<PAGE>
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D. C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-------------
Commission file number 1-12461
-------
MEDICAL RESOURCES, INC.
-----------------------
(Exact Name of registrant as specified in its charter)
Delaware 13-3584552
- ------------------------ --------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
155 State Street Hackensack, New Jersey 07601
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (201) 488-6230
--------------
Title of Each Class
-------------------
Common Stock (Par value $.01 per share)
Indicate by check Mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each class of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at August 1, 1997
----- -----------------------------
Common stock, par value
$.01 per share 21,337,042
Amendment No. 2
The registrant hereby amends its Form 10-Q for the Quarter in its
entirety ended June 30, 1997 as set forth herein.
<PAGE>
MEDICAL RESOURCES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 3
Consolidated Statements of Income for the
six months ended June 30, 1997 and 1996 5
Consolidated Statements of Income for the
three months ended June 30, 1997 and 1996 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 7
Consolidated Statements of Changes in Stockholders'
Equity 11
Notes to Consolidated Financial Statements 12
Item 2. Management's Discussion and Analysis or Plan of
Operation 28
PART II. OTHER INFORMATION
Item 2. Changes in Securities 35
Item 6. Exhibits and reports on Form 8-K 36
Exhibit 11. Computation of Shares Used For Earnings
Per Share Calculation 38
2
<PAGE>
<TABLE>
<CAPTION>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,815,225 $ 15,346,254
Short-term investments --- 1,662,600
Restricted short-term investments --- 4,500,000
Accounts receivable, net 61,934,730 39,878,380
Other receivables 4,578,879 2,290,825
Prepaid expenses 5,737,932 3,715,092
Deferred tax assets, net 2,374,000 3,354,000
------------ ------------
Total current assets 112,440,766 70,747,151
------------ ------------
Medical diagnostic and office
equipment, net 54,176,655 24,397,077
Goodwill, net 133,425,459 62,638,656
Other assets 5,875,521 3,170,684
Deferred tax assets, net 1,784,089 2,351,089
Restricted cash 1,359,328 1,045,000
Value of venture contracts 117,155 164,155
------------ ------------
Total assets $309,178,973 $164,513,812
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments on notes and
mortgage payable $ 8,940,550 $ 6,728,668
Current installments on capital
lease obligations 5,864,409 5,991,626
Accounts payable and
accrued expenses 28,316,360 13,070,370
Line of credit 1,500,000
Income taxes payable 1,178,093 2,063,860
Other current liabilities 1,447,925 116,847
------------ ------------
Total current liabilities 47,247,337 27,971,371
Senior notes payable 78,000,000 ---
Notes and mortgage payable,
less current installments 14,876,462 12,637,926
Obligations under capital leases,
less current installments 16,817,001 8,373,681
Convertible debentures --- 6,988,089
Other long term liabilities 2,655,440 108,076
------------ ------------
Total liabilities 159,596,240 56,079,143
Redeemable common stock 8,242,152 ---
Minority interest 10,585,107 2,050,695
------------ ------------
18,827,259 2,050,695
Stockholders' equity:
Common stock, $.01 par value;
authorized 50,000,000 shares,
20,866,923 issued and
outstanding at June 30, 1997 and
18,593,900 issued and 18,326,400
outstanding at December 31, 1996 209,318 185,939
Common stock to be issued; 600,000
shares at December 31, 1996 --- 1,721,250
Additional paid-in capital 119,797,398 102,927,874
Unrealized appreciation of investments --- 25,889
Retained earnings 10,748,758 2,955,530
Less, 267,500 common shares in
Treasury at December 31, 1996 --- ( 1,432,508)
------------ ------------
Total Stockholders' Equity 130,755,474 106,383,974
------------ ------------
Total liabilities and stockholders'
equity $309,178,973 $164,513,812
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Six Months ended June 30,
1997 1996
----------- -----------
$92,392,198 $36,776,497
Net service revenues ----------- -----------
Imaging center and staffing operating costs:
Technical services payroll and
related expenses 33,767,919 14,398,221
Medical supplies 3,883,925 1,703,622
Diagnostic equipment maintenance 3,386,168 1,239,556
Independent contractor fees 2,939,807 494,072
Administrative expenses 9,334,982 4,511,727
Other costs 4,027,657 1,138,801
Provision for uncollectible accounts
receivable 4,648,874 1,761,835
Corporate general and administrative 7,093,449 3,432,974
Depreciation and amortization 7,341,405 2,740,676
----------- -----------
Operating income 15,968,012 5,355,013
Interest expense, net 2,853,445 1,287,583
----------- -----------
Income before minority interest and
income taxes 13,114,567 4,067,430
----------- -----------
Minority interest ( 193,432) 64,282
----------- -----------
Income before income taxes 13,307,999 4,003,148
Provision for income taxes 5,514,771 1,099,020
----------- -----------
Net income $ 7,793,228 $ 2,904,128
=========== ===========
Per share data
Primary:
Primary net income per share $ .37 $ .33
=========== ===========
Fully diluted:
Fully diluted net income per share $ .36 $ .31
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months ended June 30,
1997 1996
----------- -----------
Net service revenues $51,799,558 $18,678,493
----------- -----------
Imaging center and staffing operating costs:
Technical services payroll and
related expenses 18,379,328 6,785,474
Medical supplies 2,493,635 880,622
Diagnostic equipment maintenance 1,876,732 658,719
Independent contractor fees 1,628,737 252,971
Administrative expenses 5,432,896 2,248,678
Other costs 2,832,767 622,536
Provision for uncollectible accounts
receivable 2,359,876 947,127
Corporate general and administrative 3,729,973 1,831,769
Depreciation and amortization 4,419,951 1,423,767
----------- -----------
Operating income 8,645,663 3,026,830
Interest expense, net 1,924,132 738,689
----------- -----------
Income before minority interest and
income taxes 6,721,531 2,288,141
Minority interest ( 428,448) 20,591
----------- -----------
Income before income taxes 7,149,979 2,267,550
Provision for income taxes 2,958,576 661,200
----------- -----------
Net income $ 4,191,403 $ 1,606,350
=========== ===========
Per share data
Primary:
Primary net income per share $ .19 $ .17
=========== ===========
Fully diluted:
Fully diluted net income per share $ .19 $ .16
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,793,228 $2,904,128
Adjustments to reconcile net income ---------- ----------
to net cash provided by
operating activities:
Depreciation and amortization 7,341,405 2,740,676
Provision for uncollectible accounts
receivable 4,648,874 1,761,835
Minority interest in income of
joint ventures and limited
partnerships, net of distributions ( 193,432) 64,282
Deferred income tax provision (benefit) 1,547,000 ( 480,000)
Changes in operating assets and liabilities:
Accounts receivable (16,219,614) (4,157,911)
Other receivables ( 2,271,574) ( 307,507)
Prepaid expenses ( 2,013,665) ( 713,714)
Other assets ( 1,218,650) ( 586,406)
Accounts payable and accrued
expenses 5,996,979 1,741,850
Income taxes payable ( 885,767) 223,103
Other current liabilities 1,331,078 ( 318,371)
Other long term liabilities ( 2,920,557) ( 125,083)
------------ -----------
Total adjustments ( 4,857,923) ( 157,246)
------------ -----------
Net cash provided by
operating activities 2,935,305 2,746,882
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended June 30,
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from investing activities:
Purchase of MRI-CT, Inc. --- ( 553,245)
Purchase of NurseCare Plus, Inc. --- (1,263,991)
Purchase of Americare Imaging
Centers, Inc. --- (1,500,000)
Purchase of Access Imaging Center, Inc. --- (1,300,000)
Purchase of WeCare - Allied Health
Care, Inc. (1,049,618)
Purchase of National Healthcare
Solutions, Inc. ( 50,000) ---
Purchase of Melbourne center ( 1,125,000) ---
Purchase of southern California centers ( 1,021,351) ---
Purchase of Advanced Diagnostic
Imaging, Inc. ( 5,974,290) ---
Purchase of West Palm Beach center ( 2,000,000) ---
Purchase of Rancho Cucamonga center ( 2,603,615) ---
Purchase of ATI Centers, Inc. (12,900,000) ---
Purchase of Maryland centers ( 2,828,872)
Purchase of Capstone Management
Group, Inc. ( 5,326,862) ---
Purchase of Wesley Medical Resources, Inc., net of
cash acquired 225,920 ---
Investment in Mid-Manhattan Resources ( 1,000,500) ---
Purchase of New York centers ( 4,128,010) ---
Purchase of medical diagnostic and
office equipment ( 4,232,562) ( 825,454)
Refinancing of assets under capital
leases ( 1,461,470) ---
Sales of short-term investments,net 5,848,272 ---
----------- ----------
Net cash used in
investing activities (38,578,340) (6,492,308)
----------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months ended June 30,
1997 1996
---------- ------------
Cash flows from financing activities:
Common Stock issuance costs --- ( 237,140)
Note and capital lease repayments
in connection with acquisitions ( 7,658,948) ---
Note and capital lease repayments in
connection with Senior Notes
transaction ( 13,764,215) ---
Note and capital lease repayments in
connection with sale leaseback
transactions ( 2,313,870) ---
Principal payments under capital
lease obligations ( 1,791,092) (2,092,048)
Principal payments on notes and
mortgage payable ( 3,426,502) ( 708,786)
Proceeds from Senior notes,
net of issuance costs 77,113,080 ---
Proceeds from borrowings 308,512 ---
Borrowings under line of credit 1,500,000 4,324,729
Proceeds from the sale/leaseback of
medical diagnostic equipment 7,855,556
Proceeds from convertible debentures,net 6,532,965
Redemption of convertible debentures ( 19,000) ---
Purchase of treasury stock --- ( 50,625)
Proceeds from exercises of options 308,485 56,668
------------- -----------
Net cash provided by
financing activities 58,112,006 7,825,763
Net increase in cash ------------- -----------
and cash equivalents 22,468,971 4,080,337
Cash and cash equivalents
at beginning of year 15,346,254 3,934,677
Cash and cash equivalents ------------- -----------
at June 30, $ 37,815,225 $ 8,015,014
============= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
9
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months ended June 30,
1997 1996
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 1,858,600 $1,387,000
Interest $ 1,577,657 $ 813,000
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Capital lease obligations assumed
in connection with acquisitions $18,996,575 $1,572,137
Note payable obligations assumed
in connection with acquisitions $23,116,249 ---
Capital lease obligations incurred
for use of equipment $ 1,703,147 $ 130,000
Conversion of subordinated debentures
to Common Stock $ 6,996,613 $ 650,000
Issuance of Common Stock in connection
with acquisitions $14,008,020 $ 914,000
Issuance of warrants in connection
with acquisitions $ 2,025,000 ---
Issuance of notes payable in connection
with acquisitions --- $4,603,863
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Common
Common Stock to
Total Stock Be Issued
-------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $106,383,974 $185,939 $ 1,721,250
Purchase of Jacksonville center
for 215,000 shares of
Common Stock 1,951,770
Purchase of West Palm Beach center
for 56,670 shares of
Common Stock 600,000 42
Purchase of Rancho Cucamonga center
for 44,016 shares of
Common Stock 500,000 440
Purchase of Capstone Management Group
Inc. for 79,441 shares of
Common Stock 1,000,002 794
Purchase of Maryland centers
for 119,166 shares of
Common Stock 1,500,000 1,192
Purchase of Wesley
for 137,222 shares
of Common Stock 2,000,000 1,372
Conversion of debentures 6,635,422 12,707
Sale of investments (25,889)
Exercise of stock options and warrant 241,967 744
Warrants issued in connection with -
acquisitions 2,025,000
Common Stock issued in
connection with Ft. Myers acquisition - 6,000 (1,721,250)
Issuance of shares for forgiveness
of debt 150,000 88
Net income 7,793,228
-------------------------------------------
$130,755,474 $209,318 $ -
============ ======== ===============
<CAPTION>
Additional Retained Treasury Unrealized
Paid-In Earnings Shares Appreciation of
Capital (Deficit) at Cost Investments
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 102,927,874 $ 2,955,530 $ (1,432,508) $ 25,889
Purchase of Jacksonville center
for 215,000 shares of
Common Stock 800,408 1,151,362
Purchase of West Palm Beach center
for 56,670 shares of
Common Stock 318,812 281,146
Purchase of Rancho Cucamonga center
for 44,016 shares of
Common Stock 499,560
Purchase of Capstone Management Group
Inc. for 79,441 shares of
Common Stock 999,208
Purchase of Maryland centers
for 119,166 shares of
Common Stock 1,498,808
Purchase of Wesley
for 137,222 shares
of Common Stock 1,998,628
Conversion of debentures 6,622,715
Sale of investments (25,889)
Exercise of stock options and warrants 241,223
Warrants issued in connection with
acquisitions 2,025,000
Common Stock issued in
connection with Ft. Myers acquisition 1,715,250
Issuance of shares for forgiveness
of debt 149,912
Net income 7,793,228
--------------------------------------------------------------------------
$ 119,797,398 $ 10,748,758 $ - $ -
==========================================================================
</TABLE>
Page 11
<PAGE>
MEDICAL RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
- -----------
The accompanying unaudited consolidated financial statements of Medical
Resources, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete consolidated financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for an entire year. The unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto contained in the Company's Annual Report
for the year ended December 31, 1996.
Reclassification
- ----------------
Certain prior year items have been reclassified to conform to current year
presentation
Revenue Recognition
- -------------------
The Company has entered into three forms of agreements (defined as Type I,
Type II and Type III as described below) to provide equipment, premises,
comprehensive management, administration and technical imaging services to
independent contractor interpreting physicians for the provision of medical
services with respect to magnetic resonance scanning, computerized tomography
scanning, radiography and fluoroscopy, ultrasound, x-ray, mammography and other
radiological modalities mutually agreed upon. In accordance with the agreements,
as part of the Company's administrative duties, the Company provides billing and
collection services on behalf of the interpreting physicians for the diagnostic
imaging services performed.
Type I
- ------
Under Type I agreements interpreting physicians are required to pay to the
Company a charge per procedure performed. These charges are specified in a
schedule included by attachment to the Type I agreement and represent the
Company's net service revenue net of contractually determined discounts. Under
the Type I agreements, the Company bears the risk of amounts being uncollectible
equivalent to the proportionate relationship of its charge per procedure,
including LOP Type procedures (See Note 2), and the total charge to the
referring physicians patient. The Company has established and recognized
reserves for potential uncollectibles.
Type II
- -------
For the consolidated centers which the Company acquired, other than NMR
developed centers, subsidiaries of the Company have entered into independent
contractor agreements with unaffiliated professional corporations to provide
radiological services. Fees paid to radiologists, based on cash collections, at
these centers are reflected as a component of independent contractor fees in the
accompanying statements of operations. The Company has entered directly into
agreements, under its Type II structure, with third party payers that provide
for payment to the Company at amounts which differ from its established rates.
Services rendered to medicare and medical beneficiaries are provided under a
prospective payment system which establishes a reimbursement rate by modality.
These rates vary depending upon the type of image rendered. The Company has also
entered into payment agreements, under its Type II structure, with certain
commercial insurance carriers, health maintenance organizations and preferred
provider organizations. The basis for payment to the Company under these
agreements includes contractually determined discounts from established rates.
Accordingly, net service revenue for these acquired centers consists of patient
billings adjusted for contractual allowances which have been negotiated with
various third party payers. Under Type II agreements, the Company bears the risk
of uncollectibles and has established and recognized reserves for potential
uncollectibles.
12
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
Type III
- --------
For centers which NMR developed, Type III agreements have been entered into
with physicians engaging in business as professional associations ("Physicians")
pursuant to which the Company maintains and operates imaging systems in offices
operated by the Physicians. The agreements had terms of up to six years and are
renewable at the option of the Company for a period of one year. All Type III
agreements are currently operating under one year extensions. Under the
agreements, Physicians has agreed to be obligated to contract for radiological
services at the centers and to sublease each facility. The Company is obligated
to make necessary leasehold improvements, provide furniture and fixtures and
perform certain administrative functions relating to the provision of technical
aspects of the centers operations for which Physicians pays a quarterly fee
composed of a fixed sum based on the cost of the respective imaging system
installed, including related financing costs, a charge per invoice processed and
a charge based upon system usage for each NMR-installed imaging system in
operation. These fees, net of an allowance based upon Physicians ability to pay
after Physicians have fulfilled their obligations under facility subleases and
radiological service contracts as set forth above, and the recognition of
contractual allowances, which have been negotiated with various third party
payers, and uncollectibles for all procedures, including LOP Type services (See
Note 2) constitutes the Company's net service revenues for sites developed by
NMR. The fixed and determinable usage fees charged to the Physicians amount to
approximately $4,980,000 per annum.
Net service revenues are reported when earned at their estimated net
realizable amounts from patients, third party payers and others for services
rendered based on contractually established rates which include prospective
contractual adjustments. These adjustments are recognized at the time the
services are rendered. Revenues derived from medicare and medicaid are subject
to audit. The Company is aware of no pending audits.
The Company also recognizes revenue from temporary nurse staffing.
Revenues are recognized on an accrual basis as earned.
New Accounting Standards
- -------------------------
In the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of" ("Statement No. 121"), which requires impairment
losses to be recorded on long-lived assets used in
13
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. No adjustments were required
pursuant to the adoption of Statement No. 121 by the Company.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("Statement No. 128"), was issued which established
standards for computing and presenting earnings per share. Statement No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Had Statement No. 128 been used the Company
would have reported the following unaudited earnings per share for the six month
periods ended:
June 30, 1997 June 30, 1996
------------- -------------
Earnings per share:
Basic $ .39 $ .37
Fully Diluted $ .34 $ .31
Weighted Average Number
of shares used in computation:
Basic 19,752,585 8,332,669
Fully Diluted 22,783,578 9,960,233
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting and Disclosure of Stock Based Compensation" ("Statement No. 123")
was issued. It encourages but does not require companies to recognize stock
awards based on their fair value at the date of grant. The Company currently
follows, and expects to continue to follow, the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations in accounting for employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
14
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Management and use receivables
Due from unaffiliated physicians................ $46,888,113 $23,569,802
Due from affiliated physicians.................. 12,812,935 9,195,387
Patient accounts receivable....................... 27,063,528 $17,481,493
Less: Allowance for doubtful accounts............. (19,019,446) (9,598,740)
Allowance for contractual allowances........ (5,810,400) (769,562)
----------- -----------
$61,934,730 $39,878,380
=========== ===========
</TABLE>
Contractual adjustments, representing standard fee reductions negotiated with
the third party payers, amounted to approximately $25,270,000, for the year
ended December 31, 1996, and $24,134,000 for the six months ended June 30, 1997.
A significant financial instrument is accounts receivable, which is
concentrated among third party medical reimbursement organizations, principally
insurance companies. Approximately 20% of the Company's imaging revenue was
derived from the delivery of services of which the timing of payment is
substantially contingent upon the timing of settlement of pending litigation
involving the recipient of services and third parties (Letter of Protection or
"LOP-type" accounts receivable). The Company undertakes certain measures to
identify and document the individual's obligation to pay for services
rendered regardless of the outcome of pending litigation. By its nature, the
realization of a substantial portion of these receivables is expected to extend
beyond one year from the date the service was rendered. The Company anticipates
that a material amount of its accounts receivable will be outstanding for
periods in excess of twelve months in the future. The Company considers the
aging of its accounts receivable in determining the amount of allowance for
doubtful accounts. Credit losses associated with the receivables are provided
for in the consolidated financial statements and have historically been within
management's expectations. For LOP-type receivables, the Company provides for
uncollectible accounts at substantially higher rates than any other revenue
source.
"LOP type" services are rendered at substantially all of the Company's imaging
centers, but only in the case of Type II agreements are such account receivables
reflected directly in the Company's financial records. This is as a result of
the structure in terms of the Company's Type I and Type III agreements as
described in Note 1 "Revenue Recognition."
3. Short-term investments
- --------------------------
Gross
unrealized Fair
Cost gains value
---------- ----------- -----------
December 31, 1996
Available-For-Sale:
U.S. Government obligations $ 5,360,694 $ 25,889 $ 5,386,583
Certificates of deposit 776,017 -- 776,017
----------- ---------- -----------
Total 6,136,711 25,889 6,162,600
Less: Restricted investments (4,500,000) -- (4,500,000)
----------- ---------- -----------
$ 1,636,711 $ 25,889 $1,662,600
========== =========== ==========
4. Acquisitions
- ----------------
On January 9, 1996, the Company consummated the acquisition of the business
assets of MRI-CT, Inc., ("MRI-CT") comprised primarily of four diagnostic
imaging centers in the city of New York. The acquisition was consummated
pursuant to an Asset Purchase Agreement dated December 21, 1995 by and among the
Company and MRI-CT. Pursuant to the Agreement, a wholly owned subsidiary of the
Company acquired all of the business assets of MRI-CT for a combination of
$533,000 cash, 194,113 shares of the Company's Common Stock valued at $914,000
and a $88,000 note payable bearing interest at prime due January 9, 2001. The
excess of the purchase price and direct acquisition costs over the fair value of
net assets acquired amounted to $1,540,000 and is being amortized on a straight-
line basis over 20 years.
On January 12, 1996, the Company consummated the acquisition of the common
stock of NurseCare Plus, Inc. ("NurseCare") a California corporation based in
Oceanside, California, which provides supplemental health care staffing services
for clients including hospitals, clinics and home health agencies in southern
California. The NurseCare acquisition was consummated pursuant to a Stock
Purchase Agreement dated January 11, 1996 by and among StarMed Staffing, Inc.
the Company's wholly owned subsidiary ("StarMed") and NurseCare. Pursuant to
the NurseCare Agreement, StarMed acquired from NurseCare all of the common stock
of NurseCare for $2,514,000, payable in $1,264,000 cash and a note payable for
$1,250,000 bearing interest at prime plus one percent due January 12, 1999. The
excess of the purchase price and direct acquisition costs over the fair value of
net assets acquired amounted to $2,087,000 and is being amortized on a straight-
line basis over 20 years.
15
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
On May 1, 1996, the Company entered into an asset purchase agreement with
AmeriCare Imaging Centers, Inc. and MRI Associates of Tarpon Springs, Inc.
("AmeriCare"), which owned and operated imaging centers in the Tampa, Florida
area. Pursuant to the acquisition agreement, the Company acquired certain of
the assets and liabilities of Americare for $1,500,000 cash and 228,751 shares
of the Company's Common Stock valued at $1,275,000. The excess of the purchase
price and direct acquisition costs over the fair value of net assets acquired
amounted to $2,862,000 and is being amortized on a straight-line basis over 20
years.
On May 22, 1996, the Company entered into an asset purchase agreement with
Clearwater, Florida based Access Imaging Center, Inc. ("Access"). Pursuant to
the acquisition, the Company acquired certain of the assets and liabilities of
Access for $1,300,000 cash and 192,063 shares of the Company's Common Stock
valued at $1,445,000. The excess of the purchase price and direct acquisition
costs over the fair value of net assets acquired amounted to $1,972,000 and is
being amortized on a straight-line basis over 20 years.
On June 28, 1996, the Company entered into an asset purchase agreement with
WeCare-Allied Health Care, Inc. ("WeCare"), a health care staffing company.
Pursuant to the agreement, the Company acquired certain assets for $1,050,000
cash and a $510,000 note payable bearing interest at prime plus one percent due
July 1998. The excess of the purchase price and direct acquisition costs over
the fair value of net assets acquired amounted to $1,769,000 and is being
amortized on a straight-line basis over 20 years.
On July 3, 1996, the Company acquired a diagnostic imaging center in
Centereach, New York ("Centereach"). Pursuant to the acquisition, the Company
acquired certain of the assets for approximately $3,100,000 in cash. The excess
of the purchase price and direct acquisition costs over the fair value of net
assets acquired amounted to $2,989,000 and is being amortized on a straight-line
basis over 20 years.
On August 30, 1996, the Company consummated the acquisition of NMR of
America, Inc. ("NMR"). NMR is engaged directly and through limited partnerships
in the operation of eighteen diagnostic imaging centers. Pursuant to the
acquisition agreement, NMR was merged into a wholly owned subsidiary of the
Company and each issued and outstanding share of NMR common stock was converted
into 0.6875 shares of the Company's common stock resulting in the issuance of
4,456,000 shares of the Company's common stock valued at $39,350,000. The excess
of the purchase price and direct acquisition costs, including $200,000 in fees
and 120,000 warrants, with an exercise price of $9.00, valued at $325,000 for
financial advisory services issued to 712 Advisory Services, Inc., an affiliate
of the Company's Chairman of the Board (the "Affiliate"), over the fair value of
net assets acquired amounted to $35,286,000 and is being amortized on a
straight-line basis over 20 years. Mr. Neil H. Koffler, a director of the
Company, is also an employee of the Affiliate.
16
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
On November 25, 1996 the Company consummated the acquisition of two
diagnostic imaging centers in Garden City and East Setauket, New York ("Smith
Garden"). Pursuant to the acquisition agreement, the Company acquired certain
of the assets and liabilities for $1,900,000 cash and 533,175 shares of the
Company's Common Stock valued at $4,500,000. The excess of the purchase price
and direct acquisition costs (including $60,000 in financial advisory fees paid
to the Affiliate), over the fair value of net assets acquired amounted to
$6,042,000 and is being amortized on a straight-line basis over 20 years.
On December 16, 1996, the Company acquired the Imaging Center of the
Ironbound in Newark, New Jersey from TME, Inc. for $216,000 in cash and 18,868
shares of the Company's Common Stock valued at $200,000. The shares issued in
connection with such acquisition 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 $440,000 and is being amortized on a straight-line
basis over 20 years.
Each of the above acquisitions (the "1996 Acquisitions") were accounted for
under the purchase method of accounting. The operations of these acquisitions
are included in the unaudited consolidated financial statements from the date of
purchase.
On January 10, 1997, the Company, through its wholly owned subsidiary,
StarMed, acquired the assets of National Health Care Solutions, Inc. a medical
staffing company in Detroit, Michigan for approximately $50,000 in cash. The
excess of the purchase price and direct acquisition costs over the fair value of
net assets acquired amounted to approximately $299,000 and is being amortized on
a straight-line basis over 20 years.
On January 16, 1997, the Company acquired a diagnostic imaging center
located in Melbourne, Florida for approximately $1,125,000 in cash. The excess
of the purchase price and direct acquisition costs over the fair value of net
assets acquired amounted to approximately $1,250,000 and is being amortized on a
straight-line basis over 20 years.
On January 28, 1997, the Company acquired two diagnostic imaging centers in
southern California; a multi-modality imaging center in San
17
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
Clemente, California and an imaging facility in Oceanside, California for
approximately $1,025,000 payable in cash and contingent consideration based on
the centers achieving certain financial objectives during the one year period
subsequent to the closing of the transaction. Contingent consideration of up to
$2,000,000 is payable in shares of the Company's Common Stock within 90 days of
the end of the measurement period. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
approximately $1,820,000 and is being amortized on a straight-line basis over 20
years.
On February 28, 1997, the Company acquired a diagnostic imaging center
located in Jacksonville, Florida for 215,000 shares of the Company's Common
Stock valued at $2,300,000 and contingent consideration based on the center
achieving certain financial objectives during the one year period subsequent to
the closing of the transaction. 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 at $96,000 issued to the
Affiliate for financial advisory services), over the fair value of net assets
acquired amounted to approximately $1,960,000 and is being amortized on a
straight-line basis over 20 years.
On March 10, 1997, the Company acquired Advanced Diagnostic Imaging, Inc.
("ADI") for approximately $6,412,000 in cash consideration. ADI owned interests
in and operated nine diagnostic imaging centers in the Northeast. As part of
the transaction, the Company has acquired an option to purchase an additional
center located in the Northeast. The excess of the purchase price and direct
acquisition costs (including 137,000 warrants with an exercise price of $10.60
valued at $411,000 issued to the Affiliate for financial advisory services),
over the fair value of net assets acquired amounted to approximately $15,980,000
and is being amortized on a straight-line basis over 20 years.
On March 10, 1997, the Company acquired a diagnostic imaging center located
in West Palm Beach, Florida for approximately $2,000,000 in cash and 56,670
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 of the issuance price
($10.59 per share) compared to 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. The excess of the purchase
price and direct acquisition costs (including 57,000 warrants with an exercise
price of $10.64 valued at $171,000 issued to the Affiliate for financial
advisory services), over the fair value of net assets acquired amounted to
approximately $2,440,000 and is being amortized on a straight-line basis over 20
years.
On March 14, 1997, the Company acquired a diagnostic imaging center in
Rancho Cucamonga, California for approximately $2,500,000 in cash and 44,016
shares of the Company's Common Stock valued at
18
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
$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 at $165,000
issued to the Affiliate for financial advisory services), over the fair value of
net assets acquired amounted to approximately $3,520,000 and is being amortized
on a straight-line basis over 20 years.
Effective May 1, 1997, the Company acquired Capstone Management Group, Inc.
("Capstone") for approximately $5,330,000 in cash and 397,204 shares of the
Company's Common Stock valued at $6,695,904 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
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 at $480,000 issued to the Affiliate for
financial advisory services), over the fair value of net assets acquired
amounted to approximately $17,125,000 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 $12,900,000 in cash consideration and contingent consideration
based on the centers achieving certain financial objectives during the one
year period subsequent to the closing of the transaction. Contingent
consideration of up to $1,500,000 is payable within 90 days of the end of the
measurement period. The estimated fair value of assets acquired amounted to
approximately $3,629,000 consisting of approximately $3,605,000 of fixed assets
and $24,000 of other assets. liabilities of $3,982,000 were assumed consisting
of approximately $1,875,000 in capital lease obligations, $1,170,000 in rates
payable and $937,000 in accounts payable and accured expenses. 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 at $504,000 issued to the
Affiliate for financial advisory services), over the fair value of net assets
acquired amounted to approximately $13,255,000 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 of the issuance price ($12.59 per
share) compared to 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. The excess of the
purchase price and direct acquisition costs (including 66,000 warrants with an
exercise price of $12.59 valued at $198,000 issued to the Affiliate for
financial advisory services), over the fair value of net assets acquired
amounted to approximately $4,070,000 and is being amortized on a straight -line
basis over 20 years.
On June 11, 1997, the Company, through StarMed, acquired the assets of
Wesley Medical Resources, Inc. 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 closing of
the transaction. 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 (including $145,000 in
financial advisory fees paid to the Affiliate), over the fair value of net
assets acquired amounted to approximately $2,720,000 and is being amortized on a
straight-line basis over 20 years.
On June 24, 1997 the Company announced it had invested $1,000,500 in a
joint venture for a multi-modality imaging center located in Mid-town Manhattan,
New York. The Company will own approximately 51% of
19
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
the center which is expected to open in September 1997. The Company paid
$25,000 in financial advisory fees to the Affiliate, which will be amortized on
a straight line basis over 20 years, beginning with the commencement of business
at the center.
On June 30, 1997, the Company acquired three diagnostic imaging centers in
New York for approximately $4,130,000 in cash and 152,356 shares of the
Company's Common Stock valued at $2,546,250. The shares issued in connection
with such acquisition are subject to registration rights. In the event the
registration statement is not declared effective by December 30, 1997, the
sellers may sell the shares back to the Company for $2,546,250. In the event the
registration statement is declared effective by December 30, 1997, the shares
of Common Stock issued in connection with such acquisition are subject to price
protection of the issuance price ($16.7125) compared to the market price at
effectiveness of the registration statement. The Company may satisfy any
deficiency by the delivery of additional shares of Common Stock or by the
payment of cash. The excess of the purchase price and direct acquisition costs
(including $205,000 in financial advisory fees paid to the Affiliate), over the
fair value of net assets acquired amounted to approximately $8,125,000 and is
being amortized on a straight-line basis over 20 years.
Each of the above acquisitions (the "1997 Acquisitions") were accounted for
under the purchase method of accounting and reflect preliminary purchase price
allocations. The operations of these acquisitions are included in the unaudited
consolidated financial statements from the date of purchase.
The Company, under certain acquisition agreements, provided the seller the
right to additional payments, depending upon the value of the issued shares
(price protection) at the effectiveness of the registration statement covering
such shares. The issuance of additional payments of either cash or additional
shares will not increase the cost of such acquisitions, as such issuance will
only effect the manner in which the total purchase price of such acquisitions is
recorded.
Under certain acquisition agreements, the Company provided the seller with
the right to sell the shares, issued to the seller, back to the Company in the
event a registration statement covering such shares is not declared effective by
a certain date. Accordingly, such shares, amounting to $8,242,152 have been
classified as redeemable common stock in the accompanying financial statements.
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 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. Any contingent consideration paid
will be accounted for as an incremental component of goodwill which will be
amortized over the acquisition remaining goodwill life.
The fair value of each warrant issued to the Affiliate for financial
advisory services has been accounted for as a component of each acquisition's
purchase price and the value has been estimated on the date of grant using the
Black-Scholes option-pricing model based on the following assumptions:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 52% 52%
Expected life (years) 2 2
</TABLE>
20
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
The risk-free interest rates for 1997 and 1996 were based upon a rate with
maturity equal to expected term. U.S. Treasury instruments were utilized. The
weighted average interest rate in 1997 and 1996 amounted to 6.01% and 5.93%,
respectively. The weighted average fair value of options and warrants granted
during the periods ended June 30, 1997 and 1996 amounted to $3.00 and $2.34.
The following unaudited consolidated proforma data reflects the 1996
Acquisitions and 1997 Acquisitions as if they had occurred at the beginning of
each of the periods presented:
Six Months Three Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
------ -------- ------- --------
Revenues, net $97,791 $66,282 $51,876 $46,927
Operating income $16,875 $12,516 $ 8,655 $ 9,833
Income before taxes $14,152 $10,093 $ 7,268 $ 8,126
Fully diluted net income
per share $ 0.35 $ 0.35 $ 0.17 $ 0.26
5. Debt Financing
- ------------------
On February 20, 1997, the Company completed a $52,000,000 private placement
of Senior Notes (the "Senior Notes") to a group of insurance companies led by
the John Hancock Mutual Life Insurance Company ("John Hancock"). The notes bear
interest at an annual rate of 7.77%, are subject to annual sinking fund payments
commencing February 2001 and have a final maturity in February 2005. The Senior
Notes are guaranteed by substantially all of the Company's diagnostic imaging
subsidiaries collateralized by certain partnership interests owned through
subsidiaries by the Company. In addition, the agreement relating to the issuance
of the Senior Notes imposes certain affirmative and negative covenants on the
Company and its restricted subsidiaries. The Company used a portion of the
proceeds from the Senior Notes to retire capital lease obligations totaling
$8,274,330 and notes payable totaling $5,489,885. The difference between the
amount used to retire capital lease obligations and the carrying value of such
obligations was approximately $1,461,000. In accordance with Financial
Accounting Standards Board Interpretation 26 ("FIN 26") "Accounting for the
Purchase of a Leased Asset by the Lessee During the Term of the Lease," the book
value of the related assets have been increased by this amount, not to exceed
the fair value of the assets, which will be amortized over the remaining useful
life of the assets. In connection with the Senior Note transaction, the Company
paid $225,000 plus expenses to the Affiliate for financial advisory services.
21
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
The difference between the amount used to retire notes payable and the
carrying value of the related note obligations was approximately $185,000. Due
to the immaterial level of this amount, such amount has been classified as a
component of corporate general and administrative expenses during the quarter
ended March 31, 1997. The interest rates under the capital lease obligations and
notes payable ranged from 4.9% to 18.5%. As a result of these retirements, the
Company's monthly cash flow and interest savings during 1997 approximate
$567,847 and $1,079,001, respectively, before income taxes. The balance of the
proceeds of the Senior Notes is being used to fund acquisitions and for general
corporate purposes.
On June 26, 1997, the Company completed a $26,000,000 private placement of
additional Senior Notes (the "Additional Senior Notes") to a group of insurance
companies led by the John Hancock Mutual Life Insurance Company. The Additional
Senior Notes bear interest at an average annual rate of 8.08%, and otherwise
have the same terms as the Senior Notes. In Connection with the Additional
Senior Note transaction, the Company paid $112,500 plus expenses to the
Affiliate for financial advisory services.
6. Convertible Subordinated Debentures and Line of Credit
- ----------------------------------------------------------
On May 30, 1995 the Company issued at par $4,350,000 aggregate principal
amount of 11% Convertible Subordinated Debentures due 2000 (the "1995
Debentures"). The 1995 Debentures are convertible into Common Stock of the
Company at any time by the holder at a conversion price of $4.00 per share. The
1995 Debentures automatically converted to Common Stock when, on June 20, 1997,
the market price of the Common Stock exceeded $6.00 per share for a 15
consecutive day period.
On February 7, 1996, the Company issued at par $6,533,000 aggregate
principal amount of 10.5% Convertible Subordinated Debentures due 2001 (the
"1996 Debentures"). The 1996 Debentures are convertible into Common Stock of
the Company at a conversion price of $6.00 per share. The Company called for
the redemption of the 1996 Debentures at the conversion price of $6.00 per share
on or before March 27, 1997. As of June 30, 1997 all of the 1996 Debentures have
converted. The unamortized portion of the debenture issuance costs of $342,000
has been included as a component of additional paid-in capital in the
Stockholders' equity section of the accompanying June 30, 1997 balance sheet.
In connection with the private placements of the 1995 Debentures and the 1996
Debentures, the Company paid $247,500 and $356,650, respectively, in placement
agent fees and expenses to an investment banking firm. Mr. Gary L. Fuhrman, a
drector of the Company, is an executive officer and director of such investment
banking firm.
Under the terms of the merger agreement with NMR, the Company assumed the
obligations of NMR under NMR's 8% Convertible Subordinated Debentures due 2001
including payment of principal and interest (the
22
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
"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 June
30, 1997, all but $19,000 of the NMR Debentures had been converted into the
Common Stock of the Company. The unamortized portion of the debenture issuance
costs of $32,387 has been recorded as a component of additional paid-in capital
in the Stockholders' equity section of the accompanying June 30, 1997 balance
sheet.
On March 31, 1997, StarMed obtained a revolving line of credit from a third
party financing corporation. The $6 million line bears interest at a rate of
prime plus 1.5% (10.0% at June 30, 1997), has a two year term and is
collateralized by substantially all of StarMed's accounts receivable.
$1,500,000 was outstanding under the line at June 30, 1997.
7. Leases
- ----------
The Company has entered into agreements for the sale and leaseback of
medical diagnostic equipment at certain of its imaging centers. The Company has
lease renewal and fair market value purchase options under the agreements. The
leases are being accounted for as operating leases in accordance with the
Statement of Financial Accounting Standards No. 13 ("SFAS No. 13").
The book values of the equipment totaling $7,855,556 have been removed from
the balance sheet, and the gains realized on the sale/leaseback transactions
have been deferred and are being amortized as a reduction to rental expense over
the term of the leases. Operating rent payments on these transactions are
approximately $1,630,000 annually.
8. Segment Information
- -----------------------
The Company operates in two industry segments-diagnostic imaging services
and temporary staffing services. The operations of the diagnostic imaging
services segment involves operating and managing diagnostic imaging centers.
The operations of the temporary staffing segment involves providing temporary
staffing of registered nurses, technicians and other medical industry personnel
to acute and sub acute care facilities.
23
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------
The following table presents selected financial information by industry
segment as of and for the six months ended June 30:
1997 1996
---- ----
Net Revenues:
Diagnostic imaging centers $66,445,667 $24,274,214
Temporary staffing services 25,946,531 12,502,283
---------- ----------
Total $92,392,198 $36,776,497
========== ==========
Operating income:
Diagnostic imaging centers $ 14,920,717 $ 4,865,078
Temporary staffing services 1,047,295 489,935
------------ -----------
Total $ 15,968,012 $ 5,355,013
============ ===========
Identifiable assets:
Diagnostic imaging centers $294,136,513 $56,892,714
Temporary staffing services 12,855,056 9,922,270
------------ -----------
Total $306,991,569 $66,814,984
============ ===========
Depreciation and amortization:
Diagnostic imaging centers $ 7,078,071 $ 2,532,718
Temporary staffing services 263,334 $ 207,958
------------ -----------
Total $ 7,341,405 $ 2,740,676
============ ===========
Capital expenditures:
Diagnostic imaging centers $ 4,212,272 $ 825,454
Temporary staffing services 20,290 ---
------------ -----------
Total $ 4,232,562 $ 825,454
============ ===========
9. Commitments and Contingencies
- ---------------------------------
In 1996, an individual and his spouse brought an action in the Supreme
Court of the State of New York, King's County against Advanced MRA Imaging
Associates in Brooklyn, New York, a wholly owned subsidiary of the Company ("MRA
Imaging"), for damages aggregating $12.5 million. The plaintiff alleges
negligent operations, improper supervision and hiring practices and failure to
operate the premises in a safe manner, as a result of which the individual
suffered physical injury. The Company's general liability and professional
negligence insurance carriers have been notified, and it has been agreed that
the general liability insurer will pursue the defense of this matter, however
such insurers have reserved the right to claim that the scope of the matter
falls outside the Company's coverage.
24
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------
The parties to this matter are engaged in discovery. The Company's legal counsel
believes that it is more probable than not that the plaintiffs will not recover
the damages sought. The Company has made no provision in the financial
statements for this matter. In the event the plaintiffs prevail, this matter may
have a material adverse effect on the Company's financial condition, results of
operations and cash flow.
10. Related Parties
- -------------------
The Company pays an annual financial advisory fee to 712 Advisory
Services, Inc., an affiliate (the "Affiliate") of the Company's Chairman of the
Board. Mr. Neil H. Koffler, a director of the Company, is also an employee of
the Affiliate. Such fees amounted to $112,500 and $102,000 for the six months
ended June 30, 1997 and 1996, respectively. During the six months ended June 30,
1997, for financial advisory services rendered by the Affiliate to the Company
in connection with the issuance of the Senior Notes, the Additional Senior Notes
and certain of the 1997 Acquisitions, the Company also paid transaction related
financial advisory fees and expenses of $712,500 and issued to the Affiliate
warrants to purchase 675,000 shares of the Company's Common Stock, such warrants
have been recorded, at their fair value, as a component of each transaction's
purchase price (See Note 3). In connection with the Company's October 1996
Common Stock offering and certain of the 1996 Acquisitions, the Company paid
transaction related financial advisory fees and expenses of $423,000 and issued
to the Affiliate warrants to purchase 120,000 shares of the Company's Common
Stock, such warrants have been recorded, at their fair value, as a component of
each transaction's purchase price (See Note 3). The Company believes that the
foregoing financial advisory fees were on terms no less favorable to the Company
than what the Company could have otherwise received from an unaffiliated third
party. In order to incentivize officers, directors, employees and consultants to
the Company, the Company from time to time grants options at fair market value
to such individuals. As of June 30, 1997, stock options to purchase 1,578,666
shares of the Company's Common Stock have been issued to board members,
including the Chairman, who are also associated with or affiliated with the
Affiliate. Approximately 765,000 of the foregoing options were granted during
1997 and are subject to stockholder approval. Options to purchase 15,000 shares
of the Company's Common Stock have been granted to an individual employed by an
affiliate of the Affiliate for consulting services rendered to the Company. The
exercise price of options and warrants issued to the Affiliate were no less than
the fair market value of the Company's Common Stock on date of grant.
During July 1997, for financial advisory services rendered to the
Company, in connection with a private placement of convertible preferred stock,
the Company paid $967,000 in fees and expenses to an investment banking firm of
which a member of the Company's Board is a Director (See Note 10).
11. Subsequent Events
- ---------------------
In July 1997, the Company issued 18,000 shares of $1,000 Series C
Convertible Preferred Stock, $.01 par value (the "Convertible Preferred Shares")
to an institutional investor (the "Holder"). The Convertible Preferred Shares
are convertible into Common Stock of the Company at the option of the Holder
beginning on the date on which a registration statement relating to the Common
Stock underlying the Convertible Preferred 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.
25
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------
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 Holder of the Convertible Preferred Shares may not convert into
Common Stock, such restriction to be for no more than 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. The Holders are 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 is $1,000 plus 3% per annum. Holders of the
Convertible Preferred Shares are entitled to limited voting rights. In
connection with the Convertible Preferred Shares placement, the Company paid
$967,000 in financial advisory fees and expenses to an investment banking firm.
Mr. Gary Fuhrman, a director of the Company, is an executive officer and
director of such investment banking firm.
On July 31, 1997 the Company acquired a diagnostic imaging center located
in Hollywood, Florida for aggregate consideration of $2,100,000 payable in cash
and Company Common Stock plus the assumption of indebtedness and additional
contingent consideration based on the center's performance. The shares of the
Company's Common Stock issued in connection with the acquisition are subject to
registration rights and price protection of the issuance price ($18.00 per
share) compared to 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. In the
event that the registration statement is not declared effective by January 1,
1998, the seller may sell the shares back to the Company for $674,000. The
acquisition will be accounted for as a purchase, under which the purchase price
will be allocated to the acquired assets and assumed liabilities based upon fair
value at the date of acquisition.
On August 1, 1997, the Company acquired a diagnostic imaging center located
in Miami, Florida for the Company's Common Stock valued at $1,650,000, plus the
assumption of indebtedness and additional contingent consideration based on the
center's collections. The shares of the Company's Common Stock issued in
connection with any additional consideration are subject to registration rights.
The acquisition will be accounted for as a purchase, under which the purchase
price will be allocated to the acquired assets and assumed liabilities based
upon fair value at the date of acquisition.
26
<PAGE>
MEDICAL RESOURCES, INC.
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------
The following unaudited consolidated proforma data reflects the 1996
Acquisitions, the 1997 Acquisitions and the above acquisitions as if they had
occurred at the beginning of each of the periods presented:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues, net $99,895 $67,334 $52,928 $47,979
Operating Income $17,813 $12,985 $ 9,124 $10,302
Income before taxes $14,774 $10,530 $ 7,705 $ 8,563
Fully diluted net income
per share $ 0.36 $ 0.36 $ 0.18 $ 0.27
</TABLE>
27
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
Revenue Recognition
- -------------------
The Company has entered into three forms of contractual agreements to
provide equipment, premises, comprehensive management, administration and
technical imaging services to independent contractor interpreting physicians for
the provision of medical services with respect to radiological modalities. Each
type of agreement as more fully described in Note 1 as Type I, Type II and Type
III results in the Company bearing different types of business risk for
provision of services.
Type I
- ------
Under Type I agreements interpreting physicians are required to pay to the
Company a charge per procedure performed. The Company bears the risk of amounts
being collected equivalent to the proportionate relationship of its charge per
procedure and the total charge to the referring physician's patient. The
Company has established and recognized reserves for potential uncollectibles.
Type II
- -------
Subsidiaries of the Company have entered into independent contractor
agreements to provide radiological services. These independent contractor fees
which are based on estimated cash collections are expenses which are only
recognized under Type II agreements (such expenses are not recognized in the
Company's financial statements under Type I and Type III agreements). Under the
Type II structure, the Company has direct agreements with third-party payers at
amounts lower than its established rates. The Company bears the risk of
uncollectibles and has established reserves for potential uncollectibles.
Type III
- --------
NMR developed centers have entered into agreements with professional
associations ("Physicians") comprised of physicians where certain fixed and
variable fees are paid to the Company for maintenance and operation of imaging
systems resident in offices operated by the Physicians. The Company bears the
risk of the Physicians' ability to pay such fees to the Company after the
Physicians have fulfilled their other financial obligations.
Net service revenues are reported when earned at their estimated net
realizable amounts from patients, third party payers and others for services
rendered based on contractually established rates which include prospective
contractual adjustments. These adjustments are recognized at the time the
services are rendered. Revenues derived from Medicare and Medicaid are subject
to audit. The Company is aware of no pending audits.
The Company also recognizes revenue from temporary nurse staffing.
Revenues are recognized on an accrual basis as earned.
Results of Operations
- ---------------------
Three and six months ended June 30, 1997 compared to three and six months ended
- -------------------------------------------------------------------------------
June 30, 1996.
- --------------
The following discussion and analysis provides information which management
believes is relevant to an assessment an understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the unaudited financial statements appearing in Item 1.
The Company's net service revenues for the three and six months ended June
30, 1997 were $51,799,558 and $92,392,198 versus $18,678,493 and $36,776,497 for
the three and six months ended June 30, 1996 or a $33,121,065 (177.3%) and
$55,615,701 (151.2%) increase, respectively. Management fee and use revenue for
the three and six months ended June 30, 1997 increased $15,343,000 and
$22,339,000 to $23,934,000 and $38,905,000, respectively from $8,591,000 and
$16,566,000, respectively for the three and six months ended June 30, 1996. This
increase is primarily attributable to revenue generated by 1996 Acquisitions
($5,299,000 and $9,777,000, respectively), 1997 Acquisitions ($9,937,000 and
$11,549,000) and increased volume at centers owned prior to January 1, 1996
($107,000 and $1,013,000, respectively). Diagnostic imaging patient revenue
increased $10,749,000 and $19,833,000 for the three and six months ended June
30, 1997 from $4,316,000 and $7,709,000 for the three and six months periods
ended June 30, 1996 to $15,065,000 and $27,542,000, respectively. This increase
is primarily attributable to revenue generated by the 1996 Acquisitions
($7,886,000 and $16,134,000, respectively), the 1997 Acquisitions ($1,185,000
and $1,447,000, respectively) and increased volume at centers owned prior to
January 1, 1996 ($1,678,000 and $2,252,000, respectively). Staffing revenues for
the three and six months ended June 30, 1997 were $12,800,000 and $25,947,000 as
compared to $5,823,000 and $12,502,000 for the three and six months ended June
30, 1996. This increase of $6,978,000 and $13,445,000, respectively is due to
the opening of additional per diem offices and StarMed acquisitions.
Technical services payroll and related expenses amounted to $18,379,328 and
$33,767,919 for the three and six months ended June 30, 1997 compared to
$6,785,474 and $14,398,221 for the three and six months ended June 30, 1996, an
increase of $11,593,854 and $19,369,698, respectively. Of this increase
$4,874,963 and $7,143,014 is attributable to costs incurred at imaging centers
acquired during 1996 and 1997 and $6,175,792 or 53% and $11,272,457 or 58% is
attributable to the opening of new per diem offices and the staffing operations.
Medical supplies amounted to $2,493,635 and $3,883,925 for the three and
six months ended June 30, 1997 as compared to $880,622 and $1,703,622 for the
three and six months ended June 30, 1996, an increase of $1,613,013 and
$2,180,303, respectively. This increase is primarily due to costs incurred at
imaging centers acquired during 1996 and 1997.
Diagnostic equipment maintenance expense increased $1,218,013 and
$2,146,612 for the three and six months ended June 30, 1997 from $658,719 and
$1,239,556 for the three and six months ended June 30, 1996 to $1,876,732 and
$3,386,168, respectively. This increase is primarily due to costs incurred at
imaging centers acquired during 1996 and 1997.
28
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
Independent contractor fees for the three and six months ended June 30,
1996 were $252,971 and $494,072 as compared to $1,628,737 and $2,939,807 for the
same periods in 1997. This increase of $1,375,766 and $2,445,735 is
attributable to fees paid to radiologists at centers acquired during 1996 and
1997.
Administrative costs which include facility rent, marketing costs and
personnel costs of employees whose activities relate to the operations of
multiple centers increased approximately $3,184,218 and $4,823,255 from
$2,248,678 and $4,511,727 for the three and six months ended June 30, 1996 to
$5,432,896 and $9,334,982 for the three and six months ended June 30, 1997.
These increases are primarily due to costs incurred at imaging centers acquired
during 1996 and 1997.
Other costs increased by $2,210,231 and $2,888,856 for the three and six
months ended June 30, 1997 to $2,832,767 and $4,027,657 as compared to $622,536
and $1,138,801 for the same periods in the prior year primarily due an increase
in accounting and legal fees for acquired centers.
Provision for uncollectible accounts receivable increased $1,412,749 or
149.2% and $2,887,039 or 163.9% from $947,127 and $1,761,835 for the three and
six months ended June 30, 1996 to $2,359,876 and $4,648,874 for the three and
six months ended June 30, 1997. This increase is due to the significant
increase in imaging revenues which have a higher bad debt experience than
staffing revenues. The imaging segment provision for uncollectible accounts
consists of $2,355,150 or 6.0% and $4,640,368 or 6.9% of revenue for the three
and six months ended June 30, 1997 as compared to $946,307 or 7.3% and
$1,756,087 or 7.2% of revenue in 1996. The decrease in the imaging provision
as a percentage of revenue is primarily due to changes in payor mix caused by
the acquisition of imaging centers during 1996 and 1997 which generate less
personal injury revenues than the Company's mature centers. The staffing
segment's provision for uncollectible accounts receivable was immaterial for the
three and six months ended June 30, 1997 and 1996.
Corporate general and administrative expense increased by $1,898,204 or
103.6% and $3,660,475 or 106.6% from $1,831,769 and $3,432,974 for the three and
six months ended June 30, 1996 to $3,729,973 and $7,093,449 for the current
periods. This increase is primarily due to the expanded business development
activities during 1996 and 1997 and the resulting growth. Corporate general and
administrative expense for the six months ended June 30, 1997 includes a non-
recurring charge of approximately $185,000 relating to the repayment of certain
notes payable in connection with the Senior Note transaction (see Note 4).
29
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
Depreciation and amortization expense was $4,419,951 and $7,341,405 for the
three and six months ended June 30, 1997 compared to $1,423,767 and $2,740,676
for the three and six months ended June 30, 1996 or an increase of $2,996,184
(210.4%) and $4,600,729 (167.9%), respectively. The imaging center segment
accounted for $2,865,516 or 95.6% and $4,449,604 or (96.7%) of the increase in
aggregate depreciation and amortization expense primarily due to the
depreciation expense relating to acquired assets and increased goodwill
amortization expense incurred in connection with the acquisitions.
Interest expense, net for the three and six months ended June 30, 1997 was
$1,924,132 and $2,853,445, respectively compared to $738,689 and $1,287,583 for
the comparable periods last year, an increase of $1,185,443 or 160.5% and
$1,565,862 or 121.6%. The increase is primarily due to increases in interest on
the debt assumed as part of the 1996 and 1997 Acquisitions, the Senior Notes and
higher outstanding balances under convertible debentures offset by scheduled
reductions in outstanding principal balances and an increase in interest income
earned on invested cash balances.
Minority interest was ($428,448) and ($193,432) for the three and six
months ended June 30, 1997 compared to $20,591 and $64,282 for the same periods
last year. The decrease of $449,039 and $257,714 is primarily due to the
acquisition of entities which operate limited partnerships with minority
investors such as the NMR centers in August 1996 and the ADI centers in March
1997.
The provision for income taxes increased $2,297,376 or 347.5% and
$4,415,751 or 401.8% from $661,200 and $1,099,020 for the three and six months
ended June 30, 1996 to $2,958,576, and $5,514,771 for the same periods in 1997.
The Company's effective tax rate for the six months ended June 30, 1997
increased to 41.4% from 27.4% at June 30, 1996. This increase is due to an
increase in the profitability of the Company's existing and acquired centers and
the impact of non-deductible goodwill.
For the reasons described above, the Company's net income for the three and
six months ended June 30, 1997 increased by $2,585,053 or 160.9% and $4,889,100
or 168.4% to $4,191,403 and $7,793,228 from $1,606,350 and $2,904,128 for the
three and six months ended June 30, 1996.
30
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
Liquidity and Capital Resources
- -------------------------------
The Company had net income of $7,793,228 for the six months ended June 30,
1997 versus net income of $2,904,128 for the comparable period in 1996. At June
30, 1997, the Company's working capital totaled $65,193,429 which includes cash
and cash equivalents totaling $37,815,225. Cash provided by operating
activities during the six months ended June 30, 1997 resulted from operating
cash flows of $21,137,075 offset by a $18,201,770 net increase in the Company's
operating assets and liabilities. The significant increase in operating assets
and liabilities relates primarily to accounts receivable, net ($16,219,140)
which increased primarily due to (i) higher StarMed receivables caused by a
significant revenue increase during the six months ended June 30, 1997 in
comparison to prior quarters relating to (i) the maturation of per diem sites
and the acquisition of per diem businesses ($3,108,000); and (ii) increases at
imaging centers acquired during the six months ended June 30, 1997 in which the
sellers' existing accounts receivable were assumed by the Company ($10,472,000)
or were not purchased at the time of acquisition and, accordingly, have
increased to normal levels following the acquisition ($2,379,263).
Investing activities used $38,578,340 in cash during the first six months
of 1997. The Company used $38,908,500 in cash to acquire additional imaging
centers during the six months ended June 30, 1997. The Company purchased
$4,232,562 of equipment and leasehold improvements primarily for imaging
centers. The Company intends to continue to evaluate hardware and software
upgrades for imaging equipment and expects to acquire such upgrades where deemed
advisable. The Company's net investments from sales and purchases of short-term
investments and marketable securities totaled $5,848,272 during the six months
ended June 30, 1997. The Company invests substantially all of its excess cash
balances in institutional funds.
Financing activities provided the Company with net cash totaling
$58,112,006. This increase is comprised of $77,113,080 and $7,855,556 in net
proceeds from the issuance of the Senior Notes and Additional Senior Notes and
sales of diagnostic equipment, respectively offset by normal repayments of debt
and capital lease obligations totaling $3,426,502 and $1,791,092, respectively,
during the six months ended June 30, 1997. In addition, the Company repaid
$13,764,215 and $7,658,948 of outstanding notes payable and capital lease
obligations in conjunction with the Senior Notes transaction and certain
acquisitions during the six months ended June 30, 1997. The Company may
refinance certain of its assets using sale/leaseback transactions structured
as operating leases during the remainder of 1997.
31
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
The Company has four revolving lines of credit from a third party financing
corporation. In May 1996, the Company obtained two $4 million lines and in
October 1996, a $4 million line. The lines bear interest at prime plus 1.5% (10%
at June 30, 1997) and have a two year term. As of June 30, 1997 no amounts were
outstanding under these lines. The Company also has a $7 million capital lease
line of credit, which bears interest at the 30-day T-bill rate plus 398 basis
points. As of June 30, 1997 no amounts were outstanding under the foregoing
lines of credit. The Company has agreed that in order to draw on the foregoing
lines it must pledge adequate collateral. Through its StarMed Staffing
subsidiary, the Company has a $6 million line which bears interest at prime plus
1.5% (10.1% at June 30, 1997), has a two year term and is collateralized by
substantially all of StarMed's accounts receivable. At June 30, 1997, $1,500,000
was outstanding under this line.
The Company believes that the existing cash and cash equivalents, and cash
generated from operating activities will be sufficient to meet the needs of its
current operations, any acquisitions of additional limited partnership interests
in the Company's centers, anticipated capital expenditures and scheduled debt
repayments for the next twelve months and on a long term basis.
In addition, management believes and continues to believe that there are
and will continue to be opportunities to acquire additional diagnostic imaging
centers, as well as companies which own multiple imaging centers. Management
reviews proposals to acquire additional centers and evaluates these
opportunities on the basis of the price at which it believes the centers can be
acquired, relevant demographic characteristics, competitive centers, physician
referral patterns, location and other factors. The Company is committed to a
substantial acquisition strategy based upon its assessment of strategic markets
and opportunities which has resulted in the acquisition of forty six imaging
centers in sixteen separate transactions subsequent to December 31, 1996.
Management intends to pursue the acquisition of additional centers if its
analysis of these factors indicate the Company would receive a favorable rate of
return from investing in these centers. Any centers that are acquired can be
expected to involve the payment of the purchase price in either cash, notes or
shares of common stock or a combination thereof. In the event the Company
engages in the acquisition of additional centers, it may be required to raise
additional long-term capital through the issuance of debt or equity securities.
No assurance can be given that such capital will be available on terms
acceptable to the Company. The unavailability of capital for this purpose would
adversely affect the Company's ability to acquire additional centers.
32
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
Other
- -----
The Company believes that its business is generally unaffected by
seasonality. The Company's 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 inflationary expectations and growing health care costs, and believes that
the Company may not be able to raise the prices for its diagnostic imaging
procedures by an amount sufficient to offset cost inflation. The Company has
responded to these concerns in the past by increasing the volume of its
business. In addition, current discussions within Federal government regarding
national health care reform are emphasizing containment of health care costs as
well as expansion of the number of eligible parties. The implementation of this
reform could have a material effect on the financial results of the Company.
Statements contained in this quarterly report which are not historical
facts are forward-looking statements. In addition, the Company, from time to
time, makes forward-looking public statements concerning its expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting the Company's best judgement
based upon current information and involve a number of risks and uncertainties,
and here can be no assurance that other factors will not affect the accuracy of
such forward-looking statements. While it is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by the Company include, but are not limited to, risks associated
with the acquisition of existing imaging centers, management of growth,
government regulation, limitations and delays in reimbursement, the Company's
ability to obtain and retain favorable arrangements with third party payers, as
well as operating risks, general conditions in the economy and capital markets,
and other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements.
33
<PAGE>
MEDICAL RESOURCES, INC.
Item 2. Management's Discussion and Analysis or Plan of Operation
(continued)
New Accounting Standards
- ------------------------
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("Statement No. 128"), was issued which established
standards for computing and presenting earnings per share. Statement No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods.
Had Statement No. 128 been used the Company would have reported the following
unaudited earnings per share for the six month periods ended:
June 30, 1997 June 30, 1996
------------- -------------
Earnings per share:
Basic $ .39 $ .37
Fully Diluted $ .34 $ .31
Weighted Average Number
of shares used in computation:
Basic 19,752,585 8,332,669
Fully Diluted 22,783,578 9,960,233
34
<PAGE>
MEDICAL RESOURCES, INC.
PART II. OTHER INFORMATION
----------------------------
Item 2.c. Changes in Securities
---------------------
The following is a list of equity securities sold by the Company during the
six months ended June 30, 1997 which, pursuant to the exemption covered under
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
were not registered under the Securities Act.
On February 28, 1997, the Company issued to The MRI Center of Jacksonville,
Inc. 215,000 share of the Company's Common Stock as consideration for the
acquisition of a diagnostic imaging center in Jacksonville, Florida.
On March 10, 1997, the Company issued to The Magnet of Palm Beach, Ltd.
56,670 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in West Palm Beach, Florida.
On March 14, 1997, the Company issued to Grove Diagnostic Center, Inc.
44,016 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in Rancho Cucamonga, California.
On May 9, 1997, the Company issued to Accessible MRI of Baltimore County,
Inc. 119,166 shares of the Company's Common Stock as partial consideration for
the acquisition of two diagnostic imaging centers in Towson and Silver Spring
Maryland.
On May 30, 1997, the Company issued to Capstone Management Group, Inc.
397,204 shares of the Company's Common Stock as partial consideration for the
acquisition of ten diagnostic imaging centers in the Northeast and Ohio.
On June 24, 1997, the Company issued to Wesley Medical Resources, Inc.
137,222 shares of the Company's Common Stock as consideration for the
acquisition of a medical staffing company in San Francisco, California.
On June 25, 1997, the Company issued 8,780 shares of the Company's Common
Stock as consideration for forgiveness of a note payable.
On June 30, 1997, the Company issued to the equity holders of Brooklyn
Medical Imaging Center, Meadows Medical Management, Inc. and The Staten Island
Medical Imaging, Inc. 152,356 shares of the Company's Common Stock as partial
consideration for the acquisition of three diagnostic imaging centers located in
New York.
35
<PAGE>
MEDICAL RESOURCES, INC.
Item 2.c. Changes in Securities (Continued)
---------------------
In addition, the Company issued to the Affiliate, for financial advisory
services rendered to the Company in connection with acquisitions which were
consummated in the first or second quarters of 1997, five-year warrants to
purchase an aggregate of 675,000 shares of the Company's Common Stock in
connection with acquisitions. These warrants were issued as of the date of the
public announcement of such acquisitions, and were contingent upon the
transaction closing. The exercise prices were based on the average of the last
sales price of the Company's Common Stock for the ten consecutive trading days
prior to the public announcement.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
Exhibit 11. Computation of Shares Used For Earnings Per
Share Calculation
b. Reports on Form 8-K
-------------------
On February 5, 1997, the Company filed a current report
on Form 8-K, reporting under Item 4, that it had
dismissed Ernst & Young LLP as its independent
accountant.
On February 5, 1997, the Company filed a current report
on Form 8-K, reporting under Item 4, that it had engaged
Coopers & Lybrand L.L.P. as its independent accountant.
On February 20, 1997, the Company filed a current report
on Form 8-K, reporting under Item 5, that the Company
completed a $52,000,000 private placement of Senior Notes.
On June 12, 1997, the Company filed a current report on
Form 8-K, reporting under Item 5, that it had consummated the
acquisition of substantially all of the business assets,
rights to manage, membership interests and partnership
interests of Capstone Management Group, Inc.
On June 27, 1997 the Company filed a current report on
Form 8-K/A, reporting under Item 7, Amendment No. 1, which
amended its current report on Form 8-K filed on September 13,
1996.
36
<PAGE>
MEDICAL RESOURCES, INC.
Item 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------
On June 27, 1997 the Company filed a current report on
Form 8-K/A, reporting under Item 7, Amendment No. 1, which
amended its current report on Form 8-K filed on July 19, 1996.
On June 27, 1997 the Company filed a current report on
Form 8-K/A, reporting under Item 7, Amendment No. 1, which
amended its current report on Form 8-K filed on January 9, 1996.
37
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Resources, Inc.
By /s/ Lawrence Ramaekers
-------------------------
Lawrence Ramaekers
Acting Chief Executive Officer
By /s/ Dennis T. Currier
---------------------------
Dennis T. Currier
Chief Financial Officer
(Principal Accounting Officer)
Date: January 7, 1998
