) 100% of the issued and outstanding shares
of Series B and Series C Preferred Stock of Maternity Resources from the holders
thereof in exchange for shares of the Company's Series A Preferred Stock and
Series B Preferred Stock. At the time of the Merger, the Company and Maternity
Resources were under common control through stock ownership and, as a result,
the Merger was accounted for as a transfer between entities under common
control. Under this method of accounting, when entities are under common
control, the assets, liabilities and operations are combined at historical cost
in a manner similar to that in pooling of interests accounting. In November
1995, the Company sold its Maternity Resources subsidiaries and consequently
transferred all of Maternity Resources liabilities to unaffiliated third
parties. The Company has no material contingent liabilities remaining with
respect to Maternity Resources. Since the Maternity operations have been sold,
Maternity Resources has been reported as a discontinued operation.
Maternity apparel revenues were recognized on an accrual basis as earned
and realizable and consisted of net revenue derived from the wholesale and
retail sale of maternity clothing and apparel. Maternity apparel revenues
amounted to approximately $11,057,000 for the year ended December 31, 1995. The
initial purchase price of $4,076,000 (the aggregate recorded fair value of the
Common Stock and the Preferred Stock issued by the Company in connection with
the Merger) exceeded the book value of net assets acquired of $1,120,000 by
$2,955,000. This amount could be considered a distribution to shareholders. On
December 27, 1995, preferred shares, which were included as part of the
$4,076,000 having a potential redemption value of $2,392,000 were redeemed by
the Company for an agreed upon aggregate amount of $24,000. The net amount paid
in excess of the net assets acquired after the redemption amounted to $564,000,
The acquisition of Maternity was accounted for in a manner similar to that in a
pooling of interests. This accounting resulted in certain adjustments directly
to stockholders' equity. A credit of $1,022,000 was made to paid-in-capital
related to the forgiveness of certain debt owed by Maternity to affiliated
organizations that is accounted for as a capital contribution due to the related
party nature. A credit of $570,000 was made to retained deficit that represents
a portion of Maternity's January 1995 losses attributable to a subsidiary. These
losses were included in the Company's 1994 operations in recognition of the then
full year's operating results for the specific subsidiary's year ended January
31, 1995. Accordingly, the amount duplicated in 1995 operating results is
reversed. A charge of $269,000 to paid-in-capital relates to a cash redemption
by Maternity of its then outstanding redeemable preferred stock prior to the
merger. Maternity Retail Partners L.P. has also been included in the Company's
consolidated operating results for the twelve months ended December 31, 1995.
On May 26, 1995, the Company consummated the acquisition of the business
operations of New England MRI, Inc. ("New England MRI"), a Florida corporation
based in Fort Myers, Florida, which owned and managed two diagnostic imaging
centers (the "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. ("CFMR"), and "New England MRI".
Pursuant to the Agreement, FMR acquired substantially all of the assets of one
of the centers and CFMR 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
$3,449,000. 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 (600,000
of such shares were issued in 1997). The centers achieved certain earnings
objectives and as a result, an additional 200,000 shares were issued in
September 1997, to New England MRI, in accordance with the additional
consideration provisions in the purchase agreement. The
F-44
<PAGE>
market value of the shares upon issuance was recorded as additional goodwill
subject to amortization over the stated period. The excess of the purchase price
over the fair value of net assets acquired amounted to approximately $5,746,000
and is being amortized on a straight line basis over 20 years. The accompanying
Consolidated Financial Statements include the operations of FMR and CFMR from
the above date of acquisition. The shares issued to New England MRI 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"), 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 the Company's
wholly owned subsidiary, Hackensack Resources, Inc. ("HRI") and PCC. Pursuant to
the agreement, 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.
The following table summarizes the unaudited pro forma results of
operations for the years ended December 31, 1997 and 1996, assuming all of the
foregoing 1997 acquisitions had occurred on January 1, 1997 and 1996 and the
foregoing 1996 acquisitions had occurred on January 1, 1996 (in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 1996
(unaudited) (unaudited)
------------- -----------
<S> <C> <C>
Revenue, net.......................................... $243,359 $225,135
Operating income (loss)............................... (15,162)(a) 27,201
Income (loss) before income taxes..................... (28,326) 11,169
Net income (loss)..................................... (30,626) 6,651
Basic net income (loss) per share..................... ($1.51) $ 0.33
</TABLE>
(a) 1997 pro forma results include a $12,962,000 loss on the impairment of
goodwill and other long-lived assets and other unusual charges of
$9,723,000. See Note 3 of the Notes to the Consolidated Financial
Statements for further details.
16. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly consolidated financial
results for the years ended December 31, 1997 and 1996 (in thousands except per
share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- ---------
<S> <C> <C> <C> <C>
1997
Revenue, net....................... $39,987 $50,678 $57,559 $ 54,162
Operating income (loss)............ 7,322 6,335 10,154 (42,947)
Net income (loss).................. 3,602 2,783 4,287 (41,911)
Basic earnings (loss) per share.... 0.19 0.14 0.20 (2.02)
Diluted earnings (loss) per share 0.18 0.13 0.19 (2.02)
</TABLE>
F-45
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
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
Basic earnings per share.... 0.16 0.18 0.17 0.15
Diluted earnings per share 0.15 0.16 0.16 0.14
</TABLE>
In the table above, the second quarter of 1997 has been restated to
include a non-cash charge of $2,305,000 for compensation expense resulting from
stock options granted in 1996 and early 1997 that were approved by the Company's
stockholders in May 1997.
The fourth quarter of 1997 includes a $12,962,000 loss on the
impairment of goodwill and other long-lived assets and other unusual charges of
$9,723,000. See Note 3 of the Notes to the Consolidated Financial Statements for
further details.
Quarterly results are generally affected by the timing of acquisitions.
F-46
<PAGE>
Medical Resources, Inc.
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning of Charged to at End
Description Period Expense Deductions (1) of Period
- ----------------------------- ------------ ---------- -------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Total Allowances for Doubtful
Accounts $ 2,881 $ 3,378 $ 427 $ 5,832
Year ended December 31, 1996
Total Allowances for Doubtful
Accounts 5,832 4,783 247 10,368
Year ended December 31, 1997
Total Allowances for Doubtful
Accounts 10,368 20,656 12,102 18,922
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT 10.5
PROMISSORY NOTE
---------------
("NOTE")
$15,000,000.00 Doylestown, PA
December 29, 1997
FOR VALUE RECEIVED, MEDICAL RESOURCES, INC., a Delaware corporation
("Market/Debtor"); promises to pay to the order of DVI FINANCIAL SERVICES INC.,
-------------
a Delaware corporation ("Payee/Lender") at 500 Hyde Park, Doylestown,
------------
Pennsylvania, the principal sum of FIFTEEN MILLION DOLLARS ($15,000,000.00)
together with interest thereon at the rate of ten and one-quarter percent
(10.25%) per annum, payable as hereinafter provided. The principal and interest
of the first advance of $8,000,000.00 shall be paid in sixty (60) equal
installments of One Hundred Seventy Thousand Nine Hundred Sixty-Two and 11/100
Dollars ($170,962.11) each, commencing thirty days after the funding of such
first advance and on the same date of each month thereafter. The principal and
interest of the second advance of $7,000,000.00 shall be paid in sixty (60)
equal installments of One Hundred Forty-Nine Thousand Five Hundred Ninety-One
and 85/100 Dollars ($149,591.85) each, commencing thirty days after the funding
of such second advance and on the same date of each month thereafter. All
remaining principal and interest not previously paid shall be due on or before
December 29, 2002 (the "Maturity Date").
-------------
Such installments shall be applied first to accrued and unpaid interest and
the balance to unpaid principal. All past due principal and interest shall bear
interest until paid at a rate which is two percent (2%) per annum in excess of
the prematurity rate specified in the immediately preceding sentence (but in no
event to exceed the maximum rate of nonusurious interest allowed by law as of
the date hereof). All interest under this Note shall be calculated on the basis
of a 360 day year over the actual number of days the principal amount hereof is
outstanding.
This Fifteen Million Dollar ($15,000,000.00) facility is available for
draw-down in two incremental fundings. The first will represent an Eight Million
Dollar ($8,000,000.00) advance due and payable to the Maker/Debtor at the time
of executing this Note. At the time of the initial funding a one percent (1.00%)
fee ($150,000) will be deducted from the Eight Million Dollar ($8,000,000)
proceeds. The second will represent a Seven Million Dollar ($7,000,000.00)
advance payable upon the receipt and satisfactory review by Payee/Lender of the
Maker/Debtor's internally prepared, quarter ended December 31, 1997, financial
statements and the approval by Payee/Lender of the use of the proceeds, which
can not be drawn upon prior to January 31, 1998 or after March 31, 1998.
Maker/Debtor agrees that as additional consideration for the loan to it
under this Note, Maker/Debtor shall deliver to Payee upon execution of this
Note, warrants in form and substance satisfactory to the Payee/Lender for the
purchase of 100,000 shares of the Maker/Debtor's common stock.
Maker/Debtor expressly agrees that it will use the proceeds of the first
advance hereunder ($8,000,000) for general corporate purposes, it being
understood that Maker/Debtor will ensure that it has available to it funds
sufficient to consummate the acquisition of the four imaging centers owned by
Dr. Yonas Zegeye (the "Centers"), and it is further agreed that the acquisition
will occur as soon as practicable after the satisfaction of all closing
conditions thereto.
<PAGE>
Further, this facility is intended to be a short term facility with a
duration of up to one to two (1-2) years. Payee/Lender has the right to call the
facility at any time on or after December 29, 1999 by demanding payment in
full of all amounts outstanding under this Note. So long as any principal
remains outstanding under this Note, then the Maker/Debtor will pay to
Payee/Lender the following fees on each anniversary of the initial draw down on
the facility:
1) One percent (1.00%) of the then outstanding principal balance if
the facility continues into year two.
2) Two percent (2.00%) of the then outstanding principal balance if
the facility continues into year three.
3) Two percent (2.00%) of the then outstanding principal balance if
the facility continues into year four.
4) Two percent (2.00%) of the then outstanding principal balance if
the facility continues into year five.
Maker/Debtor shall have the right to prepay this Note in whole or in part
at any time without penalty or premium. If the principal of this Note is
prepaid in whole or in part, at any time after the date hereof, all accrued and
unpaid interest with respect to such principal amount prepaid is due and payable
on the date of such prepayment.
All amounts prepaid hereunder shall be applied first to all interest then
accrued and unpaid hereunder, and the balance, if any, to principal. All sums
called for, payable or to be paid hereunder, shall be paid in lawful money of
the United States of America.
Maker/Debtor, and all sureties, endorsers and guarantors of this Note
hereby waive (except as hereinafter provided) presentment and demand, for
payment notice of intent to accelerate maturity, notice of acceleration of
maturity, protest or notice of protest and nonpayment, bringing of suit and
diligence in taking any action to collect any sums owing hereunder.
If (i) Maker/Debtor defaults in the payment of any principal or interest
due under this Note for more than five (5) days after any such payment becomes
due and payable; (ii) Maker/Debtor defaults in the payment or performance of any
other obligation of Maker/Debtor hereunder for more than fifteen (15) days after
Payee/Lender has given notice of such default to Maker/Debtor; (iii)
Maker/Debtor becomes insolvent or admits in writing its inability to pay its
debts as they mature or applies for, consents to or acquiesces in the
appointment of a trustee or receiver for it or any of its property, or any
bankruptcy, reorganization, debt arrangement or other proceeding under any
bankruptcy or insolvency law, or a dissolution or liquidation proceeding, shall
be instituted by or against Maker/Debtor, and if instituted against it shall be
consented to or acquiesced in by it or shall not be dismissed within a period of
sixty (60) days; or (iv) Maker/Debtor defaults in the performance of any other
obligation for the payment of money to Payee/Lender; then any indebtedness
evidenced by this Note shall become immediately due and payable and Payee/Lender
may exercise all rights and remedies available to it under this Note and any
other applicable law.
It is expressly stipulated and agreed to be the intent of Maker/Debtor and
Payee/Lender to at all times comply with the usury and other laws applicable to
this Note. If such laws are ever revised, repealed, or judicially interpreted so
as to render usurious any amount called for under this Note or
2
<PAGE>
contracted for, charged, or received with respect to the indebtedness evidenced
by this Note, or if Payee/Lender's exercise of the option herein contained to
accelerate the maturity of this Note or if any prepayment by Maker/Debtor
results in Maker/Debtor having paid any interest in excess of that permitted by
law, then it is Maker/Debtor's and Payee/Lender's express intent that all excess
amounts theretofore collected by Payee/Lender be credited on the principal
balance of this Note (or, if the Note has been paid in full, refunded to
Maker/Debtor), and the provisions of this Note immediately be deemed reformed
and the amounts thereafter collectable hereunder reduced, without the necessity
of the execution of any new document, so as to comply with the then applicable
law, but so as to permit the recovery of the fullest amount otherwise called for
hereunder.
As used herein, the terms "Maker Debtor" and "Payee/Lender" shall be deemed
to include their respective successors and assigns, whether by voluntary action
by the parties or by operation of law.
If any suit or action is instituted on this Note, Maker/Debtor promises to
pay, in addition to the costs and disbursements allowed by law, all of Payee/
Debtor's reasonable attorneys' fees in such suit or action.
This Note is intended to be performed in accordance with and only to the
extent permitted by all applicable law. If any portion of this Note or the
application therof to any person or circumstance shall, for any reason and to
any extent, be invalid or unenforceable, neither the remainder of this
instrument nor the application of such provisions to other persons or
circumstances shall be affected thereby, but rather shall be enforced to the
greatest extent permitted by law.
THIS NOTE SHALL BE COVERNED BY AND CONSTRUED UNDER THE LAWS OF THE
COMMONWEALTH OF PENNSYLVANIA. MAKER/DEBTOR HEREBY SUBMITS TO THE NONEXCLUSIVE
PERSONAL JURISDICTION OF THE COURTS (FEDERAL OR STATE) IN THE COMMONWEALTH OF
PENNSYLVANIA FOR THE ENFORCEMENT OF MAKER/DEBTOR'S OBLIGATIONS HEREUNDER.
EXECUTED as of the date and year first above written.
MEDICAL RESOURCES, INC.
By /s/ Lawrence J. Ramaekers
----------------------------
Title: Acting CEO
------------------------
3
<PAGE>
DVI Warrant
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AS AMENDED. NO SALE OR DISPOSITION OF THIS WARRANT MAY BE
MADE WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO
OR AN EXEMPTION THEREUNDER SUCH THAT REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933.
MEDICAL RESOURCES, INC
COMMON STOCK PURCHASE WARRANT NO.1
--------------------------------
THIS WARRANT to purchase shares of common stock, $ .01 par value (the
"COMMON STOCK") of MEDICAL RESOURCES, INC. a Delaware corporation (the
"COMPANY"), evidences that, for valuable consideration, receipt of which is
hereby acknowledged DVI FINANCIAL SERVICES INC., a Delaware corporation
("PURCHASER"), or registered assigns, is entitled to subscribe for and purchase
from the Company, an aggregate of up to Fifty-Three Thousand Three Hundred and
Thirty-Four (53,334) shares (subject to adjustment as specified in Section 4
hereof) of the fully paid and nonassessable, Common Stock, (the "WARRANT
STOCK"), at the price per share equal to the average of the daily closing
prices for the ten (10) business days prior to the date of initial Advance of
Eight Million Dollars ($8,000,000) under the Note ("INITIAL ADVANCES") plus an
amount equal to ten percent (10%) of said daily average of said closing prices
(such price and such other price as results, from time to time from the
adjustments specified in Section 4 hereof, is referred to herein as the
("EXERCISE PRICE"), subject to the provisions and upon the terms and conditions
set forth herein. The closing price for each day shall be the average of the
reported closing bid and asked prices regular way, on the National Association
of Securities Dealers Inc. Automated Quotation Systems ("NASDAQ").
1. Conditions to Exercise. The purchase right represented by this
----------------------
Warrant is exercisable, in whole or in part, as to the Warrant Stock at any
time, on or after the Initial Advance under the Note. This Warrant expires and
may not be exercised after December 31, 2004 (the "TERM").
2. Method of Exercise: Payment, Issuance of New Warrant. The purchase
-----------------------------------------------------
right represented by this Warrant may be exercised at any time, and from time
to time, during the Term by the surrender of this Warrant (with the Notice of
Exercise form attached hereto duly executed) at the principal office of the
Company and by the payment to the Company by check in an amount equal to the
then applicable Exercise Price per share multiplied by the number of shares of
the Warrant Stock then being purchased. In the event of any exercise of the
rights represented by this Warrant, the Company shall deliver to Purchaser
certificates for the shares of the Warrant Stock so purchased within a
reasonable time, but not later than twenty (20) business days after exercise.
This Warrant will be deemed to have been exercised immediately prior to the
close of business on the date of its surrender for exercise as provided above
and the person entitled to receive the shares of the
1
<PAGE>
Warrant Stock issuable upon such exercise is treated for all purposes as the
holder of such shares of record as of the close of business on such date. Unless
this Warrant has been fully exercised or has expired, a new Warrant representing
the number of shares, if any, with respect to which this Warrant has not then
been exercised must also be issued to Purchaser within such reasonable time.
3. Stock Fully Paid; Reservation of Shares. All Warrant Stock which may
---------------------------------------
be issued upon the exercise of the rights represented by this Warrant will,
upon issuance, be fully paid and nonassessable, and free from all taxes, liens
and charges with respect to the issue thereof. During the Term, the Company will
at all times have authorized, and reserved for the purpose of the issue upon
exercise of the purchase rights evidenced by this Warrant, a sufficient number
of shares of its fully paid and nonassessable Common Stock to provide for the
exercise of the rights represented by this Warrant.
4. Adjustment of Purchase Price and Number of Shares. The number and kind
-------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Exercise
Price are subject to adjustment from time upon the happening of the events and
in the manner described in this Section 4.
4.1 Reclassification, Consolidation or Merger. If any capital
-----------------------------------------
reorganization or reclassification of the capital stock of the Company,
consolidation or merger of the Company with another corporation or any other
entity or the sale of all or substantially all of its assets to another entity
is effected, (a) the successor entity (if other than the Company) resulting from
such consolidation or merger or the entity purchasing such assets must assume
this Warrant by written instrument executed and mailed or delivered to
Purchaser, and (b) lawful and adequate provision (in form reasonably
satisfactory to Purchaser) must be made whereby the holder hereof thereafter has
the right to purchase and receive in lieu of the shares of the Common Stock of
the Company immediately theretofore purchasable and receivable upon the exercise
of the rights represented hereby, such shares of stock, securities, cash or
other assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of shares
of such Common Stock immediately therefore purchasable and receivable upon the
exercise of the rights represented hereby immediately prior to such
reorganization, reclassification, consolidation, merger or sale. In any such
case, appropriate provision must be made with respect to the rights and
interests of the holder of this Warrant to assure that the provisions hereof
(including without limitation provisions for adjustment of the Exercise Price
and of the number of shares purchasable and receivable upon the exercise of this
Warrant) are thereafter applicable, as nearly as may be, in relation to any
shares of stock, securities, cash or other assets thereafter deliverable upon
the exercise hereof.
4.2 Antidilution Adjustments. In case the Company, subsequent to
------------------------
December 31, 1997, (a) pays a dividend or make a distribution on its shares of
Common Stock in shares of Common Stock, (b) subdivides or reclassifies its
outstanding Common Stock into a greater number of shares, or (c) combines or
reclassifies its outstanding Common Stock into a smaller number of shares or
otherwise effects a reverse split, then the Exercise Price in effect at the time
of the record date for such dividend or distribution or of the effective date of
such subdivision, combination or
2
<PAGE>
reclassification must be proportionately adjusted so that the Holder of this
Warrant exercised after such date is entitled to receive the aggregate number
and kind of shares which, if this Warrant had been exercised immediately prior
to such time, the Holder would have owned upon such exercise and been entitled
to receive upon such dividend, subdivision, combination or reclassification.
Such adjustment is made successively whenever any event listed in this Section
4.2 occur.
4.3 Adjustment for Distribution of Property. In case the Company,
---------------------------------------
subsequent to the issuance hereof, distributes to all holders of Common Stock
assets (excluding cash dividends or distributions paid out of current earnings
and dividends or distributions referred to in Section 4.2 of this Warrant), then
the Exercise Price is adjusted thereafter by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, of which the numerator is the
total number of shares of Common Stock outstanding multiplied by the Current
Market Price (as determined pursuant to Section 9.3) per share of Common Stock,
less the fair market value of the assets distributed, and of which the
denominator is the total number of shares of Common Stock outstanding multiplied
by such Current Market Price. Such adjustment must be made successively whenever
such a record date is fixed. Such adjustment must be made whenever any such
distribution is made and becomes effective immediately after the record date for
the determination of stockholders entitled to receive such distribution.
4.4 Intentionally deleted.
---------------------
4.5 Other Adjustments. In the case any event occurs as to which the
-----------------
failure to make any adjustment would not fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles of this Warrant, then, in each such case, the Purchaser may appoint
an independent investment bank or firm of independent public accountants, which
will give its opinion as to the adjustment, if any, on a basis consistent with
the essential intent and principles established in this Warrant, necessary to
preserve the purchase rights represented by this Warrant. Upon receipt of such
opinion, the Company will promptly deliver a copy of such opinion to the
Purchaser and will make the adjustments described in such opinion. The fees and
expenses of such investment bank of independent public accountants will be borne
by the Company.
4.6 Adjustment in Number of Shares. Whenever the Exercise Price
------------------------------
payable upon exercise of each Warrant is adjusted pursuant to Sections 4.2 or
4.3, the number of shares of Common Stock purchasable upon exercise of each
Warrant must simultaneously be adjusted by multiplying the number of shares of
Common Stock issuable upon exercise of each Warrant in effect on the date
thereof by the Exercise Price in effect on the date thereof and dividing the
product so obtained by the Exercise Price, as adjusted.
4.7 De Minimum Adjustment. No adjustment in the Exercise Price is
---------------------
required unless such adjustment would require an increase or decrease of at
least one-half cent ($0.005) in the price. Any adjustments which by reason of
this Section 4.7 are not required to be made are carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 4 are
made to the nearest cent or to the nearest one-hundredth of a share, as the case
may be.
3
<PAGE>
4.8 Retention of Accountants. The Company may retain a firm of
------------------------
independent accountants of recognized standing selected by the Board of
Directors (who may be the regular accountants employed by the Company) to make
any computation required by this Section 4, and a certificate signed by such
firm is presumptive evidence of the correctness of such adjustment.
4.9 Applicability of Adjustments. In the event that at any time, as
----------------------------
a result of an adjustment made pursuant to Section 4.2 of this Warrant, the
holder of any Warrant thereafter becomes entitled to receive any shares of the
Company, other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Warrant is subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section 4.
4.10 No Change In Language of Warrant. Irrespective of any
--------------------------------
adjustments in the Exercise Price or the number or kind of shares purchasable
upon exercise of Warrants, Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in this and similar Warrants initially issued by the Company.
4.11 Notice of Specific Events. In case at any time:
-------------------------
(a) the Company declares any dividend payable in stock upon
its Common Stock or makes any special dividend or other distribution (other
than cash dividends paid at an established annual or quarterly rate) to the
holders of its Common Stock;
(b) the Company offers for subscription pro rata to the
holders of its Common stock any additional shares of stock of any class or
other rights;
(c) there is a capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another entity;
or
(d) there is a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, the Company shall give Purchase; (i) at least (60) days prior written
notice of the date on which the books of the Company close or a record is taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (ii) in the case of
any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least sixty (60) days prior written
notice of the date when the same will take place. Notice in accordance with the
foregoing clause (i) must also specify, in the case of any dividend,
distribution or subscription rights, the date on which the holders of Common
Stock are entitled to exchange their Common Stock for securities or other
property deliverable upon Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
4
<PAGE>
4.12 Notice of Adjustments. Whenever the Exercise Price is adjusted
---------------------
pursuant to Section 4 hereof, the Company shall as promptly as practicable
prepare a certificate signed by its chief financial officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the Exercise
Price after giving effect to such adjustment, and shall cause copies of such
certificate to be delivered to Purchaser.
4.13 Fractional Shares. No fractional shares of the Warrant Stock
-----------------
will be issued in connection with any issuance hereunder. If any fraction of a
share of Common Stock would, except for the provisions of this Section 4.13, be
issuable upon exercise of this Warrant, the Company shall in lien thereof pay to
the person entitled thereto an amount in cash equal to the Current Market Price
multiplied by such fraction.
5. Transfers. This Warrant or the Warrant Stock may be transferred in
---------
whole or in part by Purchaser in compliance with applicable law.
6. Registration under the Securities Act of 1933.
---------------------------------------------
6.1 Piggy-Back Registration Rights. If at any time during the period
------------------------------
commencing upon the issuance hereof and ending December 31, 2004, the Company
proposes to file a registration statement under the Security Act of 1933, as
amended (the "1933 ACT"), covering equity securities of the Company, whether for
the Company's own account or for the account of selling securities holders,
other than registration statement relating to an acquisition or merger or a
registration statement on Form S-8 or subsequent similar form, it shall advise
the holders of this Warrant or the Warrant Stock (each such person being
referred to herein as a "HOLDER") by written notice at least sixty (60) days (or
in the case of the pending S-3 of the Company five (5) days) prior to the filing
of such registration statement and will upon the request of any such holder
include in any such registration statement such information as may be required
to permit a public offering of the Warrant Stock. The Company shall keep such
registration statement current for a period of nine months from the effective
date of such registration statement or until such earlier date as all of the
registered Warrant Stock has been sold. In connection with such registration,
the holders shall execute and deliver such customary underwriting documents as
the managing underwriter requests as a condition to the inclusion of the Warrant
Stock in the registration statement.
6.2 Intentionally Deleted.
---------------------
6.3 Additional Provisions Concerning Registration. The following
---------------------------------------------
provisions of this Section 6.3 are also applicable to any registration statement
filed pursuant to Section 6.1.
(a) The Company shall bear the entire cost and expense of any
registration of securities initiated under Section 6. Notwithstanding the
foregoing, any holder whose Warrant Stock is included in any such
registration statement pursuant to this Section 6 shall, however, bear the
fees of its own counsel and accountants and any transfer taxes or
5
<PAGE>
underwriting discounts or commissions applicable to the Warrant Stock sold
by the holder pursuant thereto.
(b) The Company shall indemnify and hold harmless each such
holder and each underwriter, within the meaning of the 1933 Act, who may
purchase from or sell for any such holder any Warrant Stock from and
against any and all losses, claims, damages and liabilities (including fees
and expenses of counsel, which counsel may, if the holders request, be
separate from counsel for the Company) caused by any untrue statement or
alleged untrue statement of material fact contained in the registration
statement or any post-effective amendment thereto or any registration
statement under the 1933 Act or any prospectus included therein required to
be filed or furnished by reason of this Section 6 or any application or
other filing under any state securities law caused by any omission or
alleged omissions to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading to which
such holder or any such underwriter or any of them may become subject under
the 1933 Act, the Securities Exchange Act of 1934 or other Federal or state
statutory law or regulation, at common law or otherwise, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or alleged untrue statement or omission or alleged omission based
upon information furnished to the Company by the indemnified holder or
underwriter expressly for use therein, which indemnification includes each
person, if any, who controls any such underwriter within the meaning of
each such Act. Any such holder or underwriter must at the same time
indemnify the Company, its directors, each officer signing the related
registration statement, each person, if any, who controls the Company
within the meaning of each such Act and each other holder or underwriter,
from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or any prospectus required to be
filed or furnished by reason of this Section 6 or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, insofar
as such losses, claims, damages or liabilities are caused by any untrue
statement or alleged untrue statement or omission based upon information
furnished to the Company by such holder or underwriter expressly for use
therein.
(c) The Company shall qualify the Warrant Stock for sale in such
states as it is otherwise qualifying its Common Stock for sale. The Company
shall also provide the holders with prospectuses upon request from the
holders.
(d) The selling holders shall furnish information and provide
indemnification as set forth in Section 6.3(b).
(e) Neither the giving of any notice by any holder nor the
making of any request for prospectuses imposes any upon any holder making
such request any obligation to sell any Warrant Stock or exercise any
Warrant.
6
<PAGE>
(f) The registration rights set forth in Section 6.1 are exercisable
only by Purchaser and its permitted assigns.
(g) The Company is not required to include in any registration
statement any Warrant Stock which could, pursuant to the provisions of Rule
144 of the Securities and Exchange Commission under the 1933 Act, be sold
during a period of four months following the date on which registration of
such Warrant Stock was requested.
(h) The Company's agreements with respect to this Warrant or the
Warrant Stock in this Section 6 continue in effect regardless of the
exercise and surrender of this Warrant.
7. Listing Rights. If the Company at any time lists any Common Stock
--------------
or other securities of the same class as those issuable on the exercise of this
Warrant on any national securities exchange, the Company will, at its expense,
simultaneously list on that exchange, on official notice of issuance on exercise
of this Warrant, and maintain such listing of, all shares of the Warrant Stock
or other securities from time to time issuable on exercise of this Warrant.
8. No Rights as Stockholders. Purchaser is not entitled by virtue of the
-------------------------
terms hereof to vote or receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof until the Warrant has been exercised.
9. Current Market Price. The "CURRENT MARKET PRICE" of the Common Stock
--------------------
at any date is based on the public market for the Common Stock, if any, and is
based on the average of the daily closing prices for twenty (20) consecutive
trading days commencing thirty (30) trading days before such date. The closing
price for each day is the last sale price reported or, in case no such reported
sale takes place on such day, the average of the reported last bid and asked
prices regular way, in either case on the principal national securities exchange
on which the Common Stock is admitted to trading or listed or on the NASDAQ
System, or if not listed or admitted to trading on such exchange or such System,
the average of the reported highest bid and reported lowest asked prices as
reported by NASDAQ or other similar organization if NASDAQ is no longer
reporting such information.
10. Definitions. As used in this Warrant, the following terms, unless the
----------
context requires otherwise have the following meanings.
10.1 "Company" includes any corporation that shall succeed to or
-------
assume the obligations of the Company under this Warrant.
10.2 "Advance" means advances of funds to the Company pursuant to the
-------
Note.
7
<PAGE>
10.3 "Note" means that certain Promissory Note dated December 29,
----
1997 in the sum of Fifteen Million Dollars ($15,000,000) executed by the Company
as "Maker" in favor of Purchaser as "Payee."
11. Governing Law. This Warrant must be construed and interpreted in
-------------
accordance with and is governed in all respects by the laws of the State of
Delaware applicable to agreements executed and to be performed wholly within
such State.
12. Notices. All notices, demands, requests and other communications
-------
which any party hereto desires or is required to deliver or otherwise give to
any other party hereunder must be in writing and are deemed to have been
delivered, given and received when personally given, delivered by overnight
courier against receipt or transmitted by facsimile if receipt is acknowledged
or transmission is confirmed by mail or on the third day after it is mailed by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows or to such other address as any of the parties shall
specify by notice in accordance with this provision:
Notices to the Company:
Medical Resources, Inc.
155 State Street
Hackensack, New Jersey 07601
Attn: Chief Executive Officer
Fax: (201) 488 8455
Notices to Purchaser:
DVI Financial Service, Inc.
500 Hyde Park
Doylestown, Pennsylvania 18901,
Attn: Richard Miller
Fax: (215) 345-4428
With a copy to:
Jeffery Wong, Esq.
Cooper, White & Cooper
201 California Street, 17th Floor
San Francisco, California 94111
Fax: (415) 433-5530
13. Registered Holder. The Company may deem and treat the person whose
-----------------
name appears on its warrant register as the holder of this Warrant as the
absolute owner hereof for all
8
<PAGE>
purposes, and the Company is not affected by any notice to the contrary.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officers duly authorized as of December 29, 1997.
MEDICAL RESOURCES, INC.
By: /s/ Lawrence J. Ramaekers
------------------------------
Name: Lawrence J. Ramaekers
------------------------------
Title: Acting CEO
------------------------------
9
<PAGE>
NOTICE OF EXERCISE
------------------
TO: MEDICAL RESOURCES, INC.
1. The undersigned hereby elects to purchase ___________ shares of Common
Stock of Medical Resources, Inc. pursuant to the terms of the Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any, in the amount of $_______________.
2. Please issue a certificate or certificates representing the shares of
Common Stock in the name of the undersigned or in such name as is specified
below:
_________________________________
(Name)
_________________________________
_________________________________
3. The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for relsale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares.
_________________________________
_________________________________
_____________________________
Date
<PAGE>
Exhibit 10.10
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY
BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT OR AN
OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SUCH
ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. ANY SUCH
SALE, ASSIGNMENT OR TRANSFER MUST ALSO COMPLY WITH APPLICABLE
STATE SECURITIES LAWS.
Right to
Purchase
817,000
Shares of
Common
Stock, par
value $.01 per
share
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, RGC International Investors, LDC
or its registered assigns, is entitled to purchase from Medical Resources, Inc.,
a Delaware corporation (the "Company"), at any time or from time to time during
the period specified in Paragraph 2 hereof, Eight Hundred Seventeen Thousand
(817,000) fully paid and nonassessable shares of the Company's Common Stock, par
value $.01 per share (the "Common Stock"), at an exercise price of $11.51 per
share (the "Exercise Price"). The term "Warrant Shares," as used herein, refers
to the shares of Common Stock purchase hereunder. The Warrant Shares and the
Exercise Price are subject to adjustment as provided in paragraph 4 hereof. The
term Warrants means this Warrant and any other warrants issued pursuant to that
certain letter agreement, dated
<PAGE>
December 29, 1997 by and among the Company and RGC International Investors, LDC
(the "Letter Agreement").
This Warrant is subject to the following terms, provisions, and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
----------------------------------------------------------------
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices) or such other office or agency of
the Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the holder hereof or such holder's designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered, the completed Exercise Agreement
shall have been delivered, and payment shall have been made for such shares as
set forth above. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding three (3)
business days, after this Warrant shall have been so exercised. The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder
a new Warrant representing the number of shares with respect to which this
Warrant shall not then have been exercised.
Notwithstanding anything in this Warrant to the contrary, in no event
shall the Holder of this Warrant be entitled to exercise a number of Warrants
(or portions thereof) in excess of the number of Warrants (or portions thereof)
upon exercise of which the sum of (i) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unexercised Warrants and unconverted shares of Series C Preferred Stock (as
defined in that certain Securities Purchase Agreement dated July 21, 1997, by
and among the Company and the Buyers listed on the execution page thereof (the
"Securities Purchase Agreement")) and (ii) the number of shares of Common Stock
issuable upon exercise of the Warrants (or portions thereof) with respect to
which the determination described herein is being made, would result in
beneficial ownership by the Holder and its affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the immediately preceding
sentence, (a) beneficial
-2-
<PAGE>
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (i) hereof and (b) the holder of this Warrant may
waive the limitations set forth therein by written notice to the Company upon
not less than sixty-one (61) days prior notice (with such waiver taking effect
only upon the expiration of such 61-day notice period).
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
------------------
time to time, on or after December 30, 1997 and before 5:00 p.m., New York City
time on the fifth (5th) anniversary of such date (the "Exercise Period").
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
---------------------------------
agrees as follows:
(A) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance
----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
(B) RESERVATION OF SHARES. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(C) LISTING. The Company shall promptly secure the listing of the
-------
shares of Common Stock issuable upon exercise of the Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(D) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment
--------------------------
of its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance or any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may
-3-
<PAGE>
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant.
(E) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.
4. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Paragraph 4.
In the event that any adjustment of the Exercise Price as required herein
results in a fraction of a cent, such Exercise Price shall be rounded up to the
nearest cent.
(A) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any
------------------------------------------
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(B) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Paragraph 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(C) CONSOLIDATION, MERGER OR SALE. In case of any consolidation of
-----------------------------
the Company with, or merger of the Company with or into any other corporation,
or in case of any sale or conveyance of all or substantially all of the assets
of the Company other than in connection with a plan of complete liquidation of
the Company, then as a condition of such consolidation, merger or sale or
conveyance, adequate provision will be made whereby the holder of this Warrant
will have the right to acquire and receive upon exercise of this Warrant in lieu
of the shares of Common Stock immediately theretofore acquirable upon the
exercise of this Warrant, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Paragraph 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance
-4-
<PAGE>
unless prior to the consummation thereof, the successor corporation (if other
than the Company) assumes by written instrument the obligations under this
Paragraph 4 and the obligations to deliver to the holder of this Warrant such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, the holder may be entitled to acquire. The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers or share
exchanges.
(d) Distribution of Assets. In case the Company shall declare or make
----------------------
any distribution of its assets (including cash) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise, then,
after the date of record for determining stockholders entitled to such
distribution, but prior to the date of distribution, the holder of this Warrant
shall be entitled upon exercise of this Warrant for the purchase of any or all
of the shares of Common Stock subject hereto, to receive the amount of such
assets which would have been payable to the holder had such holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
(e) Notice of Adjustment. Upon the occurrence of any event which
--------------------
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(f) Minimum Adjustment of Exercise Price. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(g) No Fractional Shares. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
(h) Other Notices. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings)
to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
-5-
<PAGE>
(iii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock, or consolidation or merger of the Company
with or into, or sale of all or substantially all its assets to, another
corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the date
on which the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto. Failure to give any such notice or any defect therein shall not
affect the validity of the proceedings referred to in clauses (i), (ii), (iii)
and (iv) above.
(i) CERTAIN EVENTS. If any event occurs of the type contemplated by
--------------
the adjustment provisions of this Paragraph 4 but not expressly provided
for by such provisions, the Company will give notice of such event as provided
in Paragraph 4(e) hereof, and the Company's Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of shares of Common
Stock acquirable upon exercise of this Warrant so that the rights of the Holder
shall be neither enhanced nor diminished by such event.
(j) DEFINITION OF COMMON STOCK. For purposes of this Paragraph 4,
--------------------------
includes the Common Stock, par value $.01 per share, and any additional class of
stock of the Company having no preference as to dividends or distributions on
liquidation, provided that the shares purchasable pursuant to this Warrant shall
include only shares of Common Stock, par value $.01 per share, in respect of
which this Warrant is exercisable, or shares resulting from any subdivison or
combination of such Common Stock, or in the case of any reorganization,
reclassification, consolidation, merger, or sale of the character referred to in
Paragraph 4(c) hereof, the stock or other securities or property provided for in
such Paragraph.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
-6-
<PAGE>
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
---------------------------------------------
(A) RESTRICTION ON TRANSFER. This Warrant and the rights granted to
-----------------------
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Paragraph 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Paragraph 7(f) hereof and to the provisions of
Section 11(d) below. Until due presentment for registration of transfer on the
books of the Company, the Company may treat the registered holder hereof as the
owner and holder hereof for all purposes, and the Company shall not be affected
by any notice to the contrary. Notwithstanding anything to the contrary
contained herein, the registration rights described in Paragraph 8 are
assignable only in accordance with the provisions of that certain Registration
Rights Agreement, dated as of July 21, 1997, by and among the Company and the
other signatories thereto (the "Registration Rights Agreement").
(B) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
------------------------------------------------
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Paragraph 7(e) below, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrant to represent the right to purchase such number of shares as shall be
designated by holder hereof at the time such surrender.
(C) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, or destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(D) CANCELLATION: PAYMENT OF EXPENSES. Upon the surrender in this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Paragraph 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and changes payable in connection with the preparation, execution,
and delivery of Warrants to this Paragraph 7.
(E) REGISTER. The Company shall maintain, at its principal executive
--------
offices (or such other office or agency of the Company as it may designate by
notice to the holder hereof),
-7-
<PAGE>
a register for this Warrant, in which the Company shall record the name and
address of the person in whose name this Warrant has been issued, as well as the
name and address of each transferee and each prior owner of this Warrant.
(F) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of
-----------------------------------------
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of an exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the "Securities Act") and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a) promulgated under the Securities
Act; provided that no such opinion, letter or status as an "accredited investor"
shall be required in connection with a transfer pursuant to Rule 144 under the
Securities Act. The first holder of this Warrant, by taking and holding the
same, represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
8. REGISTRATION RIGHTS. The Company agrees that the definition of
-------------------
Registrable Securities in the Registration Rights Agreement is hereby amended to
include the Warrant Shares. The initial holder of this Warrant (and certain
assignees thereof) is hereby deemed to be an "Investor" as defined in the
Registration Rights Agreement and is entitled to the benefit of such
registration rights in respect of the Warrant Shares as are set forth in Section
2 of the Registration Rights Agreement.
9. NOTICES. All notices, requests, and other communications required or
-------
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to such holder at the address shown for such holder on the books of
the Company, or at such other address as shall have been furnished to the
Company by notice from such holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight mail courier, postage
prepaid and addressed, to the office of the Company at 155 State Street,
Hackensack, New Jersey 07601 Attention: Chief Executive Officer, or at such
other address as shall have been furnished to the holder of this Warrant by
notice from the Company. Any such notice, request, or other communication may be
sent by facsimile, but shall in such case be subsequently confirmed by a writing
personally delivered or sent by certified or registered mail or by recognized
overnight mail courier as provided above. All notices, requests, and other
communications shall be deemed to have been given either at the time of the
receipt thereof by the person entitled to receive such notice at the address of
such person for purposes of this Paragraph 9, or, if mailed by registered or
certified mail or with a recognized
-8-
<PAGE>
overnight mail courier upon deposit with the United States Post Office or such
overnight mail courier, if postage is prepaid and the mailing is properly
addressed, as the case may be.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW.
11. MISCELLANEOUS.
-------------
(A) AMENDMENTS. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and the holder
hereof.
(B) DESCRIPTIVE HEADINGS. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(C) CASHLESS EXERCISE. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised by presentation and surrender of
this Warrant to the Company at its principal executive offices with a written
notice of the holder's intention to effect a cashless exercise, including a
calculation of the number of shares of Common Stock to be issued upon such
exercise in accordance with the terms hereof (a "Cashless Exercise"). In the
event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the
holder shall surrender this Warrant for that number of shares of Common Stock
determined by multiplying the number of Warrant Shares to which it would
otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
(D) CALL AND PUT RIGHTS; RESET OF EXERCISE PRICE. This Warrant is
--------------------------------------------
subject to the call and put rights set forth in the Letter Agreement. In
addition, pursuant to the fourth paragraph of the Letter Agreement, and subject
to the terms and conditions thereof, at the option of the Company, the Exercise
Price may be reset to the greater of (i) $11.51 and (ii) 130% of the average
closing bid price of the Common Stock over the three (3) trading days ending
January 30, 1998. Notwithstanding anything to the contrary set forth herein,
this Warrant may not be transferred other than to affiliates of the initial
holder until after the expiration of the "Call Period" and, if applicable, the
"Extended Call Period" and "Put Period" as such terms are defined in the Letter
Agreement.
-9-
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-10-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
MEDICAL RESOURCES, INC.
By:________________________________
Lawrence Ramaekers
Acting Chief Executive Officer
Dated as of December 30, 1997
-11-
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated: _______, ____.
To:_________________________
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ____________ shares of Common Stock covered
by such Warrant, and makes payment herewith in full therefor at the price per
share provided by such Warrant in cash or by certified or official bank check in
the amount of, or, if the resale of such Common Stock by the undersigned is not
currently registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, by surrender of securities issued by the
Company (including a portion of the Warrant) having a market value (in the case
of a portion of this Warrant, determined in accordance with Section 11(c) of the
Warrant) equal to $_______. Please issue a certificate or certificates for such
shares of Common Stock in the name of and pay any cash for any fractional share
to:
Name:____________________________
Signature: ______________________
Address: ________________________
________________________
Note: The above signature should
correspond exactly with the
name on the face of the
within Warrant.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ____________ _________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: ____________, ____.
In the presence of
_______________________
Name: ___________________________________________
Signature: ________________________________
Title of Signing Officer or Agent (if any):
___________________________________________
Address:___________________________________
___________________________________
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") by and between Medical Resources,
Inc., a Delaware corporation (the "Company"), and Duane C. Montopoli (the
"Executive"), dated as of the 30th day of January, 1998 (the "Effective Date").
W I T N E S S E T H:
1. Employment Period. Subject to the terms and conditions of
-----------------
this Agreement, the Company hereby agrees to employ the Executive and the
Executive hereby agrees to remain in the employ of the Company, for the period
commencing on the Effective Date and ending on the date this Agreement is
terminated in accordance with Section 3 (the "Employment Period").
2. Terms of Employment. (a) Position and Duties. (i) Commencing on the
------------------- -------------------
Effective Date and for the remainder of the Employment Period, the Executive
shall be the President and Chief Executive Officer of the Company and shall
report exclusively to the Company's Board of Directors (the "Board") and shall
have such duties, responsibilities and authority as shall be determined by the
Board, including, without limiting the authority of the Board, the authority to
make personnel decisions with respect to those employees of the Company that
will report, directly or indirectly, to Executive. In the event of the
acquisition of the Company by way of merger, sale of substantially all assets,
stock purchase or any other method, and if the Company either (A) is not the
surviving entity or (B) the Company becomes a subsidiary of the acquiror, then
the Executive shall report exclusively to the board of directors of such
surviving company or such parent. The Company shall cause the Executive to
become a member of the Board as of the Effective Date and to remain a member of
the Board during the Employment Period. The Executive shall be based at the
Company's offices in Hackensack, New Jersey, provided that the Executive shall
perform such duties and responsibilities not involving a permanent transfer of
his base of operations outside of Hackensack, New Jersey at such other places as
shall from time to time be necessary to fulfill his obligations hereunder.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote full time during normal business hours to the business and affairs of the
Company and to use the Executive's best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period the Executive
shall not be engaged in any other business activity whether or not such business
activity is pursued for gain, profit
<PAGE>
or other pecuniary advantage, but this shall not be construed as preventing the
Executive from (A) serving on the board of directors of Chemfab Corporation and
Optima Healthcare, Inc. and (B) investing his personal assets in businesses
which do not compete with the Company in such form or manner as will not require
any services on the part of the Executive in the operation of the affairs of the
companies in which such investments are made and in which his participation is
solely that of an investor, and except that the Executive may purchase
securities in any corporation whose securities are regularly traded provided
that such purchase shall not result in his owning beneficially at any time,
other than through a registered investment company, one percent (1%) or more of
the equity securities of any corporation engaged in a business competitive with
that of the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
------------ -----------
Executive shall receive an annual base salary ("Annual Base Salary") of
$275,000. The Annual Base Salary shall be paid in accordance with the normal
payroll practices of the Company, and may be increased (but not decreased) from
time to time, in the discretion of the Board.
(ii) Annual Bonus. In addition to Annual Base Salary, the
------------
Executive shall be eligible to receive an annual bonus (the "Annual Bonus") for
each calendar year during the Employment Period, provided that the Executive is
--------
employed on the last day of such calendar year. The target amount of the Annual
Bonus for any year shall be fifty percent (50%) of the Annual Base Salary in
effect for that year. The actual amount of the Annual Bonus for any calendar
year shall be determined by the Board at its discretion and paid no later than
60 days following the end of the calendar year for which the Annual Bonus is
awarded.
(iii) Stock Options. The Executive shall be granted, on the
-------------
Effective Date, nonqualified stock options (the "Options") to acquire 600,000
shares of the common stock of the Company, $0.01 par value per share (the
"Common Stock"). The Options shall be divided into two tranches, referred to
herein as "Tranche A" and "Tranche B". Tranche A shall consist of options to
purchase 400,000 shares of Common Stock, at an exercise price per share equal to
the "Fair Market Value" (as defined below) of one share of Common Stock on the
Effective Date. Tranche B shall consist of options to purchase 200,000 shares of
Common Stock, at an exercise price per share equal to $14.50. The Options shall
have a term of ten years from the date of grant. Twenty percent (20%) of the
Tranche A and B Options shall vest and become exercisable on the Effective Date,
and the remaining eighty percent (80%) of each Tranche shall vest and become
exercisable in equal installments on the first, second, third and fourth
-2-
<PAGE>
anniversary of the Effective Date; provided, however, that in the event of a
-------- -------
"Change in Control" (as defined in Section 7), any outstanding unvested Options
in each Tranche shall become immediately vested and exercisable. For purposes of
this Agreement, "Fair Market Value" on the Effective Date means the average
between the high and low sale price for the Common Stock reported on the trading
day immediately preceding the Effective Date on which the Common Stock traded in
the National Market System of the National Association of Securities Dealers
Automated Quotation System. The Company will file, as soon as practicable but no
later than five months following the Effective Date, a registration statement in
order to allow Executive to sell any shares of Common Stock acquired through the
exercise of Options, and shall use its reasonable best efforts to keep such
registration effective during the period in which any of the Options remain
outstanding. All terms and conditions relating to the Options shall be set forth
in a stock option agreement to be executed by the Company and the Executive as
soon as practicable following the Effective Date, which shall, among other
things, provide for (A) substantially identical rights to those described in
Section 9 of the Company's 1996 Stock Option Plan (the "Plan"), or any successor
to Section 9 of the Plan, in the event of a "Change in Capitalization" (as
defined in the Plan) and (B) substantially identical rights to those described
in Section 10 of the Plan, or any successor to Section 10 of the Plan.
(iv) Benefit Plans. During the Employment Period, the Executive and/or the
-------------
Executive's family, as the case may be, shall be eligible for participation in
and shall receive all benefits under employee benefit plans provided by the
Company (including, without limitation, medical, prescription, dental,
disability, salary continuance, group life, accidental death and travel accident
insurance plans and programs, and incentive, savings and retirement plans and
programs) to the extent applicable generally to other senior executives of the
Company. In addition, the Company shall use its best efforts to obtain, pay for
and keep in force during the Employment Period a term life insurance policy for
the benefit of a beneficiary named by the Executive, having death benefits in
the amount of $1,000,000.
(v) Insurance. The Company shall maintain such insurance for the
---------
protection of the Executive as is appropriate and customary for the officers and
directors of entities engaged in the Company's business. Such insurance shall
cover Executive with respect to his services for the Company and affiliates
thereof (including as a director, if applicable).
(vi) Expenses. During the Employment Period, the Company shall pay or
--------
promptly reimburse the Executive for all reasonable business expenses upon
presentation of receipts therefor in accordance with the normal practices of the
Company.
-3-
<PAGE>
In addition, the Company shall reimburse the Executive, upon presentation of
appropriate receipts, for the reasonable expenses incurred by the Executive in
transporting his household belongings to one location in the Hackensack, New
Jersey area from Salem, New Hampshire and North Andover, Massachusetts, and for
the cost of a reasonable and customary real estate commission incurred by the
Executive on the sale of his real property in North Andover, Massachusetts.
(vii) Automobile Allowance. During the Employment Period, the Executive
--------------------
shall be reimbursed for the cost of leasing and insuring an automobile, up to a
maximum of $800.00 per month, increased as of each January 1 in the Employment
Period to reflect increases in the United States Consumer Price Index for All
Urban Consumers.
(viii) Vacation. During the Employment Period, the Executive shall be
--------
entitled to four weeks of paid vacation per year.
(ix) Temporary Housing. The Company will reimburse Executive for the cost
-----------------
of renting a temporary home in the Hackensack, New Jersey area, at a total cost
not to exceed $3,500 per month, for the period commencing on the Effective Date
(or such later date on which the Executive first rents such home) and ceasing on
the earlier of (A) the date the Executive closes the sale of his real property
in North Andover, Massachusetts or (B) the six-month anniversary of the
Effective Date (the "Relocation Period"). In addition, the Company shall
reimburse the Executive for the cost of (X) one round-trip coach class airplane
ticket for the Executive from the Hackensack, New Jersey area to Boston,
Massachusetts for each two-weeks of the Relocation Period and (Y) three trips to
the Hackensack, New Jersey area for the Executive's spouse to assist the
Executive in obtaining a permanent residence, including round trip coach class
airfare from Boston, Massachusetts, and reasonable local travel and food
expenses during such trips.
-4-
<PAGE>
3. Termination of Employment. (a) Death or Disability. The Executive's
------------------------- -------------------
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Board determines in good faith that the "Disability"
(as defined below) of the Executive has occurred during the Employment Period,
it may terminate the Executive on account of such Disability. For purposes of
this Agreement, "Disability" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 90 consecutive
days, or 90 out of 120 consecutive days, as a result of incapacity due to mental
or physical illness which is determined by the Board to prevent the Executive
from performing his duties to the Company.
(b) With or Without Cause. The Company may terminate the Executive's
---------------------
employment during the Employment Period with or without Cause. For purposes of
this Agreement, "Cause" shall mean: (i) a material breach by the Executive of
the terms of this Agreement, (ii) the conviction of, plea of guilty or no
contest to, a felony or crime involving moral turpitude, or (iii) a failure by
the Executive to follow the reasonable lawful instructions of the Board;
provided that the Executive may be terminated for Cause pursuant to clause (iii)
- --------
above only after a written demand for substantial performance is delivered to
the Executive by the Board, which specifically identifies the manner in which
the Board believes that the Executive has not followed the lawful instructions
of the Board, and the Executive fails to cure such noncompliance within thirty
days after receipt of such demand.
(c) With or Without Good Reason. The Executive's employment may be
---------------------------
terminated by the Executive with or without Good Reason. For purposes of this
Agreement, "Good Reason" shall mean in each case, without the Executive's prior
written consent:
(i) the assignment to the Executive of duties materially
inconsistent with the position, authority, duties or responsibilities customary
of the Chief Executive Officer of publicly traded corporations, excluding for
this purpose an action which is remedied by the Company within 30 days after
receipt of notice thereof given by the Executive; or
(ii) a material breach by the Company of this Agreement (and without
limitation, any breach by the Company of its obligations pursuant to the first
three sentences of Section 2 hereof shall be a material breach), other than a
breach which is remedied by the Company within 30 days after receipt of notice
thereof given by the Executive; or
(iii) the approval by the Board of any transaction between the Company
and a director of the Company or an entity
-5-
<PAGE>
affiliated or associated with a director of the Company that would require
disclosure in a proxy statement pursuant to applicable rules and regulations of
the Securities Exchange Commission, where Executive has affirmatively dissented
to such transaction.
(d) Notice of Termination. Any termination by the Company or by the
---------------------
Executive shall be communicated to the other party by a "Notice of Termination"
(as defined below) to the other party hereto given in accordance with Section
10(e) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the "Date of Termination" (as defined Section 3(e)) is
other than the date of receipt of such notice, specifies the termination date
(which date shall be not more than thirty days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause, whether or not known at the time, shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be (although such Date of
Termination shall retroactively cease to apply if the circumstances providing
the basis of termination for Cause or Good Reason are cured in accordance with
Section 3(b) or 3(c) of this Agreement, respectively); (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, or
by the Executive without Good Reason, the Date of Termination shall be the date
of receipt of the Notice of Termination or any later date specified therein, as
the case may be; and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the first date on which the Board makes the determination that
the Executive shall be terminated as a result of his having been absent from his
duties to the extent required by the definition of Disability set forth in
Section 3(a) of this Agreement, as the case may be.
4. Obligations of the Company Upon Termination. (a) Good Reason; Other
------------------------------------------- ------------------
Than for Cause or Disability. If the Executive shall terminate employment for
- ----------------------------
Good Reason or the
-6-
<PAGE>
Company shall terminate the Executive's employment other than for Cause or
Disability:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the sum of (A) the Executive's
Annual Base Salary through the Date of Termination to the extent not previously
paid ("Accrued Salary"), (B) if such termination occurs following the end of a
calendar year and, prior to or following such termination, an Annual Bonus for
such calendar year is determined by the Board acting in good faith to have been
earned, the amount of such Annual Bonus ("Accrued Bonus"), and (C) if such
termination occurs prior to the end of a calendar year, thereby causing
Executive to be ineligible for an Annual Bonus pursuant to Section 2(b)(ii)
hereof, an amount of bonus determined by the Board acting in good faith to have
been earned for the portion of such calendar year that Executive was employed
("Partial Bonus");
(ii) the Company shall continue to pay to the Executive his Annual
Base Salary, in effect as of the Date of Termination, for a period of eighteen
months following the Date of Termination, payable in accordance with the
Company's normal payroll practices; and
(iii) the Company shall continue to provide to the Executive for a
period of eighteen months following the Date of Termination, benefits under
"employee welfare plans" (as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended), other than the life insurance policy
referenced in the last sentence of Section 2(b)(iv), at least equal to those
which are provided to the senior executives of the Company during such period;
provided, however, that if the Executive becomes reemployed with another
- -------- -------
employer and is eligible to receive any of such benefits under another employer
provided plan at the other employer's cost, other than reasonable and customary
employee contributions (whether or not he actually elects to receive such
benefits), the corresponding benefits described herein shall be terminated;
further, provided, however, that the Company shall not be required to provide
- ------- -------- -------
any such benefit if the effect thereof would be to violate the terms of any law,
plan or insurance policy or jeopardize the tax benefit associated with such
benefit to which the Company otherwise would be entitled, but in such event, the
Company shall pay to the Executive, in cash, an amount equal to the cost of
providing such benefit. Any such benefits provided by another employer shall be
promptly reported by the Executive to the Company as the Executive becomes
eligible therefor.
(b) Death, Disability, With Cause, Without Good Reason. If the Executive's
--------------------------------------------------
employment is terminated by reason of the Executive's death, Disability,
termination by the Company with Cause or termination by the Executive without
Good Reason, this
-7-
<PAGE>
Agreement shall terminate without further obligations to the Executive or his
legal representatives under this Agreement, other than for payment of Accrued
Salary and, in the case of a termination by reason of death or Disability,
payment of Accrued Bonus and Partial Bonus, which shall be paid to the Executive
or his estate or beneficiary, as applicable, in a lump sum in cash within 30
days following the Date of Termination. If the Executive's employment is
terminated for Cause, nothing in this Agreement shall prevent the Company from
pursuing any other available remedies against the Executive.
5. Confidential Information; Nonsolicitation; Noncompetition;
---------------------------------------------------------
Nondisparagement. (a) The Executive shall hold in a fiduciary capacity for the
- ----------------
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it.
(b) The Executive hereby covenants and agrees that for eighteen months
following the termination of the Executive's employment for any reason, the
Executive shall not, directly or indirectly, employ or seek to employ any person
who is at the Date of Termination, or was at any time within the six-month
period preceding the Date of Termination, an employee of the Company or any of
its subsidiaries or affiliates or otherwise cause or induce any employee of the
Company or any of its subsidiaries or affiliates to terminate such employee's
employment with the Company or such subsidiary or affiliate for the employment
of another company.
(c) The Executive hereby covenants and agrees that during the Employment
Period and for eighteen months following the termination of the Executive's
employment for any reason, the Executive will not, without the prior written
consent of the Company, engage in "Competition" (as defined below) with the
Company. For purposes of this Agreement, if the Executive takes any of the
following actions he will be engaged in "Competition:" engaging in or carrying
on, directly or indirectly, any enterprise, whether as an advisor, principal,
agent, partner, officer, director, employee, stockholder, associate or
consultant to any person, partnership, corporation or any other business entity,
that is principally engaged in any business in which the
-8-
<PAGE>
Company is engaged, or is contemplating becoming engaged, on the Date of
Termination, in any area in which the Company is then engaged, or is then
contemplating being engaged, in such business; provided, however, that
-------- -------
"Competition" will not include (i) the mere ownership of securities in any
enterprise and exercise of rights appurtenant thereto or (ii) participation in
management of any enterprise or business operation thereof other than in
connection with the competitive operation of such enterprise.
(d) The Executive hereby covenants and agrees that during the Employment
Period and for eighteen months following the termination of the Executive's
employment for any reason, the Executive will not assist a third party in
preparing or making an unsolicited bid for the Company, engaging in a proxy
contest with the Company, or engaging in any other similar activity.
(e) During the Term and for eighteen months following the termination of
the Executive's employment for any reason, the parties hereto each agree not to
make disparaging public statements concerning the other, provided that nothing
herein shall prevent either party hereto from enforcing its rights hereunder;
further, provided that the foregoing shall not prohibit Executive from making
good faith comparative claims regarding the products and services of the Company
and those of an entity by which Executive may be employed following termination
of his employment hereunder, if the making of such claims does not otherwise
violate this Agreement.
(f) The Executive acknowledges that a breach of any of the covenants
contained in Section 5(a), (b), (c), (d) or (e) may result in material
irreparable injury to the Company for which there is no adequate remedy at law,
that it will not be possible to measure damages for such injury precisely and
that, in the event of such a breach or threat thereof, the Company shall be
entitled to a temporary restraining order and/or a preliminary or permanent
injunction, restraining the Executive from engaging in such prohibited
activities or such other relief as may be required specifically to enforce any
of the covenants contained therein. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach.
(g) The restrictions set forth in Section 5(a), (b), (c), (d) and (e) are
considered by the parties hereto to be reasonable for the purposes of protecting
the business of the Company. However, if any such restriction is found by a
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it is the intention of the parties that such restriction shall
be interpreted to extend only over
-9-
<PAGE>
the maximum period of time, range of activities or geographic area as to which
it may be enforceable.
6. Post-Termination Assistance. The Executive agrees that after his
---------------------------
employment with the Company has terminated he will provide, upon reasonable
notice, such information and assistance to the Company as may reasonably be
requested by the Company in connection with any audit, governmental
investigation or litigation in which it or any of its affiliates is or may
become a party; provided, however, that (a) the Company agrees to reimburse the
-------- -------
Executive for any related out-of-pocket expenses, including travel expenses,
and, if the Executive is not then being paid severance pursuant to Section
4(a)(ii), to pay the Executive reasonable compensation for his time based on his
rate of Annual Base Salary at the time of termination and (b) any such
assistance may not unreasonably interfere with the then-current employment of
the Executive.
7. Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more (on a
fully diluted basis) of either (i) the then outstanding shares of Common Stock,
taking into account as outstanding for this purpose such shares issuable upon
the exercise of options or warrants, the conversion of convertible shares or
debt, and the exercise of any similar right to acquire shares (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors or member managers (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this Section 7(a), the following
acquisitions shall not constitute a Change in Control: (A) any acquisition by
the Company or any "affiliate" of the Company, within the meaning of 17 C.F.R.
(S) 230.405 (an "Affiliate"), (B) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any Affiliate of
the Company, (C) any acquisition by any corporation pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of Section 7(c), or (D) any
acquisition by any entity in which the Executive has a direct or indirect equity
interest of greater than five percent; or
(b) Individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
-------- -------
the
-10-
<PAGE>
Effective Date whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of
the then outstanding shares of common stock or interests and the combined voting
power of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation or other
entity resulting from such Business Combination (including, without limitation,
a corporation or entity which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, and (ii) no Person (excluding (A) any employee benefit plan (or related
trust) sponsored or maintained by the Company or any Affiliate of the Company,
or such corporation resulting from such Business Combination or any Affiliate of
such corporation, or (B) any entity in which the Executive has a direct or
indirect equity interest of greater than five percent or any Affiliate of such
entity) beneficially owns, directly or indirectly, 50% or more (on a fully
diluted basis) of, respectively, the then outstanding shares of common stock or
interests of the corporation or entity resulting from such Business Combination,
taking into account as outstanding for this purpose such common stock or
interests issuable upon the exercise of options or warrants, the conversion of
convertible stock, interests or debt, and the exercise of any similar right to
acquire such common stock or interests, or the combined voting power of the then
outstanding voting securities of such corporation or other entity except to the
extent that such ownership existed prior to the Business Combination and (iii)
at least a majority of the members of the board of directors or equivalent
governing body of the corporation or other entity
-11-
<PAGE>
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(d) Approval by the shareholders or equityholders of the Company of a
complete liquidation or dissolution of the Company.
8. Successors (a) This Agreement is personal to the Executive and
----------
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
heirs and personal and legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
9. Indemnification. (a) Indemnification. Executive shall be
--------------- ---------------
indemnified and held harmless by the Company to the fullest extent permitted by
applicable law, as the same exists or may hereafter be amended, against all
expenses, liability and loss (including attorneys' fees, judgments, fines, and
amounts paid or to be paid in any settlement approved in advance by the Company,
such approval not to be unreasonably withheld) (collectively, "Indemnifiable
Expenses") actually incurred or suffered by Executive in connection with any
present or future threatened, pending or contemplated investigation, claim,
action, suit or proceeding, whether civil, criminal, administrative or
investigative, to which Executive is a defendant, is threatened to be made a
defendant, or is or has been identified as a target in connection with any
criminal investigation or proceeding by reason of any action or inaction taken
by Executive, within the scope of Executive's present or former employment by,
or service as a director for, the Company in Executive's capacity as an officer,
employee or director of the Company or any of its subsidiaries or affiliates
(collectively, "Indemnifiable Litigation").
(b) Advance Payment of Interim Expenses. The Company agrees to pay
-----------------------------------
promptly Indemnifiable Expenses incurred by Executive in connection with any
Indemnifiable Litigation in advance of the final disposition thereof, provided
--------
that the Company has received an undertaking by or an behalf of Executive, to
the extent required by law, to repay the amount so advanced to the extent that
it is finally adjudicated by court order or judgment from which no further right
of appeal exists that Executive is not entitled to be indemnified by the Company
under this Agreement or otherwise. The advances to be made hereunder shall be
paid by the Company to Executive within ten (10)
-12-
<PAGE>
business days following delivery of a written request therefor by Executive to
the Company.
(c) Provision of Counsel Where Executive Is Not A Defendant Or Target. The
-----------------------------------------------------------------
Company shall provide Executive with legal representation, at no cost to the
Executive, in the event that the Executive shall be called upon to provide sworn
testimony in connection with any investigation, claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative
(collectively a "Non-Party Proceeding") as to which Executive is not a defendant
or target. The Company may designate one counsel to represent both the Company
and/or one or more directors or officers of the Company. Executive may reject
the counsel designated and require the Company to designate other counsel only
in the event that designated counsel has a disqualifying conflict of interest.
Executive may, at his own expense, retain counsel of his own choosing at any
time.
(d) Procedure for Making Demand. Executive shall, as a condition precedent
---------------------------
to his rights under this Section 9, give the Company notice in writing as soon
as practicable of any claim or demand made against Executive for which
indemnification or the provision of counsel will or could be sought under this
Section 9. No failure to give such notice shall relieve the Company from any
obligations hereunder, except to the extent, if any, such failure shall
materially and adversely affect and prejudice the Company. Notice to the Company
shall be directed to the Company at the address set forth in Section 10(e)
hereof (or such other address as the Company shall designate in writing to
Executive). In addition, Executive shall give the Company such information and
cooperation as it may reasonably require and as shall be within Executive's
power, unless prohibited by law. Any indemnification or appointment of counsel
provided for hereunder shall be made no later than ten (10) business days after
receipt of the written request of Executive.
(e) Failure to Indemnify. (i) If a claim under this Section 9 for
--------------------
indemnification or appointment of counsel is not paid in full by the Company or
satisfied within ten (10) business days after a written request for payment
thereof has been received by the Company, Executive may, but need not, at any
time thereafter bring an action against the Company and, if successful in whole
or in part, Executive shall also be entitled to be paid all expenses (including
attorneys' fees and expenses) of bringing such action.
(ii) It shall be a defense to such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Executive has not
met the standard of conduct which make it permissible under applicable law for
the
-13-
<PAGE>
Company to indemnify Executive for the amount claimed, but the burden of proving
such defense shall be on the Company and Executive shall be entitled to receive
interim payments of interim expenses pursuant to Section 9(b) hereof unless and
until such defense may be finally adjudicated by court order or judgment from
which no further right of appeal exists. It is the parties' intention that if
the Company contests Executive's right to indemnification, the question of
Executive's right to indemnification shall be for the Court to decide, and
neither the failure of the Company (including the Board, independent legal
counsel or its stockholders) to have made a determination that indemnification
of Executive is proper in the circumstances because Executive has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including the Board, any committee or subgroup of
the Board, independent legal counsel, or its stockholders) that Executive has
not met such applicable standard of conduct, shall create a presumption that
Executive has or has not met the applicable standard of conduct.
(f) Notice to Insurers. At the time of the receipt of a notice of a claim
------------------
pursuant to Section 9(c) hereof, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective director and officer liability insurance
policies. The Company shall thereafter take all necessary or desirable action to
cause such insurers to pay, on behalf of the Executive, all amounts payable as a
result of such proceeding in accordance with the terms of such policies.
(g) Retention of Counsel. In the event that the Company shall be obligated
--------------------
to pay Indemnifiable Expenses under Section 9(a) of this Agreement as a result
of any proceeding against Executive, the Company shall be entitled to assume the
defense of such proceeding, with counsel approved by Executive, which approval
shall not be unreasonably withheld, upon the delivery to Executive of written
notice of its election to do so. The Executive may withhold such approval if he
reasonably concludes that there may be a conflict of interest or position on any
significant issue between the Company and the Executive in the conduct of the
defense of such proceeding. After delivery of such notice, approval of such
counsel by Executive and the retention of such counsel by the Company to
represent the Executive, the Company will not be liable to Executive under this
Agreement for any fees of any other counsel subsequently incurred by Executive
with respect to that same proceeding; provided, however, that in the event of a
-------- -------
proceeding brought by shareholders of the Company in the right of the Company,
the Company agrees to retain counsel which is different and separate from the
Company's counsel to represent Executive in such proceeding, subject to the
other terms and conditions of this Section 9(g).
-14-
<PAGE>
(h) Contract Rights Not Exclusive. The contract rights conferred by this
-----------------------------
Section 9 shall be in addition to, but not exclusive of, any right which
Executive may have or may hereafter acquire under any statute, provision of the
Company's Certificate of Incorporation or Bylaws, agreement, vote of
shareholders or disinterested directors, or otherwise. Nothing in this Section 9
shall be construed to affect or modify any much right.
(i) Attorneys' Fees. In the event that any action is instituted by
---------------
Executive under this Agreement to enforce or interpret any of the terms of this
Section 9 and Executive prevails or substantially prevails in such action,
Executive shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Executive with respect to such action.
In the event of an action instituted by or in the name of the Company under this
Section 9 to enforce or interpret any terms hereof and Executive prevails or
substantially prevails in such action, Executive shall be entitled to be paid
all court costs and expenses, including attorneys' fees, incurred by Executive
in defense of such action (including with respect to Executive's counterclaims
and cross-claims made in such action).
10. Miscellaneous. (a) Governing Law. This Agreement shall be governed
-------------
by and construed in accordance with the laws of the State of Delaware, without
reference to principles of conflict of laws.
(b) Captions and Amendments. The captions of this Agreement are not part
-----------------------
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(c) Stipulation. Executive hereby stipulates to the Company that on the
-----------
date of this Agreement, neither Executive nor his affiliates has any claim of
any type against the Company, except claims that may arise under this Agreement,
and represents and warrants that this Agreement does not conflict with any other
agreement to which Executive is a party.
(d) Construction. The parties have participated jointly in the negotiation
------------
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless
-15-
<PAGE>
the context requires otherwise. The word "including" shall mean including
without limitation.
(e) Notices. All notices and other communications hereunder shall be in
-------
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
-------------------
Mr. Duane C. Montopoli
Medical Resources, Inc.
155 State Street
Hackensack, New Jersey 07601
Tel: 201 488-6230
Fax: 201 488-8455
With a copy to:
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Attn: David O. Johanson, Esq.
Tel: 617 951-8304
Fax: 617 951-8736
If to the Company:
-----------------
Medical Resources, Inc.
155 State Street
Hackensack, New Jersey 07601
Tel: 201 488-6230
Fax: 201 488-8455
With a copy to:
Willkie Farr & Gallagher
153 East 53rd Street
One Citicorp Center
New York, New York 10022
Attn: Michael J. Segal, Esq.
Tel: 212 821-1514
Fax: 212 821-1555
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
-16-
<PAGE>
(f) Legal Fees. The Company agrees to pay as incurred, all legal and
----------
professional fees and expenses which the Executive may reasonably incur as a
result of negotiation, preparation and subsequent amendment of, or supplement
to, this Agreement, provided that such amount shall not exceed $15,000 with
respect to the initial negotiation and execution of this Agreement, and shall
not exceed an amount reasonably agreed upon by the Company and the Executive
with respect to any subsequent amendment of this Agreement. In addition, the
Company agrees to pay and be financially responsible for 100% of any and all
reasonable attorneys' and related fees and expenses incurred by Executive in
connection with any dispute associated with the interpretation, enforcement or
defense of Executive's rights under this Agreement, by litigation or otherwise,
provided that, in regard to such dispute, Executive has prevailed or
substantially prevailed with respect to at least one material issue; further,
provided, that this Section 10(f) shall not apply to Section 9 of this Agreement
(to which Section 9(i) applies).
(g) Enforceability. The invalidity or unenforceability of any provision of
--------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(h) Withholding. The Company may withhold from any amounts payable under
-----------
this Agreement such Federal, state, local or foreign taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
(i) No Waiver. The Executive's or the Company's failure to insist upon
---------
strict compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder shall not be deemed to be a waiver of such provision or right or
any other provision or right of this Agreement. No waiver of any provision of
this Agreement by the Company or the Executive shall be effective unless it is
in a writing signed by the party against whom enforcement is sought.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused this Agreement to be executed in its name on its behalf, all as of
the day and year first above written.
DUANE C. MONTOPOLI
------------------------
-17-
<PAGE>
MEDICAL RESOURCES, INC.
By:
---------------------------
Name: Gary N. Siegler
Title: Chairman of the Board of
Directors
-18-
<PAGE>
Exhibit 10.12
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") by and between Medical
Resources, Inc., a Delaware corporation (the "Company"), and Geoffrey A. Whynot
(the "Executive"), dated as of the 23rd day of March, 1998.
W I T N E S S E T H:
-------------------
1. Employment Period. Subject to the terms and conditions of this
------------------
Agreement, the Company hereby agrees to employ the Executive and the Executive
hereby agrees to remain in the employ of the Company, for the period commencing
on March 23, 1998 (the "Effective Date") and ending on the date this Agreement
is terminated in accordance with Section 3 (the "Employment Period").
2. Terms of Employment. (a) Position and Duties. (i) Commencing on the
------------------- -------------------
Effective Date and for the remainder of the Employment Period, the Executive
shall be Senior Vice President - Finance and Chief Financial Officer of the
Company, shall report exclusively to the Company's Chief Executive Officer
("CEO") and shall have such duties, responsibilities and authority as are
customary to the office of Chief Financial Officer of a publicly traded United
States corporation. The Executive shall be based at the Company's offices in
Hackensack, New Jersey, provided that the Executive shall perform such duties
--------
and responsibilities not involving a permanent transfer of his base of
operations outside of Hackensack, New Jersey at such other places as shall from
time to time be necessary to fulfill his obligations hereunder.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote full time during normal business hours to the business and affairs of the
Company and to use the Executive's best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period the Executive
shall not be engaged in any other business activity whether or not such business
activity is pursued for gain, profit or other pecuniary advantage, but this
shall not be construed as preventing the Executive from investing his personal
assets in businesses which do not compete with the Company in such form or
manner as will not require any services on the part of the Executive in the
operation of the affairs of the companies in which such investments are made and
in which his participation is solely that of an investor, and except that the
Executive may purchase securities in any corporation whose securities are
regularly traded provided that such purchase shall not result in
<PAGE>
his owning beneficially at any time, other than through a registered investment
company, one percent (1%) or more of the equity securities of any corporation
engaged in a business competitive with that of the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
------------ -----------
Executive shall receive an annual base salary ("Annual Base Salary") of
$185,000. The Annual Base Salary shall be paid in accordance with the normal
payroll practices of the Company and may be increased (but not decreased) from
time to time at the discretion of the Company's Board of Directors (the
"Board").
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
------------
shall be eligible to receive an annual bonus (the "Annual Bonus") for each
calendar year during the Employment Period, provided that the Executive is
--------
employed on the last day of such calendar year. Subject to the foregoing
proviso, for calendar year 1998, the Executive shall receive an Annual Bonus in
an amount not less than $100,000. For all other calendar years during the
Employment Period, the target amount of the Annual Bonus for any year shall be
fifty percent (50%) of the Annual Base Salary in effect for that year. Subject
to the foregoing proviso for a minimum Annual Bonus for calendar year 1998, the
actual amount of the Annual Bonus for any calendar year shall be determined by
the Board at its discretion and paid no later than March 15 of the calendar year
following the calendar year for which the Annual Bonus is awarded.
(iii) Stock Options. The Executive shall be granted, on the Effective
-------------
Date, nonqualified stock options (the "Options") to acquire 160,000 shares of
the common stock of the Company, $0.01 par value per share (the "Common Stock"),
at an exercise price per share of $10.625. The Options shall have a term of ten
years from the date of grant and twenty-five percent (25%) of the Options shall
vest and become exercisable on each of the first, second, third and fourth
anniversaries of the Effective Date, provided Executive remains in the employ of
the Company on each such anniversary date; provided, however, that in the event
-------- -------
of a "Change in Control" (as defined in Section 7), any outstanding unvested
Options shall become immediately vested and exercisable.
(iv) Benefit Plans. During the Employment Period, the Executive and/or
-------------
the Executive's family, as the case may be, shall be eligible for participation
in and shall receive all benefits under employee benefit plans provided by the
Company (including, without limitation, medical, prescription, dental,
disability, group life, accidental death and travel accident insurance plans and
programs, and incentive, savings and retirement plans and programs) to the
extent applicable generally to other senior executives of the Company. In
addition, the
<PAGE>
Company shall use its best efforts to obtain, pay for, and keep in
force during the Employment Period, a term life insurance policy in favor of a
beneficiary named by the Executive providing a death benefit in the amount of
$350,000 (subject to the
Executive passing any physical examinations required by the insurance carrier).
(v) Insurance. The Company shall maintain such insurance for the
---------
protection of the Executive as is appropriate and customary for the officers and
directors of entities engaged in the Company's business. Such insurance shall
cover Executive with respect to his services for the Company and affiliates
thereof (including as a director, if applicable).
(vi) Expenses. During the Employment Period, the Company shall pay or
--------
promptly reimburse the Executive for all reasonable business expenses upon
presentation of receipts therefor in accordance with the normal practices of the
Company. In addition, the Company shall reimburse the Executive, upon
presentation of appropriate receipts, for the reasonable expenses incurred by
the Executive in transporting his household belongings to one location in the
Hackensack, New Jersey area from Lancaster, Pennsylvania, and for the cost of a
reasonable and customary real estate commission incurred by the Executive on the
sale of his home in Lancaster, Pennsylvania.
(vii) Automobile Allowance. During the Employment Period, the Executive
--------------------
shall receive an automobile allowance in an amount equal to $650.00 per month to
cover the cost of leasing or purchasing an automobile, as well as other related
expenses. The allowance shall be increased as of each January 1 in the
Employment Period to reflect increases in the United States Consumer Price Index
for All Urban Consumers.
(viii) Vacation. During the Employment Period, the Executive shall be
--------
entitled to four weeks of paid vacation per year.
(ix) Temporary Housing. The Company will reimburse Executive for the
-----------------
cost of renting a temporary home in the Hackensack, New Jersey area, at a total
cost not to exceed $2,000 per month, for the period commencing on the Effective
Date (or such later date on which the Executive first rents such home) and
ceasing on the earlier of (A) the date the Executive closes the sale of his real
property in Lancaster, Pennsylvania or (B) the six-month anniversary of the
Effective Date (the "Relocation Period"). In addition, the Company shall
reimburse the Executive for the cost of (X) one round-trip visit for the
Executive from the Hackensack, New Jersey area to Lancaster, Pennsylvania for
each two weeks of the Relocation Period and (Y) three trips to the Hackensack,
New Jersey area for the Executive's spouse to
<PAGE>
assist the Executive in obtaining a permanent residence, including the cost of
round-trip travel by car or train from Lancaster, Pennsylvania, and reasonable
local travel and food expenses during such trips.
3. Termination of Employment. (a) Death or Disability. The Executive's
------------------------- -------------------
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Board determines in good faith that the "Disability"
(as defined below) of the Executive has occurred during the Employment Period,
it may terminate the Executive on account of such Disability. For purposes of
this Agreement, "Disability" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 90 consecutive
days, or 90 out of 120 consecutive days, as a result of incapacity due to mental
or physical illness which is determined by the Board to prevent the Executive
from performing his duties to the Company.
(b) With or Without Cause. The Company may terminate the Executive's
---------------------
employment during the Employment Period with or without Cause. For purposes of
this Agreement, "Cause" shall mean: (i) a material breach by the Executive of
the terms of this Agreement, (ii) the conviction of, plea of guilty or no
contest to, a felony or crime involving moral turpitude, or (iii) a failure by
the Executive to follow the reasonable lawful instructions of the CEO; provided
--------
that the Executive may be terminated for Cause pursuant to clause (iii) above
only after a written demand for substantial performance is delivered to the
Executive by the CEO, which specifically identifies the manner in which the CEO
believes that the Executive has not followed the lawful instructions of the CEO,
and the Executive fails to cure such noncompliance within thirty days after
receipt of such demand.
(c) With or Without Good Reason. The Executive's employment may be
---------------------------
terminated by the Executive with or without Good Reason. For purposes of this
Agreement, "Good Reason" shall mean, without the Executive's prior written
consent, a material breach by the Company of this Agreement (and without
limitation, any breach by the Company of its obligations pursuant to Section
2(a)(i) hereof shall be a material breach), other than a breach which is
remedied by the Company within 30 days after receipt of notice thereof given by
the Executive.
(d) Notice of Termination. Any termination by the Company or by the
---------------------
Executive shall be communicated to the other party by a "Notice of Termination"
(as defined below) to the other party hereto given in accordance with Section
10(e) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
<PAGE>
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the "Date of Termination" (as defined in Section 3(e)) is
other than the date of receipt of such notice, specifies the termination date
(which date shall be not more than thirty days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause, whether or not known at the time, shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be; (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, or
by the Executive without Good Reason, the Date of Termination shall be the date
of receipt of the Notice of Termination or any later date specified therein, as
the case may be; and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the first date on which the Board makes the determination that
the Executive shall be terminated as a result of his having been absent from his
duties to the extent required by the definition of Disability set forth in
Section 3(a) of this Agreement, as the case may be.
4. Obligations of the Company Upon Termination. (a) Good Reason; Other Than
------------------------------------------- -----------------------
for Cause or Disability. If the Executive shall terminate employment for Good
- -----------------------
Reason or the Company shall terminate the Executive's employment other than for
Cause or Disability:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the sum of (A) the Executive's
Annual Base Salary through the Date of Termination to the extent not previously
paid ("Accrued Salary"), (B) if such termination occurs following the end of a
calendar year and, prior to or following such termination, an Annual Bonus for
such calendar year is determined by the Board acting in good faith to have been
earned, the amount of such Annual Bonus ("Accrued Bonus"), and (C) if such
termination occurs prior to the end of a calendar year, thereby causing
Executive to be ineligible for an Annual Bonus pursuant to Section 2(b)(ii)
hereof, an amount of bonus determined by the Board acting in good faith to have
been
<PAGE>
earned for the portion of such calendar year that Executive was employed
("Partial Bonus");
(ii) the Company shall continue to pay to the Executive his Annual
Base Salary, in effect as of the Date of Termination, for a period of twelve
(12) months following the Date of Termination, payable in accordance with the
Company's normal payroll practices; provided, however, that if the Executive
-------- -------
becomes reemployed with another employer, the amounts to be paid under this
Section 4(a)(ii) shall be reduced, on a dollar for dollar basis, by any
compensation received from such employer which is attributable to services
performed by the Executive in the period in which such amounts under this
Section 4(a)(ii) otherwise would have been paid; further, provided that any such
------- --------
compensation shall be promptly reported by the Executive to the Company;
further, provided, that if such termination shall occur within twelve (12)
- ------- --------
months following a Change in Control, in addition to the benefits provided under
Section 4(a)(i) and (iii) hereof, the Executive shall receive a lump sum cash
payment, within 30 days after the Date of Termination, in an amount equal to
twelve (12) months of his then current Annual Base Salary, which amount shall
not be subject to reduction for any compensation earned from another employer;
and
(iii) the Company shall continue to provide to the Executive for a
period of twelve (12) months following the Date of Termination, benefits under
"employee welfare plans" (as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), other than the life
insurance policy referenced in the last sentence of Section 2(b)(iv), at least
equal to those which were provided to the Executive immediately prior to the
Date of Termination; provided, however, that if the Executive becomes reemployed
-------- -------
with another employer and is eligible to receive any of such benefits under
another employer provided plan at the other employer's cost, other than
reasonable and customary employee contributions (whether or not he actually
elects to receive such benefits), the corresponding benefits described herein
shall be terminated; further, provided, however, that the Company shall not be
------- -------- -------
required to provide any such benefit if the effect thereof would be to violate
the terms of any law, plan or insurance policy or jeopardize the tax benefit
associated with such benefit to which the Company otherwise would be entitled,
but in such event, the Company shall pay to the Executive, in cash, an amount
equal to the cost of providing such benefit. Any such benefits provided by
another employer shall be promptly reported by the Executive to the Company as
the Executive becomes eligible therefor.
(b) Death, Disability, With Cause, Without Good Reason. If the
--------------------------------------------------
Executive's employment is terminated by reason of the Executive's death,
Disability, termination by the Company with
<PAGE>
Cause or termination by the Executive without Good Reason, this Agreement shall
terminate without further obligations to the Executive or his legal
representatives under this Agreement, other than for payment of Accrued Salary
and, in the case of a termination by reason of death or Disability, payment of
Accrued Bonus and Partial Bonus, which shall be paid to the Executive or his
estate or beneficiary, as applicable, in a lump sum in cash within 30 days
following the Date of Termination. If the Executive's employment is terminated
for Cause, nothing in this Agreement shall prevent the Company from pursuing any
other available remedies against the Executive.
5. Confidential Information; Nonsolicitation; Noncompetition;
----------------------------------------------------------
Nondisparagement. (a) The Executive shall hold in a fiduciary capacity for the
- ----------------
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it.
(b) The Executive hereby covenants and agrees that for eighteen (18) months
following the termination of the Executive's employment for any reason, the
Executive shall not, directly or indirectly, employ or seek to employ any person
who is at the Date of Termination, or was at any time within the six-month
period preceding the Date of Termination, an employee of the Company or any of
its subsidiaries or affiliates or otherwise cause or induce any employee of the
Company or any of its subsidiaries or affiliates to terminate such employee's
employment with the Company or such subsidiary or affiliate for the employment
of another company.
(c) The Executive hereby covenants and agrees that during the Employment
Period and for twelve (12) months following the termination of the Executive's
employment for any reason, the Executive will not, without the prior written
consent of the Company, engage in "Competition" (as defined below) with the
Company. For purposes of this Agreement, if the Executive takes any of the
following actions he will be engaged in "Competition": engaging in or carrying
on, directly or indirectly, any enterprise, whether as an advisor, principal,
agent, partner, officer, director, employee, stockholder, associate or
consultant to any person, partnership, corporation or any other business
<PAGE>
entity, that is principally engaged in any business in which the Company is
engaged, or is contemplating becoming engaged, on the Date of Termination, in
any area in which the Company is then engaged, or is then contemplating being
engaged, in such business; provided, however, that "Competition" will not
-------- -------
include (i) the mere ownership of securities in any enterprise and exercise of
rights appurtenant thereto or (ii) participation in management of any enterprise
or business operation thereof other than in connection with the competitive
operation of such enterprise.
(d) The Executive hereby covenants and agrees that during the Employment
Period and for twelve (12) months following the termination of the Executive's
employment for any reason, the Executive will not assist a third party in
preparing or making an unsolicited bid for the Company, engaging in a proxy
contest with the Company, or engaging in any other similar activity.
(e) During the Employment Period and following the termination of the
Executive's employment for any reason, the parties hereto each agree not to make
disparaging public statements concerning the other, provided that nothing herein
--------
shall prevent either party hereto from enforcing its rights hereunder; further,
-------
provided that the foregoing shall not prohibit Executive and the Company from
- --------
making good faith comparative claims regarding the products and services of the
Company and those of an entity by which Executive may be employed following
termination of his employment hereunder, if the making of such claims does not
otherwise violate this Agreement.
(f) The Executive acknowledges that a breach of any of the covenants
contained in Section 5(a), (b), (c), (d) or (e) may result in material
irreparable injury to the Company for which there is no adequate remedy at law,
that it will not be possible to measure damages for such injury precisely and
that, in the event of such a breach or threat thereof, the Company shall be
entitled to a temporary restraining order and/or a preliminary or permanent
injunction, restraining the Executive from engaging in such prohibited
activities or such other relief as may be required specifically to enforce any
of the covenants contained therein. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach.
(g) The restrictions set forth in Section 5(a), (b), (c), (d) and (e) are
considered by the parties hereto to be reasonable for the purposes of protecting
the business of the Company. However, if any such restriction is found by a
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it is the intention of the parties
<PAGE>
that such restriction shall be interpreted to extend only over the maximum
period of time, range of activities or geographic area as to which it may be
enforceable.
6. Post-Termination Assistance. The Executive agrees that after his
---------------------------
employment with the Company has terminated he will provide, upon reasonable
notice, such information and assistance to the Company as may reasonably be
requested by the Company in connection with any audit, governmental
investigation or litigation in which it or any of its affiliates is or may
become a party; provided, however, that (a) any such assistance may not
-------- -------
unreasonably interfere with the then-current employment of the Executive, and
(b) the Company agrees to pay the Executive (i) for any related out-of-pocket
expenses incurred, including travel expenses, and (ii) reasonable compensation
for his time based on his rate of Annual Base Salary at the time of termination,
unless the Executive is then being paid severance pursuant to Section 4(a)(ii)
or the date on which such assistance is needed is within the 12-month period
following the Executive's receipt of a lump sum severance payment pursuant to
Section 4(a)(ii).
7. Change in Control. For purposes of this Agreement, a "Change in Control"
-----------------
shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more (on a
fully diluted basis) of either (i) the then outstanding shares of Common Stock,
taking into account as outstanding for this purpose such shares issuable upon
the exercise of options or warrants, the conversion of convertible shares or
debt, and the exercise of any similar right to acquire shares (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors or member managers (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this Section 7(a), the following
- -------- -------
acquisitions shall not constitute a Change in Control: (A) any acquisition by
the Company or any "affiliate" of the Company, within the meaning of 17 C.F.R.
(S) 230.405 (an "Affiliate"), (B) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any Affiliate of
the Company, (C) any acquisition by any corporation pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of Section 7(c), or (D) any
acquisition by any entity in which the Executive has a direct or indirect equity
interest of greater than five percent; or
<PAGE>
(b) Individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
-------- -------
the Effective Date whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of
the then outstanding shares of common stock or interests and the combined voting
power of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation or other
entity resulting from such Business Combination (including, without limitation,
a corporation or entity which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, and (ii) no Person (excluding (A) any employee benefit plan (or related
trust) sponsored or maintained by the Company or any Affiliate of the Company,
or such corporation resulting from such Business Combination or any Affiliate of
such corporation, or (B) any entity in which the Executive has a direct or
indirect equity interest of greater than five percent or any Affiliate of such
entity) beneficially owns, directly or indirectly, 50% or more (on a fully
diluted basis) of, respectively, the then outstanding shares of common stock or
interests of the corporation or entity resulting from such Business Combination,
taking into account as outstanding for this purpose such common stock or
interests issuable upon the exercise of options or warrants, the conversion of
convertible stock, interests or debt, and the exercise of any similar right to
acquire such common stock or interests, or the combined voting power of the then
outstanding voting securities of such
<PAGE>
corporation or other entity except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors or equivalent governing body of the corporation or
other entity resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders or equityholders of the Company of a
complete liquidation or dissolution of the Company.
8. Successors (a) This Agreement is personal to the Executive and without
----------
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
heirs and personal and legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
9. Indemnification. (a) Indemnification. Executive shall be indemnified
--------------- ---------------
held harmless by the Company to the fullest extent permitted by applicable law,
as the same exists or may hereafter be amended, against all expenses, liability
and loss (including attorneys' fees, judgments, fines, and amounts paid or to be
paid in any settlement approved in advance by the Company, such approval not to
be unreasonably withheld) (collectively, "Indemnifiable Expenses") actually
incurred or suffered by Executive in connection with any present or future
threatened, pending or contemplated investigation, claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
Executive is a defendant, is threatened to be made a defendant, or is or has
been identified as a target in connection with any criminal investigation or
proceeding by reason of any action or inaction taken by Executive, within the
scope of Executive's present or former employment by, or service as a director
for, the Company in Executive's capacity as an officer, employee or director of
the Company or any of its subsidiaries or affiliates (collectively,
"Indemnifiable Litigation").
(b) Advance Payment of Interim Expenses. The Company agrees to pay prompt
-----------------------------------
Indemnifiable Expenses incurred by Executive in connection with any
Indemnifiable Litigation in advance of the final disposition thereof, provided
--------
that the Company has received an undertaking by or on behalf of Executive, to
the extent required by law, to repay the amount so advanced to the extent that
it is finally adjudicated by court order or judgment from which no further right
of appeal exists that
<PAGE>
Executive is not entitled to be indemnified by the Company under this Agreement
or otherwise. The advances to be made hereunder shall be paid by the Company to
Executive within ten (10) business days following delivery of a written request
therefor by Executive to the Company.
(c) Provision of Counsel Where Executive Is Not A Defendant Or Target. The
-----------------------------------------------------------------
Company shall provide Executive with legal representation, at no cost to the
Executive, in the event that the Executive shall be called upon to provide sworn
testimony in connection with any investigation, claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative
(collectively a "Non-Party Proceeding") as to which Executive is not a defendant
or target. The Company may designate one counsel to represent both the Company
and/or one or more directors or officers of the Company. Executive may reject
the counsel designated and require the Company to designate other counsel only
in the event that designated counsel has a disqualifying conflict of interest.
Executive may, at his own expense, retain counsel of his own choosing at any
time.
(d) Procedure for Making Demand. Executive shall, as a condition precedent
---------------------------
to his rights under this Section 9, give the Company notice in writing as soon
as practicable of any claim or demand made against Executive for which
indemnification or the provision of counsel will or could be sought under this
Section 9. No failure to give such notice shall relieve the Company from any
obligations hereunder, except to the extent, if any, such failure shall
materially and adversely affect and prejudice the Company. Notice to the Company
shall be directed to the Company at the address set forth in Section 10(e)
hereof (or such other address as the Company shall designate in writing to
Executive). In addition, Executive shall give the Company such information and
cooperation as it may reasonably require and as shall be within Executive's
power, unless prohibited by law. Any indemnification or appointment of counsel
provided for hereunder shall be made no later than ten (10) business days after
receipt of the written request of Executive.
(e) Failure to Indemnify. (i) If a claim under this Section 9 for
--------------------
indemnification or appointment of counsel is not paid in full by the Company or
satisfied within ten (10) business days after a written request for payment
thereof has been received by the Company, Executive may, but need not, at any
time thereafter bring an action against the Company and, if successful in whole
or in part, Executive shall also be entitled to be paid all expenses (including
attorneys' fees and expenses) of bringing such action.
(ii) It shall be a defense to such action (other than an action brought to
enforce a claim for expenses incurred in
<PAGE>
connection with any action, suit or proceeding in advance of its final
disposition) that Executive has not met the standards of conduct which make it
permissible under applicable law for the Company to indemnify Executive for the
amount claimed, but the burden of proving such defense shall be on the Company
and Executive shall be entitled to receive interim payments of interim expenses
pursuant to Section 9(b) hereof unless and until such defense may be finally
adjudicated by court order or judgment from which no further right of appeal
exists. It is the parties' intention that if the Company contests Executive's
right to indemnification, the question of Executive's right to indemnification
shall be for the Court to decide, and neither the failure of the Company
(including the Board, independent legal counsel or its stockholders) to have
made a determination that indemnification of Executive is proper in the
circumstances because Executive has met the applicable standard of conduct
required by applicable law, nor an actual determination by the Company
(including the Board, any committee or subgroup of the Board, independent legal
counsel, or its stockholders) that Executive has not met such applicable
standard of conduct, shall create a presumption that Executive has or has not
met the applicable standard of conduct.
(f) Notice to Insurers. At the time of the receipt of a notice of a claim
------------------
pursuant to Section 9(d) hereof, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective director and officer liability insurance
policies. The Company shall thereafter take all necessary or desirable action
to cause such insurers to pay, on behalf of the Executive, all amounts payable
as a result of such proceeding in accordance with the terms of such policies.
(g) Retention of Counsel. In the event that the Company shall be obligated
--------------------
to pay Indemnifiable Expenses under Section 9(a) of this Agreement as a result
of any proceeding against Executive, the Company shall be entitled to assume the
defense of such proceeding, with counsel approved by Executive, which approval
shall not be unreasonably withheld, upon the delivery to Executive of written
notice of its election to do so. The Executive may withhold such approval if he
reasonably concludes that there may be a conflict of interest or position on any
significant issue between the Company and the Executive in the conduct of the
defense of such proceeding. After delivery of such notice, approval of such
counsel by Executive and the retention of such counsel by the Company to
represent the Executive, the Company will not be liable to Executive under this
Agreement for any fees of any other counsel subsequently incurred by Executive
with respect to that same proceeding; provided, however, that in the event of a
-------- -------
proceeding brought by shareholders of the Company in the right of the Company,
the Company agrees to retain counsel
<PAGE>
which is different and separate from the Company's counsel to represent
Executive in such proceeding, subject to the other terms and conditions of this
Section 9(g).
(h) Contract Rights Not Exclusive. The contract rights conferred by this
-----------------------------
Section 9 shall be in addition to, but not exclusive of, any right which
Executive may have or may hereafter acquire under any statute, provision of the
Company's Certificate of Incorporation or Bylaws, agreement, vote of
shareholders or disinterested directors, or otherwise. Nothing in this Section
9 shall be construed to affect or modify any such right.
(i) Attorneys' Fees. In the event that any action is instituted by
----------------
Executive under this Agreement to enforce or interpret any of the terms of this
Section 9 and Executive prevails or substantially prevails in such action,
Executive shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Executive with respect to such action.
In the event of an action instituted by or in the name of the Company under this
Section 9 to enforce or interpret any terms hereof and Executive prevails or
substantially prevails in such action, Executive shall be entitled to be paid
all court costs and expenses, including attorneys' fees, incurred by Executive
in defense of such action (including with respect to Executive's counterclaims
and cross-claims made in such action).
10. Miscellaneous. (a) Governing Law. This Agreement shall be governed
------------- -------------
by and construed in accordance with the laws of the State of Delaware, without
reference to principles of conflict of laws.
(b) Captions and Amendments. The captions of this Agreement are not part
-----------------------
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(c) Stipulation. Executive hereby stipulates to the Company that on the
-----------
date of this Agreement, neither Executive nor his affiliates has any claim of
any type against the Company, except claims that may arise under this Agreement,
and represents and warrants that this Agreement does not conflict with any other
agreement to which Executive is a party.
(d) Construction. The parties have participated jointly in the negotiation
------------
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
<PAGE>
provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
(e) Notices. All notices and other communications hereunder shall be in
-------
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
-------------------
Geoffrey A. Whynot
Medical Resources, Inc.
155 State Street
Hackensack, New Jersey 07601
Tel: 201 488-6230
Fax: 201 488-8455
If to the Company:
------------------------------
Medical Resources, Inc.
155 State Street
Hackensack, New Jersey 07601
Attn: Duane C. Montopoli
Tel: 201 488-6230
Fax: 201 488-3546
With a copy to:
Willkie Farr & Gallagher
153 East 53rd Street
One Citicorp Center
New York, New York 10022
Attn: Michael J. Segal, Esq.
Tel: 212 821-1514
Fax: 212 821-1555
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
f. Enforceability. The invalidity or unenforceability of any provision of
--------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
g. Withholding. The Company may withhold from any amounts payable under
-----------
this Agreement such Federal, state, local or foreign
<PAGE>
taxes as shall be required to be withheld pursuant to any applicable law or
regulation.
h. No Waiver. The Executive's or the Company's failure to insist upon
---------
strict compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder shall not be deemed to be a waiver of such provision or right or
any other provision or right of this Agreement. No waiver of any provision of
this Agreement by the Company or the Executive shall be effective unless it is
in writing signed by the party against whom enforcement is sought.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused this Agreement to be executed in its name on its behalf, all as of
the day and year first above written.
This instrument may be executed in any number of counterparts, each of
which shall be deemed to be an original, and such counterparts together shall
constitute one and the same instrument.
GEOFFREY A. WHYNOT
________________________
MEDICAL RESOURCES, INC.
By: _________________________
Name: Duane C. Montopoli
Title: President and Chief
Executive Officer
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") by and between Medical Resources,
Inc., a Delaware corporation (the "Company"), and Christopher J. Joyce (the
"Executive"), dated as of the 6th day of April, 1998.
W I T N E S S E T H:
-------------------
1. Employment Period. Subject to the terms and conditions of this
-----------------
Agreement, the Company hereby agrees to employ the Executive and the Executive
hereby agrees to remain in the employ of the Company, for the period commencing
on April 6, 1998 (the "Effective Date") and ending on the date this Agreement is
terminated in accordance with Section 3 (the "Employment Period").
2. Terms of Employment. (a) Position and Duties. (i) Commencing
------------------- -------------------
on the Effective Date and for the remainder of the Employment Period, the
Executive shall be the Senior Vice President - Legal Affairs and Administration
of the Company, which position shall encompass serving as the Company's General
Counsel and Secretary. Executive shall report exclusively to the Company's
Chief Executive Officer (the "CEO") and shall have such duties, responsibilities
and authority as shall be determined by the CEO in good faith. The Executive
shall be based at the Company's offices in Hackensack, New Jersey, provided that
--------
the Executive shall perform such duties and responsibilities not involving a
permanent transfer of his base of operations outside of Hackensack, New Jersey
at such other places as shall from time to time be necessary to fulfill his
obligations hereunder.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote full time during normal business hours to the business and affairs of
the Company and to use the Executive's best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period the Executive
shall not be engaged in any other business activity whether or not such business
activity is pursued for gain, profit or other pecuniary advantage, but this
shall not be construed as preventing the Executive from investing his personal
assets in businesses which do not compete with the Company in such form or
manner as will not require any services on the part of the Executive in the
operation of the affairs of the companies in which such investments are made and
in which his participation is solely that of an investor, and except that the
Executive may purchase securities in any corporation whose securities are
regularly traded provided that such purchase shall not result in
<PAGE>
his owning beneficially at any time, other than through a registered investment
company, one percent (1%) or more of the equity securities of any corporation
engaged in a business competitive with that of the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
------------ -----------
Executive shall receive an annual base salary ("Annual Base Salary") of
$170,000. The Annual Base Salary shall be paid in accordance with the normal
payroll practices of the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
------------
shall be eligible to receive an annual bonus (the "Annual Bonus") for each
calendar year during the Employment Period, provided that the Executive is
--------
employed on the last day of such calendar year. For calendar year 1998,
Executive shall receive an Annual Bonus in an amount not less than fifty percent
(50%) of the Annual Base Salary in effect for 1998. For all other calendar
years during the Employment Period, the target amount of the Annual Bonus for
any year shall be fifty percent (50%) of the Annual Base Salary in effect for
that year. The actual amount of the Annual Bonus for any calendar year shall be
determined by the Board at its discretion and paid no later than March 15 of the
calendar year following the calendar year for which the Annual Bonus is awarded;
provided that the Annual Bonus shall be paid at the same time as the bonuses
- --------
paid to other senior executives of the Company.
(iii) Stock Options. The Executive shall be granted, on the Effective
-------------
Date, nonqualified stock options (the "Options") to acquire 120,000 shares of
the common stock of the Company, $0.01 par value per share (the "Common Stock"),
at an exercise price per share equal to $10.625. The Options shall have a term
of ten years from the date of grant and shall vest and become exercisable in
equal installments on the first, second, third and fourth anniversaries of the
Effective Date, provided Executive remains in the employ of the Company on each
such anniversary date; provided, however, that in the event of a "Change in
-------- -------
Control" (as defined in Section 7), any outstanding unvested Options shall
become immediately vested and exercisable. All terms and conditions relating to
the Options shall be set forth in a stock option agreement (attached hereto as
Exhibit A) to be executed by the Company and the Executive on the Effective
Date.
(iv) Benefit Plans. During the Employment Period, the Executive and/or
-------------
the Executive's family, as the case may be, shall be eligible for participation
in and shall receive all benefits under employee benefit plans provided by the
Company (including, without limitation, medical, prescription, dental,
disability, group life, accidental death and travel accident insurance plans and
programs, and incentive, savings and
-2-
<PAGE>
retirement plans and programs) to the extent applicable generally to other
senior executives of the Company.
(v) Insurance. The Company shall maintain such insurance for the
---------
protection of the Executive as is appropriate and customary for the officers and
directors of entities engaged in the Company's business. Such insurance shall
cover Executive with respect to his services for the Company and affiliates
thereof (including as a director, if applicable).
(vi) Expenses. During the Employment Period, the Company shall pay or
--------
promptly reimburse the Executive for all reasonable business expenses upon
presentation of receipts therefor in accordance with the normal practices of the
Company.
(vii) Automobile Allowance. During the Employment Period, the
--------------------
Executive shall be reimbursed for the actual cost of (A) leasing and insuring an
automobile, up to a maximum of $750.00 per month, increased as of each January 1
in the Employment Period to reflect increases in the United States Consumer
Price Index for All Urban Consumers, and (B) parking expenses at a garage in New
York City, up to a maximum of $350.00 per month, increased as of each January 1
in the Employment Period to reflect increases in the United States Consumer
Price Index for All Urban Consumers.
(viii) Vacation. During the Employment Period, the Executive shall be
--------
entitled to three weeks of paid vacation per year.
3. Termination of Employment. (a) Death or Disability. The
------------------------- -------------------
Executive's employment shall terminate automatically upon the Executive's death
during the Employment Period. If the Board determines in good faith that the
"Disability" (as defined below) of the Executive has occurred during the
Employment Period, it may terminate the Executive on account of such Disability.
For purposes of this Agreement, "Disability" shall mean the absence of the
Executive from the Executive's duties with the Company on a full-time basis for
90 consecutive days, or 90 out of 120 consecutive days, as a result of
incapacity due to mental or physical illness which is determined by the Board to
prevent the Executive from performing his duties to the Company.
(b) With or Without Cause. The Company may terminate the Executive's
---------------------
employment during the Employment Period with or without Cause. For purposes of
this Agreement, "Cause" shall mean: (i) a material breach by the Executive of
the terms of this Agreement, (ii) the conviction of, or plea of guilty or no
contest to, a felony or crime involving moral turpitude, or (iii) a failure by
the Executive to follow the reasonable lawful
-3-
<PAGE>
instructions of the CEO; provided that the Executive may be terminated for Cause
--------
pursuant to clause (iii) above only after a written demand for substantial
performance is delivered to the Executive by the CEO, which specifically
identifies the manner in which the CEO believes that the Executive has not
followed the lawful instructions of the CEO, and the Executive fails to cure
such noncompliance within thirty days after receipt of such demand.
(c) With or Without Good Reason. The Executive's employment may be
---------------------------
terminated by the Executive with or without Good Reason. For purposes of this
Agreement, "Good Reason" shall mean, without the Executive's prior written
consent, a material breach by the Company of this Agreement (and without
limitation, any breach by the Company of its obligations pursuant to the last
sentence of Section 2(a)(i) hereof shall be a material breach), other than a
breach which is remedied by the Company within 30 days after receipt of notice
thereof given by the Executive.
(d) Notice of Termination. Any termination by the Company or by the
---------------------
Executive shall be communicated to the other party by a "Notice of Termination"
(as defined below) to the other party hereto given in accordance with Section
10(e) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the "Date of Termination" (as defined Section 3(e)) is
other than the date of receipt of such notice, specifies the termination date
(which date shall be not more than thirty days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause, whether or not known at the time, shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be; (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, or
by the Executive without Good Reason, the Date of Termination shall be the date
of receipt of the Notice of Termination or any later date specified therein, as
the case may be; and (iii) if the Executive's employment is terminated by reason
of death or
-4-
<PAGE>
Disability, the Date of Termination shall be the date of death of the Executive
or the first date on which the Board makes the determination that the Executive
shall be terminated as a result of his having been absent from his duties to the
extent required by the definition of Disability set forth in Section 3(a) of
this Agreement, as the case may be.
4. Obligations of the Company Upon Termination. (a) Good Reason;
------------------------------------------- ------------
Other Than for Cause or Disability. If the Executive shall terminate employment
- ----------------------------------
for Good Reason or the Company shall terminate the Executive's employment other
than for Cause or Disability:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the sum of (A) the Executive's
Annual Base Salary through the Date of Termination to the extent not previously
paid ("Accrued Salary"), (B) if such termination occurs following the end of a
calendar year and, prior to or following such termination, an Annual Bonus for
such calendar year is determined by the Board acting in good faith to have been
earned, the amount of such Annual Bonus ("Accrued Bonus"), and (C) if such
termination occurs prior to the end of a calendar year, thereby causing
Executive to be ineligible for an Annual Bonus pursuant to Section 2(b)(ii)
hereof, an amount of bonus determined by the Board acting in good faith to have
been earned for the portion of such calendar year that Executive was employed
("Partial Bonus");
(ii) the Company shall continue to pay to the Executive his Annual Base
Salary, in effect as of the Date of Termination, for a period of nine months
following the Date of Termination, payable in accordance with the Company's
normal payroll practices; and
(iii) the Company shall continue to provide to the Executive for a
period of nine months following the Date of Termination, benefits under
"employee welfare plans" (as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended), at least equal to those which are
provided to the senior executives of the Company during such period; provided,
--------
however, that if the Executive becomes reemployed with another employer and is
- -------
eligible to receive any of such benefits under another employer provided plan at
the other employer's cost, other than reasonable and customary employee
contributions (whether or not he actually elects to receive such benefits), the
corresponding benefits described herein shall be terminated; further, provided,
------- --------
however, that the Company shall not be required to provide any such benefit if
- -------
the effect thereof would be to violate the terms of any law, plan or insurance
policy or jeopardize the tax benefit associated with such benefit to which the
Company otherwise would be entitled, but in such event, the
-5-
<PAGE>
Company shall pay to the Executive, in cash, an amount equal to the cost of
providing such benefit. Any such benefits provided by another employer shall be
promptly reported by the Executive to the Company as the Executive becomes
eligible therefor.
(b) Death, Disability, With Cause, Without Good Reason. If the
--------------------------------------------------
Executive's employment is terminated by reason of the Executive's death,
Disability, termination by the Company with Cause or termination by the
Executive without Good Reason, this Agreement shall terminate without further
obligations to the Executive or his legal representatives under this Agreement,
other than for payment of Accrued Salary and, in the case of a termination by
reason of death or Disability, payment of Accrued Bonus and Partial Bonus, which
shall be paid to the Executive or his estate or beneficiary, as applicable, in a
lump sum in cash within 30 days following the Date of Termination. If the
Executive's employment is terminated for Cause, nothing in this Agreement shall
prevent the Company from pursuing any other available remedies against the
Executive.
5. Confidential Information; Nonsolicitation; Noncompetition;
----------------------------------------------------------
Nondisparagement. (a) The Executive shall hold in a fiduciary capacity for the
- ----------------
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it.
(b) The Executive hereby covenants and agrees that for nine (9) months
following the termination of the Executive's employment for any reason, the
Executive shall not, directly or indirectly, employ or seek to employ any person
who is at the Date of Termination, or was at any time within the six-month
period preceding the Date of Termination, an employee of the Company or any of
its subsidiaries or affiliates or otherwise cause or induce any employee of the
Company or any of its subsidiaries or affiliates to terminate such employee's
employment with the Company or such subsidiary or affiliate for the employment
of another company.
(c) The Executive hereby covenants and agrees that during the Employment
Period and for nine (9) months following the termination of the Executive's
employment for any reason, the
-6-
<PAGE>
Executive will not, without the prior written consent of the Company, engage in
"Competition" (as defined below) with the Company. For purposes of this
Agreement, if the Executive takes any of the following actions he will be
engaged in "Competition:" engaging in or carrying on, directly or indirectly,
any enterprise, whether as an advisor, principal, agent, partner, officer,
director, employee, stockholder, associate or consultant to any person,
partnership, corporation or any other business entity, that is principally
engaged in any business in which the Company is engaged, or is contemplating
becoming engaged, on the Date of Termination, in any area in which the Company
is then engaged, or is then contemplating being engaged, in such business;
provided, however, that "Competition" will not include (i) the mere ownership of
- -------- -------
securities in any enterprise and exercise of rights appurtenant thereto or (ii)
participation in management of any enterprise or business operation thereof
other than in connection with the competitive operation of such enterprise.
(d) The Executive hereby covenants and agrees that during the Employment
Period and for nine (9) months following the termination of the Executive's
employment for any reason, the Executive will not assist a third party in
preparing or making an unsolicited bid for the Company, engaging in a proxy
contest with the Company, or engaging in any other similar activity.
(e) During the Term and following the termination of the Executive's
employment for any reason, the parties hereto each agree not to make disparaging
public statements concerning the other, provided that nothing herein shall
--------
prevent either party hereto from enforcing its rights hereunder; further,
-------
provided that the foregoing shall not prohibit Executive and the Company from
- --------
making good faith comparative claims regarding the products and services of the
Company and those of an entity by which Executive may be employed following
termination of his employment hereunder, if the making of such claims does not
otherwise violate this Agreement.
(f) The Executive acknowledges that a breach of any of the covenants
contained in Section 5(a), (b), (c), (d) or (e) may result in material
irreparable injury to the Company for which there is no adequate remedy at law,
that it will not be possible to measure damages for such injury precisely and
that, in the event of such a breach or threat thereof, the Company shall be
entitled to a temporary restraining order and/or a preliminary or permanent
injunction, restraining the Executive from engaging in such prohibited
activities or such other relief as may be required specifically to enforce any
of the covenants contained therein. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach or
threatened breach.
-7-
<PAGE>
(g) The restrictions set forth in Section 5(a), (b), (c), (d) and (e) are
considered by the parties hereto to be reasonable for the purposes of protecting
the business of the Company. However, if any such restriction is found by a
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it is the intention of the parties that such restriction shall
be interpreted to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable.
6. Post-Termination Assistance. The Executive agrees that after his
---------------------------
employment with the Company has terminated he will provide, upon reasonable
notice, such information and assistance to the Company as may reasonably be
requested by the Company in connection with any audit, governmental
investigation or litigation in which it or any of its affiliates is or may
become a party; provided, however, that (a) the Company agrees to reimburse the
-------- -------
Executive for any related out-of-pocket expenses, including travel expenses,
and, if the Executive is not then being paid severance pursuant to Section
4(a)(ii), to pay the Executive reasonable compensation for his time based on his
rate of Annual Base Salary at the time of termination and (b) any such
assistance may not unreasonably interfere with the then-current employment of
the Executive.
7. Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more (on a
fully diluted basis) of either (i) the then outstanding shares of Common Stock,
taking into account as outstanding for this purpose such shares issuable upon
the exercise of options or warrants, the conversion of convertible shares or
debt, and the exercise of any similar right to acquire shares (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors or member managers (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this Section 7(a), the following
- -------- -------
acquisitions shall not constitute a Change in Control: (A) any acquisition by
the Company or any "affiliate" of the Company, within the meaning of 17 C.F.R.
(S) 230.405 (an "Affiliate"), (B) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any Affiliate of
the Company, (C) any acquisition by any corporation pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of Section 7(c),
-8-
<PAGE>
or (D) any acquisition by any entity in which the Executive has a direct or
indirect equity interest of greater than five percent; or
(b) Individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
-------- -------
the Effective Date whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of
the then outstanding shares of common stock or interests and the combined voting
power of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation or other
entity resulting from such Business Combination (including, without limitation,
a corporation or entity which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case may
be, and (ii) no Person (excluding (A) any employee benefit plan (or related
trust) sponsored or maintained by the Company or any Affiliate of the Company,
or such corporation resulting from such Business Combination or any Affiliate of
such corporation, or (B) any entity in which the Executive has a direct or
indirect equity interest of greater than five percent or any Affiliate of such
entity) beneficially owns, directly or indirectly, 50% or more (on a fully
diluted basis) of, respectively, the then outstanding shares of common stock or
interests of the corporation or entity resulting from such Business Combination,
taking into account as outstanding for this purpose such common stock or
interests issuable upon the
-9-
<PAGE>
exercise of options or warrants, the conversion of convertible stock, interests
or debt, and the exercise of any similar right to acquire such common stock or
interests, or the combined voting power of the then outstanding voting
securities of such corporation or other entity except to the extent that such
ownership existed prior to the Business Combination and (iii) at least a
majority of the members of the board of directors or equivalent governing body
of the corporation or other entity resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders or equityholders of the Company of a
complete liquidation or dissolution of the Company.
8. Successors (a) This Agreement is personal to the Executive and
----------
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
heirs and personal and legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
9. Indemnification. (a) Indemnification. Executive shall be
--------------- ---------------
indemnified and held harmless by the Company to the fullest extent permitted by
applicable law, as the same exists or may hereafter be amended, against all
expenses, liability and loss (including attorneys' fees, judgments, fines, and
amounts paid or to be paid in any settlement approved in advance by the Company,
such approval not to be unreasonably withheld) (collectively, "Indemnifiable
Expenses") actually incurred or suffered by Executive in connection with any
present or future threatened, pending or contemplated investigation, claim,
action, suit or proceeding, whether civil, criminal, administrative or
investigative, to which Executive is a defendant, is threatened to be made a
defendant, or is or has been identified as a target in connection with any
criminal investigation or proceeding by reason of any action or inaction taken
by Executive, within the scope of Executive's present or former employment by,
or service as a director for, the Company in Executive's capacity as an officer,
employee or director of the Company or any of its subsidiaries or affiliates
(collectively, "Indemnifiable Litigation").
(b) Advance Payment of Interim Expenses. The Company agrees to pay promptly
-----------------------------------
Indemnifiable Expenses incurred by Executive in connection with any
Indemnifiable Litigation in advance of the final disposition thereof, provided
--------
that the
-10-
<PAGE>
Company has received an undertaking by or an behalf of Executive, to the extent
required by law, to repay the amount so advanced to the extent that it is
finally adjudicated by court order or judgment from which no further right of
appeal exists that Executive is not entitled to be indemnified by the Company
under this Agreement or otherwise. The advances to be made hereunder shall be
paid by the Company to Executive within ten (10) business days following
delivery of a written request therefor by Executive to the Company.
(c) Provision of Counsel Where Executive Is Not A Defendant Or Target. The
-----------------------------------------------------------------
Company shall provide Executive with legal representation, at no cost to the
Executive, in the event that the Executive shall be called upon to provide sworn
testimony in connection with any investigation, claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative
(collectively a "Non-Party Proceeding") as to which Executive is not a defendant
or target. The Company may designate one counsel to represent both the Company
and/or one or more directors or officers of the Company. Executive may reject
the counsel designated and require the Company to designate other counsel only
in the event that designated counsel has a disqualifying conflict of interest.
Executive may, at his own expense, retain counsel of his own choosing at any
time.
(d) Procedure for Making Demand. Executive shall, as a condition precedent
---------------------------
to his rights under this Section 9, give the Company notice in writing as soon
as practicable of any claim or demand made against Executive for which
indemnification or the provision of counsel will or could be sought under this
Section 9. No failure to give such notice shall relieve the Company from any
obligations hereunder, except to the extent, if any, such failure shall
materially and adversely affect and prejudice the Company. Notice to the
Company shall be directed to the Company at the address set forth in Section
10(e) hereof (or such other address as the Company shall designate in writing to
Executive). In addition, Executive shall give the Company such information and
cooperation as it may reasonably require and as shall be within Executive's
power, unless prohibited by law. Any indemnification or appointment of counsel
provided for hereunder shall be made no later than ten (10) business days after
receipt of the written request of Executive.
(e) Failure to Indemnify. (i) If a claim under this Section 9 for
--------------------
indemnification or appointment of counsel is not paid in full by the Company or
satisfied within ten (10) business days after a written request for payment
thereof has been received by the Company, Executive may, but need not, at any
time thereafter bring an action against the Company and, if successful in whole
or in part, Executive shall also be entitled to be paid
-11-
<PAGE>
all expenses (including attorneys' fees and expenses) of bringing such action.
(ii) It shall be a defense to such action (other than an action brought
to enforce a claim for expenses incurred in connection with any action, suit or
proceeding in advance of its final disposition) that Executive has not met the
standard of conduct which make it permissible under applicable law for the
Company to indemnify Executive for the amount claimed, but the burden of proving
such defense shall be on the Company and Executive shall be entitled to receive
interim payments of interim expenses pursuant to Section 9(b) hereof unless and
until such defense may be finally adjudicated by court order or judgment from
which no further right of appeal exists. It is the parties' intention that if
the Company contests Executive's right to indemnification, the question of
Executive's right to indemnification shall be for the Court to decide, and
neither the failure of the Company (including the Board, independent legal
counsel or its stockholders) to have made a determination that indemnification
of Executive is proper in the circumstances because Executive has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including the Board, any committee or subgroup of
the Board, independent legal counsel, or its stockholders) that Executive has
not met such applicable standard of conduct, shall create a presumption that
Executive has or has not met the applicable standard of conduct.
(f) Notice to Insurers. At the time of the receipt of a notice of a claim
------------------
pursuant to Section 9(c) hereof, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective director and officer liability insurance
policies. The Company shall thereafter take all necessary or desirable action
to cause such insurers to pay, on behalf of the Executive, all amounts payable
as a result of such proceeding in accordance with the terms of such policies.
(g) Retention of Counsel. In the event that the Company shall be obligated
--------------------
to pay Indemnifiable Expenses under Section 9(a) of this Agreement as a result
of any proceeding against Executive, the Company shall be entitled to assume the
defense of such proceeding, with counsel approved by Executive, which approval
shall not be unreasonably withheld, upon the delivery to Executive of written
notice of its election to do so. The Executive may withhold such approval if he
reasonably concludes that there may be a conflict of interest or position on any
significant issue between the Company and the Executive in the conduct of the
defense of such proceeding. After delivery of such notice, approval of such
counsel by Executive and the retention of such counsel by the Company to
represent the Executive, the
-12-
<PAGE>
Company will not be liable to Executive under this Agreement for any fees of any
other counsel subsequently incurred by Executive with respect to that same
proceeding; provided, however, that in the event of a proceeding brought by
-------- -------
shareholders of the Company in the right of the Company, the Company agrees to
retain counsel which is different and separate from the Company's counsel to
represent Executive in such proceeding, subject to the other terms and
conditions of this Section 9(g).
(h) Contract Rights Not Exclusive. The contract rights conferred by this
-----------------------------
Section 9 shall be in addition to, but not exclusive of, any right which
Executive may have or may hereafter acquire under any statute, provision of the
Company's Certificate of Incorporation or Bylaws, agreement, vote of
shareholders or disinterested directors, or otherwise. Nothing in this Section
9 shall be construed to affect or modify any much right.
(i) Attorneys' Fees. In the event that any action is instituted by
---------------
Executive under this Agreement to enforce or interpret any of the terms of this
Section 9 and Executive prevails or substantially prevails in such action,
Executive shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Executive with respect to such action.
In the event of an action instituted by or in the name of the Company under this
Section 9 to enforce or interpret any terms hereof and Executive prevails or
substantially prevails in such action, Executive shall be entitled to be paid
all court costs and expenses, including attorneys' fees, incurred by Executive
in defense of such action (including with respect to Executive's counterclaims
and cross-claims made in such action).
10. Miscellaneous. (a) Governing Law. This Agreement shall be
------------- -------------
governed by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
(b) Captions and Amendments. The captions of this Agreement are not part of
-----------------------
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(c) Stipulation. Executive hereby stipulates to the Company that on the
-----------
date of this Agreement, neither Executive nor his affiliates has any claim of
any type against the Company, except claims that may arise under this Agreement,
and represents and warrants that this Agreement does not conflict with any other
agreement to which Executive is a party.
-13-
<PAGE>
(d) Construction. The parties have participated jointly in the negotiation
------------
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
(e) Notices. All notices and other communications hereunder shall be in
-------
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
-------------------
Mr. Christopher J. Joyce
138 East 36th Street, #6-A
New York, New York 10016
Tel: 212 683-9476
If to the Company:
-----------------
Medical Resources, Inc.
155 State Street
Hackensack, New Jersey 07601
Attn: Duane C. Montopoli
Tel: 201 488-6230
Fax: 201 488-8455
With a copy to:
Willkie Farr & Gallagher
153 East 53rd Street
One Citicorp Center
New York, New York 10022
Attn: Michael J. Segal, Esq.
Tel: 212 821-1514
Fax: 212 821-1555
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(f) Enforceability. The invalidity or unenforceability of any provision of
--------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
-14-
<PAGE>
(g) Withholding. The Company may withhold from any amounts payable under
-----------
this Agreement such Federal, state, local or foreign taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
(h) No Waiver. The Executive's or the Company's failure to insist upon
---------
strict compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder shall not be deemed to be a waiver of such provision or right or
any other provision or right of this Agreement. No waiver of any provision of
this Agreement by the Company or the Executive shall be effective unless it is
in a writing signed by the party against whom enforcement is sought.
[SIGNATURE PAGE FOLLOWS]
-15-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused this Agreement to be executed in its name on its behalf, all as of
the day and year first above written.
This instrument may be executed in any number of counterparts, each of
which shall be deemed to be an original, and such counterparts together shall
constitute one and the same instrument.
CHRISTOPHER J. JOYCE
------------------------
MEDICAL RESOURCES, INC.
By:
----------------------------
Name: Duane C. Montopoli
Title: President and Chief
Executive Officer
-16-
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<C> <S> <C>
1. Accessible Resources, Inc. Delaware
2. ADI of Central New Jersey, Inc. Delaware
3. ADI of Chelmsford, Inc. Delaware
4. ADI of Mass., Inc. Delaware
5. ADI of Mid-New Jersey, Inc. Delaware
6. ADI of Northern New Jersey, Inc. Delaware
7. ADI of RI-Mass, Inc. Delaware
8. ADI of Rockaway, Inc. Delaware
9. Advanced Diagnostic Imaging, Inc. Delaware
10. Albany MRI Capstone, Inc. Delaware
11. ATI Resources, Inc. Delaware
12. Baltimore MRI Capstone, Inc. Delaware
13. Boardman Resources, Inc. Delaware
14. Bradenton Resources, Inc. Delaware
15. Bronx Medical Resources, Inc. Delaware
16. Brooklyn Resources, Inc. New York
17. C.D. Acquisition, Inc. Illinois
18. Centereach Resources, Inc. Delaware
19. Central Fort Myers Resources, Inc. Delaware
20. Charlotte Resources, Inc. Delaware
21. Clearwater Resources, Inc. Delaware
22. Collier Resources, Inc. Delaware
23. Coral Resources, Inc. Delaware
24. Diagnostic Imaging Resources, Inc. Delaware
25. Diagnostic Imaging Services of New York, Inc. Delaware
26. Diagnostic Networks Incorporated California
27. DIN Resources, Inc. Delaware
28. DIR Acquisition, Inc. Delaware
29. East Bergen Resources, Inc. New Jersey
30. Essex-Passaic Resources, Inc. Delaware
31. Fort Myers Resources, Inc. Delaware
32. Germantown Resources, Inc. Delaware
33. Hackensack Resources, Inc. Delaware
34. Hollywood Resources, Inc. Delaware
35. Imaging Networks, Inc. Delaware
36. Imaging Resources, Inc. Delaware
37. Jacksonville Resources, Inc. Delaware
38. Jupiter MRI, Inc. Delaware
39. Lehigh Valley Resources, Inc. Delaware
40. Long Beach Resources, Inc. Delaware
41. M.M. Funding, Inc. Delaware
42. Medical Equity Resources, Inc. Delaware
43. Melbourne Resources, Inc. Delaware
44. Morgan Medical Corporation Florida
45. Morgan Medical Holdings, Inc. Colorado
46. MRI Capstone Resources, Inc. Delaware
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C>
47. MRI Sub, Inc. Delaware
48. MRI-BCC, Inc. New Jersey
49. MRI-Madison Resources, Inc. Delaware
50. MRI-South Umberton, Inc. Florida
51. MRIS, Inc. Delaware
52. Network Management Services, Inc. New Jersey
53. Newark Resources, Inc. Delaware
54. North Bronx Resources, Inc. Delaware
55. Nursecare Plus, Inc. California
56. Oak Lawn Imaging Center, Inc. Illinois
57. Oak Lawn Magnetic Resonance Imaging Center, Inc. Illinois
58. Queens Medical Resources, Inc. Delaware
59. Queens/Kings Resources, Inc. Delaware
60. Rancho Cucamonga Resources, Inc. Delaware
61. San Clemente Resources, Inc. Delaware
62. San Jose Resources, Inc. Delaware
63. Sarasota Resources, Inc. Delaware
64. Smith Garden Resources, Inc. Delaware
65. South Hudson Resources, Inc. New Jersey
66. Starmed Health Personnel, Inc. Delaware
67. Starmed Staffing, Inc. Delaware
68. Starmed Staffing California, Inc. Delaware
69. Starmed Staffing Michigan, Inc. Delaware
70. Staten Island Resources, Inc. Delaware
71. Tampa Bay Resources, Inc. Delaware
72. Valley Imaging Resources, Inc. Delaware
73. Venice Resources, Inc. Delaware
74. Warren Resources, Inc. Delaware
75. Wesley Medical Resources, Inc. California
76. West Essex Resources, Inc. Delaware
77. West Essex Spect Resources, Inc. New Jersey
78. West Palm Beach Resources, Inc. Delaware
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-4048) pertaining to the 1992, 1995 and 1996 Stock Option Plans and
Individual Officer and Director Stock Option Agreements of Medical Resources,
Inc. of our report dated May 26, 1998, with respect to the consolidated
financial statements and schedule for the years ended December 31, 1997 and
1995, included in the Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
May 26, 1998
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the registration
statement of Medical Resources, Inc. and Subsidiaries on Form S-8 of our report
dated March 28, 1997, on our audit of the consolidated financial statements and
financial statement schedule of Medical Resources, Inc. and Subsidiaries as of
December 31, 1996 and for the year then ended, which report is included in this
Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
June 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,198
<SECURITIES> 0
<RECEIVABLES> 84,809
<ALLOWANCES> 18,922
<INVENTORY> 0
<CURRENT-ASSETS> 111,138
<PP&E> 97,428
<DEPRECIATION> 33,085
<TOTAL-ASSETS> 338,956
<CURRENT-LIABILITIES> 169,312
<BONDS> 38,078
0
18,242
<COMMON> 219
<OTHER-SE> 108,443
<TOTAL-LIABILITY-AND-EQUITY> 338,956
<SALES> 202,386
<TOTAL-REVENUES> 202,386
<CGS> 0
<TOTAL-COSTS> 178,817
<OTHER-EXPENSES> 22,685
<LOSS-PROVISION> 20,656
<INTEREST-EXPENSE> 9,167
<INCOME-PRETAX> (28,939)
<INCOME-TAX> 2,300
<INCOME-CONTINUING> (31,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,938)
<NET-INCOME> (33,177)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
