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RULE NO. 424(b)(3)
REGISTRATION NO. 333-24865
PROSPECTUS
9,336,961 SHARES
MEDICAL RESOURCES, INC.
COMMON STOCK
($.01 PAR VALUE)
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The shares offered hereby (the "Shares") consist of up to 9,336,961 shares
of common stock, par value $.01 per share (the "Common Stock"), of Medical
Resources, Inc., a Delaware corporation (the "Company"). The Shares may be
offered from time to time by certain stockholders (the "Selling Stockholders")
identified herein. See "Selling Stockholders." The Company will not receive
any part of the proceeds from the sales of the Shares. All expenses of
registration incurred in connection herewith are being borne by the Company,
but all selling and other expenses incurred by the Selling Stockholders will
be borne by the Selling Stockholders.
The Selling Stockholders have not advised the Company of any specific plans
for the distribution of the Shares covered by this Prospectus, but it is
anticipated that the Shares will be sold from time to time primarily in
transactions (which may include block transactions) on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System at the
market price then prevailing or at prices related to prevailing prices,
although sales may also be made in negotiated transactions at negotiated
prices or otherwise. See "Plan of Distribution."
The Company's Common Stock is traded and quoted on the Nasdaq National
Market under the symbol MRII. On July 24, 1998, the Company effected a one-
for-three reverse stock split of its Common Stock. The information in this
Prospectus gives effect to such reverse stock split. On October 6, 1998, the
closing sale price of the Common Stock was $2.25 per share.
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THE PURCHASE OF THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5-15.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS OCTOBER 9, 1998
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations, other than those contained or
incorporated by reference in this Prospectus, in connection with the offering
contained herein and, if given or made, such information must not be relied
upon as having been authorized by the Company or the Selling Stockholders.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction. Neither
the delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
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PAGE
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The Company.......................................................... 3
Risk Factors......................................................... 5
Use of Proceeds...................................................... 16
Price Range of Common Stock and Dividend Policy...................... 16
Selected Consolidated Financial Data................................. 17
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 18
Business............................................................. 32
Management........................................................... 49
Security Ownership Of Certain Beneficial Owners and Management....... 58
Certain Relationships and Related Transactions....................... 60
Description of Capital Stock......................................... 63
Selling Stockholders................................................. 64
Plan of Distribution................................................. 68
Legal Matters........................................................ 68
Experts.............................................................. 69
Available Information................................................ 69
Index to Financial Statements........................................ F-1
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THE COMPANY
The Company specializes in the operation and management of fixed site
outpatient medical diagnostic imaging centers. The Company currently operates
94 outpatient diagnostic imaging centers located in the Northeast (56),
Southeast (24), the Midwest (9) 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 94 at September 1, 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.
Until August 1998, the Company, through the Per Diem and Travel Nursing
Divisions of its wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley
Medical Resources Inc. ("StarMed"), provided temporary healthcare staffing of
registered nurses and other medical personnel to acute and sub-acute care
facilities nationwide. On August 18, 1998, the Company sold the stock of
StarMed to RehabCare Group, Inc. for gross proceeds of $33 million (the
"StarMed Sale"). Due to the StarMed Sale, the results of operations of StarMed
are herein reflected in the Company's Consolidated Statements Of Operations as
discontinued operations.
The Company's diagnostic imaging centers provide diagnostic imaging services
to patients referred by physicians in a comfortable, service-oriented
environment located mainly in an outpatient setting. Of the Company's 94
centers, 82 provide magnetic resonance imaging, which accounts for a majority
of the Company's imaging revenues. Many of the Company's centers also provide
some or all of the following services: computerized tomography, ultrasound,
nuclear medicine, general radiology and fluoroscopy and mammography.
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, Interpreting Physician Groups which
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 does not believe
that it engages in the practice of medicine in jurisdictions which prohibit or
permit 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 of the Company, such as Medicare, insurance
companies and managed care providers, 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
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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: (1) 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; (2) the Company pays
the Interpreting Physician Group a fixed percentage of fees collected at the
center or a contractually fixed amount, based upon the specific diagnostic
imaging procedures performed; or, (3) 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 (1), 80% to 93% for the agreements described in item (2) and 80% to
89% for the agreements described in item (3). The agreements generally have
terms ranging from one to ten years.
Since the beginning of 1996, the Company has acquired 90 imaging centers
through 27 acquisitions. When the Company acquires an imaging center, the
Company 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 and other agreements and,
in most instances, accounts receivable. Other than with respect to such
accounts receivable for 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 for that physician group as an independent
contractor to perform medical services at the center.
The Company was incorporated in Delaware in August 1990 and has its
principal executive offices at 155 State Street, Hackensack, New Jersey 07601
(telephone no.: (201) 488-6230). Prior to the Company's incorporation, the
Company's operations, which commenced in 1979, were conducted by subsidiary
corporations.
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following matters in
evaluating the Company and its business before purchasing the shares of Common
Stock offered hereby.
DEFAULTS UNDER LOAN AGREEMENTS
As a result of its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under the agreements for its $78,000,000 of Senior Notes. The
financial covenant defaults under the Senior Note agreements entitle the
lenders to exercise certain remedies including acceleration of repayment. In
addition, certain medical equipment notes and operating and capital leases of
the Company, aggregating $14,575,000 at June 30, 1998 (the "Cross-Default
Debt"), 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 holders of the Cross Default
Debt 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 Cross Default Debt were shown as current liabilities on the
Company's Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.
Accordingly, the Company had a deficit in working capital of $55,892,000 at
June 30, 1998. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The report of the Company's
independent auditors, Ernst & Young LLP, on the consolidated financial
statements of the Company for the year ended December 31, 1997 contains an
explanatory paragraph with respect to the issues that raise substantial doubt
about the Company's ability to continue as a going concern mentioned in Note 2
to the Company's consolidated financial statements. 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 have resulted from the outcome of this
uncertainty.
Management has reached an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications. Under the terms of the agreement in principle, the Senior Note
lenders have agreed to waive all existing covenant defaults and to modify the
financial covenants applicable over the remaining term of the Senior Notes. In
consideration for these waivers and covenant modifications, the Company has
agreed to increase the effective blended interest rate on the Senior Notes
from 7.87% to 9.00%, and issue to the Senior Note lenders warrants to acquire
375,000 shares of the Company's Common Stock at an exercise price of $7.67 per
common share. In addition, the Company has agreed to prepay $2,000,000 of
principal outstanding on the Senior Notes (without premium) and to pay a fee
to the Senior Note lenders of $500,000. The agreement in principle is subject
to the execution of definitive documents, which are expected to be completed
during September 1998. There can be no assurance, however, that definitive
documents effecting the agreement in principle will be executed.
EFFECTS OF LEVERAGE
During 1997, the Company incurred substantial debt in connection with
acquisitions of imaging centers. As of June 30, 1998, the Company's debt,
including capitalized lease obligations, totaled $155,369,000. The Company's
ratio of debt to total capitalization (total debt plus stockholders' equity)
was 56% as of June 30, 1998. In addition, the Company is obligated under
certain repurchase obligations, purchase price remedies and earnouts
associated with acquisitions (see "Effects of Grant of Repurchase and Purchase
Price Remedies and Earnout Rights to Sellers of Acquired Centers"). The
Company does not expect to incur significant additional debt in the near
future and expects to rely on its existing cash balances, of approximately
$18,242,000 at August
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31, 1998, and its ability to enter into operating leases to fund expansions
and equipment replacement at its centers. Assuming that the Company executes
definitive documents with respect to the Senior Notes consistent with the
agreement in principle, management believes that, based upon current levels of
operating cash flows, the Company will have sufficient funds available to
finance its needs through 1998. There can be no assurance, however, that
management's belief as to available funds for 1998 will prove accurate or that
the Company will be able to enter into operating leases on terms acceptable to
the Company.
RECENT LITIGATION
As described below under "Certain Relationships and Related Transactions--
Independent Committee Investigation into Related-Party Transactions" beginning
on page 63, the Company and its directors and certain former officers have
been named as defendants in several actions filed in state and federal court
arising out of the events described below involving, among other matters,
allegations against the Company's practices regarding related-party
transactions and securities fraud. As the cases are still in their preliminary
stages, their outcomes cannot presently be determined. A decision adverse to
the Company in these cases could have a material adverse effect on the
Company, its cash flow, financial condition and results of operation. In
addition, the Company may incur substantial legal and other expenses in
connection with the defense of these cases which could have a material adverse
effect on the Company's cash flows, financial condition and results of
operation. The Company cannot currently estimate the amount or timing of such
expenses or the time frame in which these cases will ultimately be resolved.
EFFECTS OF GRANT OF REPURCHASE AND PURCHASE PRICE REMEDIES AND EARNOUT RIGHTS
TO SELLERS OF ACQUIRED CENTERS
In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as partial consideration therefor,
the Company granted rights to have such shares registered for resale pursuant
to the federal securities laws. In connection with certain of such
acquisitions, the Company has granted specific remedies to the sellers in the
event the registration statement covering the relevant shares was 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. As a result of the Company's failure to register
such shares by the required dates, the Company has become obligated to
repurchase such shares issued in connection with such acquisition. As of
September 1, 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 June 30, 1998, the Company had
reflected $5,509,000 as Common Stock Subject to Redemption on its Consolidated
Balance Sheets which is related to shares that the Company is, has agreed to
or may be required to repurchase. During the first six months of 1998, the
Company paid $3,311,000 to sellers who exercised their rights to have shares
of Common Stock repurchased. In addition, the Company expects to pay an
additional $5,509,000 during the remainder of 1998 ($3,696,000 of which was
due and payable on June 3, 1998 (the "June 1998 Repurchase Obligation") but
has not yet been paid by the Company) in connection with the settlement of
certain repurchase obligations of the Company subject, under certain
circumstances, to the consent of the Senior Notes holders. With respect to the
June 1998 Repurchase Obligation which remains due and payable, the Company is
in discussions with the sellers to whom such obligations are owed and the
Senior Note holders regarding the timing and satisfaction of the June 1998
Repurchase Obligation.
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 September 1, 1998 ($4.00 per share), such shortfall
would be approximately $3,351,000, including Price Protection obligations
related to the shares which have repurchase obligations referred to above.
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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 consideration may be paid in cash
or shares of Common Stock, or a combination of both.
Although the Company possesses 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.
EFFECTS OF FAILURE TO COMPLY WITH TERMS OF THE CONVERTIBLE PREFERRED STOCK
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement, dated
July 21, 1997, as amended, between the Company and RGC International, LDC
("RGC") (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. As amended 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 July 23, 1998.
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) issued
warrants to RGC to acquire 389,000 shares of Common Stock at an exercise price
ranging from $34.86 to $38.85 per share, subject to reset in November 1998
(such warrants having an estimated value for accounting purposes, of
$3,245,000); and (ii) issued interest bearing promissory notes (the "RGC
Penalty Notes") in the aggregate principal amount of $2,450,000 due October
15, 1998. The principal amount of and interest accrued on the RGC Penalty
Notes may be converted, at the option of the Company or RGC in certain
circumstances, into additional shares of Series C Preferred Stock or Common
Stock. Pursuant to an amendment to the RGC Agreements entered into in June
1998, the Company will no longer incur any monthly penalties for failure to
register the RGC Conversion Shares following July 23, 1998. However, if the
RGC Conversion Shares are not registered as of September 15, 1998, RGC may
demand a one-time penalty of $1,550,000 (the "September 1998 Penalty"),
payable, at the option of RGC, in cash or additional shares of Common Stock.
There can be no assurance that the Company will be able to register the RGC
Conversion Shares by such date or that the Company will be able to pay the RGC
Penalty Notes when due or the September 1998 Penalty, if such payment becomes
due.
LOSSES FROM CERTAIN CENTERS; IMPAIRMENT OF CERTAIN ASSETS
Certain centers that the Company acquired in connection with multiple center
acquisitions since January 1996 have generated losses. With respect to these
centers, the Company has utilized its working capital to fund the operations
of such centers. During 1997, the Company recorded a $12,962,000 loss from the
impairment of goodwill and other long-lived assets. This loss consisted of the
write-off of goodwill of $10,425,000, covenants not to compete of $118,000 and
fixed assets of $2,419,000. The write-down of fixed assets primarily relates
to imaging equipment. 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
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methods and structures, does not cover the carrying value of the related long-
lived assets. Furthermore, the Company has determined to sell or close
approximately eight imaging centers during the third and fourth quarters of
1998. In most cases, the Company decided to sell or close these centers due to
general competitive pressures and their close proximity to other imaging
centers of the Company which have more advanced imaging equipment. The Company
expects to incur a charge of between $3,000,000 and $4,000,000 during the
third quarter of 1998 related to these imaging centers. Such charge will
consist of (i) the write-off of fixed assets and other assets of between
$2,000,000 and $2,600,000 and (ii) reserve for costs to exit facility and
equipment leases of between $1,000,000 and $1,400,000.
The Company continues to investigate the underlying causes of under-
performance by certain centers to determine what actions, if any, may be taken
to improve the future operating performance of such centers. There can be no
assurance, however, that additional assets of the Company will not be impaired
in the future or that the future operating performance of the Company's
centers with a history of losses will improve. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ACQUISITION STRATEGY; MANAGEMENT OF GROWTH
One of the Company's objectives is to continue to acquire diagnostic imaging
centers and integrate them into the Company's operations. Successfully
accomplishing this goal depends upon a number of factors, including the
Company's ability to find suitable acquisition candidates, negotiate
acquisitions on acceptable terms, obtain necessary financing on acceptable
terms, retain key personnel of the acquired entities, hire and train other
competent managers, and effectively and profitably integrate the operations of
the acquired businesses into the Company's existing operations. The process of
integrating acquired businesses may require a significant amount of resources
and management attention which could temporarily detract from attention to the
day-to-day business of the Company and which may be prolonged due to
unforeseen circumstances. The Company's ability to manage its growth
effectively will require it to continue to improve its operational, financial
and management information systems and controls (including improving and
standardizing of its billing systems), and to attract, retain, motivate and
manage employees effectively. The failure of the Company to manage growth in
its business effectively would have a material adverse effect on its results
of operations.
Future acquisitions may be financed through the incurrence of additional
indebtedness or the issuance of equity securities. The issuance by the Company
of additional Common Stock in connection with acquisitions could be dilutive
to Company stockholders. In addition, because the Common Stock has experienced
significant market price fluctuations recently, sellers of acquisition targets
may be hesitant to accept shares of Common Stock in payment of all or portions
of the purchase price of centers unless they are provided with suitable price
protection rights. The grant and ultimate exercise of any such rights could
result in significant dilution to existing shareholders. See "Effects of Grant
of Purchase Price Remedies and Earnout Rights to Sellers of Acquired Centers."
Competition for suitable acquisition candidates is expected to be intense and,
in addition to local hospital and physician groups, to include regional and
national diagnostic imaging service companies and other medical services
companies, many of which have greater financial resources than the Company.
REDUCTIONS AND DELAYS IN REIMBURSEMENT
Third-party payors, including Medicare, Medicaid, managed care/HMO providers
and certain commercial payors have taken extensive steps to contain or reduce
the costs of healthcare. In certain areas, the payors are subject to
regulations which limit the amount of payments. Discussions within the Federal
government regarding national healthcare reform are emphasizing containment of
healthcare costs. In addition, certain managed care organizations have
negotiated capitated payment arrangements for imaging services. Under
capitation, diagnostic imaging service providers are compensated using a fixed
rate per member of the managed care organization regardless of the total cost,
including the numbers of procedures performed, 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
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payment for services rendered, substantially all of the Company's imaging
centers' revenues are derived from third-party payors. Successful reduction of
reimbursement amounts and rates, changes in services covered, delays or
denials of reimbursement claims, negotiated or discounted pricing and other
similar measures could materially adversely affect the Company's respective
imaging centers' revenues, profitability and cash flow.
The Company's management believes that 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 (including future reductions in Medicare and Medicaid
reimbursement rates). 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. Although during 1997 and the first
six months of 1998, the aggregate volume of procedures performed by the
Company at its centers has remained relatively constant (and therefore has not
offset the reduction in reimbursement rates per procedure), the Company
expects these agreements, over time, 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 potential increased volume of
procedures associated with these contractual arrangements will offset the
reduction in reimbursement rate per procedure.
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 person 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 judgments 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 may vary 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 will generally 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 generally
pursues 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 personal injury 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 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.
Consequently, the Company's services with respect to the personal injury claim
are not contingent. If the settlement or judgment proceeds received by the
individual are insufficient to cover the individual's obligation to the
Company, the Company either (i) accepts a reduced amount in full satisfaction
of the individual's outstanding obligation, or
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(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. Significant delays in the collection or the inability to collect
receivables relating to personal injury claims or the refusal of insurance
companies to pay the higher reimbursement rates typically associated with
personal injury claims could have a material adverse effect on the Company's
diagnostic imaging operations.
RESTRICTIONS IMPOSED BY GOVERNMENT REGULATION
The healthcare industry is highly regulated. The ownership, construction,
operation, expansion and acquisition of outpatient diagnostic imaging centers
are subject to various federal and state laws, regulations and approvals
concerning such matters as physician referrals, licensing of facilities and
personnel, and Certificates of Need and other required certificates for
certain types of healthcare facilities and major medical equipment. Among
other penalties, violations of these laws can result in the shutdown of a
company's facilities and loss of Medicare and Medicaid reimbursement for
patient services. The Federal Anti-Kickback Act of 1977, as amended (the
"Anti-Kickback Act") prohibits the offer, payment, solicitation or receipt of
any form of remuneration in return for referring Medicare or Medicaid patients
or purchasing, leasing, ordering or arranging for any item or service that is
covered by Medicare or Medicaid. The law provides several penalties for
engaging in prohibited acts, including criminal sanctions and exclusion from
the Medicare and Medicaid programs. Although the Company does not believe that
it is operating in violation of this law, the scope of the law remains
somewhat unclear and there is no assurance that the Company would prevail in
its position. In addition, in 1991 and subsequently, the Office of the
Inspector General of the Department of Health and Human Services promulgated
"safe harbor" regulations specifying activities that will be protected from
criminal and civil investigation and prosecution under the Anti-Kickback Act.
The Office of the Inspector General has stated that failure to satisfy the
conditions of an applicable "safe harbor" does not necessarily indicate that
the arrangement in question violates the Anti-Kickback Act, but means that the
arrangement is not among those that the "safe harbor" regulations protect from
criminal and civil investigation and prosecution under that law. The finding
of a violation must still be determined based upon the precise language of the
Anti-Kickback Act.
The Federal Omnibus Budget Reconciliation Act of 1989, as amended by the
Federal Omnibus Budget Reconciliation Act of 1993, contains provisions that,
unless an exception applies, restrict physicians from making referrals to,
among others, providers of MR and other radiological services for services to
be rendered to Medicare or Medicaid patients in which the physicians have a
"financial relationship" or an ownership interest or with which they have a
compensation arrangement (the so-called "Stark Law"). The Stark Law provides
exceptions for certain types of employment and contractual relationships. The
Company believes that it is in compliance with the Stark Law, but there is no
assurance that the Company will prevail in its position if challenged.
The State of Florida also enacted in 1992 an anti-kickback statute
substantially similar in scope to the Anti-Kickback Act. Although the Company
does not believe that it is operating in violation of this law, as with its
Federal counterpart, the scope of the Florida law remains unclear and there is
no assurance that the Company would prevail in its position.
The States of Florida, Illinois, New Jersey, New York, Maryland and
Pennsylvania in which the Company currently operates centers have enacted laws
that restrict or prohibit physicians from referring patients to healthcare
facilities in which such physicians have a financial interest. Although the
Company does not believe that these laws will have a material adverse effect
on its operations in these states, there is no assurance that these laws will
not be interpreted or applied in such a way as to create such a material
adverse effect, or that these states, or other states in which the Company
does business, will not adopt similar or more restrictive laws or regulations
that could have such a material adverse effect.
10
<PAGE>
All states where the Company has imaging centers have enacted Certificate of
Need laws to facilitate healthcare planning by placing limitations on the
purchase of certain major medical equipment and certain other capital
expenditures. These statutes, together with their implementing regulations,
could limit the Company's ability to acquire new imaging facilities and
imaging equipment or expand or replace its equipment at existing centers, and
no assurances can be given that the required regulatory approvals for any
future acquisitions, expansions or replacements will be granted to the
Company.
The Company continues to review all aspects of its operations and believes
that it complies in all material respects with applicable provisions of the
Anti-Kickback Act, the Stark Law and applicable state laws governing fraud and
abuse as well as licensing and certification, although because of the broad
and sometimes vague nature of these laws and requirements, there can be no
assurance that an enforcement action will not be brought against the Company
or that the Company will not be found to be in violation of one or more of
these regulatory provisions. Further, there can be no assurance that new laws
or regulations will not be enacted, or existing laws or regulations
interpreted or applied in the future in such a way as to have a material
adverse impact on the Company, or that Federal or state governments will not
impose additional restrictions upon all or a portion of the Company's
activities, which might adversely affect the Company's business.
CORPORATE PRACTICE OF MEDICINE AND FEE SPLITTING
The Company presently operates imaging centers in New York, New Jersey,
Pennsylvania, Maryland, Massachusetts, Ohio, Illinois, Florida, California and
Arkansas. The laws of many states prohibit unlicensed, non-physician-owned
entities or corporations (such as the Company) from performing medical
services, or in certain instances, physicians from splitting fees with non-
physicians, such as the Company. The Company does not believe that it engages
in the unlicensed practice of medicine or the delivery of medical services in
any state where it is prohibited, and is generally 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 licensed
Interpreting Physicians, as independent contractors, pursuant to agreements
with the Company. At each of the Company's centers, all medical services are
performed exclusively by Physician Groups, generally consisting exclusively 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. The Company's
employees do not perform professional medical services at the centers.
Consequently, the Company does not believe that it engages in the practice of
medicine in jurisdictions which prohibit or permit the corporate practice of
medicine. The Company performs only administrative and technical services and
does not exercise control over the practice of medicine by physicians at the
centers or employ physicians to provide medical services.
In many jurisdictions, however, the laws restricting the corporate practice
of medicine and fee-splitting have been subject to limited judicial and
regulatory interpretation and, therefore, there is 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. Imposition of civil
or criminal penalties against the Company could have a material adverse effect
on its operations, cash flows and financial condition.
POTENTIAL ADVERSE EFFECT OF CAPITATION CONTRACTS
The Company has entered into a number of "capitated contracts" with third
party payors which typically provide for payment of a fixed fee per month on a
per member basis, without regard to the amount or scope of services actually
rendered. Because the obligations to perform services 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,
11
<PAGE>
and there may be a significant period between the time the services are
rendered and payment is received. Approximately 2% of the Company's net
service revenues in 1997 was derived from capitated contracts. While prior to
entering into any such contracts the Company carefully analyzes the potential
risks of capitation arrangements, there can be no assurances that any
capitated contracts to which the Company is a party or which it may enter into
in the future 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 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 a 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.
COMPETITION; RELIANCE ON REFERRALS
The outpatient diagnostic imaging industry is highly competitive.
Competition focuses primarily on attracting physician referrals, including
referrals through relationships with managed care organizations, at the local
market level. The Company believes that principal competitors in each of its
markets are hospitals, 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 facility location, type and quality of
equipment, quality and timeliness of test results, ability to develop and
maintain relationships with referring physicians, convenience of scheduling
and availability of patient appointment times and the pricing of services.
These factors impact the referring physician's decision to direct a patient to
an imaging center. Competition for physician referrals can also be affected by
the ownership or affiliation of competing centers or hospitals. In addition,
managed care has affected the availability of referrals by approving only a
certain number of centers in a given geographic region. The competitive
environment which the Company faces could result in lower patient volume or in
an adverse change in payor mix.
MR systems compete with a variety of other scanning technologies which are
available in physicians offices, hospitals and other diagnostic imaging
centers. Competition with other imaging modalities is generally based on the
nature of the medical procedure to be performed and the condition of the
patient. The use of MR imaging as a diagnostic tool continues to gain both
professional and public acceptance as MR imaging and diagnostic techniques
improve, equipment software is enhanced and attention is directed to MR's
diagnostic successes. The Company's performance is dependent upon physician
and patient confidence in the superiority of its MR imaging and service over
other competing modalities and systems.
There are a number of manufacturers of MR imaging systems. These
manufacturers' marketing efforts can be expected to stimulate others,
including hospitals, to purchase and install the MR systems. Periodically,
manufacturers introduce innovations or newly designed MR systems with enhanced
features. Therefore, the Company encounters strong competition from other MR
diagnostic systems with innovative or enhanced features installed in the areas
where the Company has installed its MR systems, as well as strong competition
in its endeavors to acquire new locations.
The temporary healthcare staffing business is also very competitive. StarMed
competes for clients' business with other providers of travel nurse temporary
staffing and with other staffing companies that provide per diem staffing
services. StarMed also competes for the limited number of available qualified
staff. StarMed competes with several companies which are larger and may
possess greater financial and other resources.
12
<PAGE>
DEPENDENCE ON QUALIFIED INTERPRETING PHYSICIANS
The Company's strategy of maintaining the high quality of its services is
dependent upon its ability to obtain and maintain arrangements with qualified
Interpreting Physicians at each of its centers. No assurance can be given that
the Company's contractual arrangements with Interpreting Physician groups at
each of the Company's centers can be maintained on terms advantageous to the
Company. No assurance can be given that the Interpreting Physicians with whom
the Company has contracts will perform satisfactorily or continue to practice
in the markets served by its imaging centers. In addition, with respect to the
acquired centers, there can be no assurance that arrangements can be entered
into with Interpreting Physicians on acceptable terms or that such physicians
will be successful in such centers. The Company's success is significantly
dependent on the ability of these physicians to attract patient referrals,
thereby enabling the Company's centers to operate profitably. Agreements with
Interpreting Physicians generally range from one to ten years and permit
termination only for cause. Many agreements prohibit the Interpreting
Physician from performing professional interpreting services for a competitor
within a defined geographic distance from the Company's center which may vary
depending upon the relevant demographics and density of the immediate region.
Such restrictive covenants are customarily in effect from one to five years
following the termination of the agreements. The inability of these physicians
to attract sufficient referrals, the termination of their agreements with the
Company or the inability of the Company to enforce the restrictive covenants
contained in the agreements could have a material adverse effect on the
Company's financial condition and operating results.
TECHNOLOGICAL OBSOLESCENCE
There have been rapid technological advancements made in the software and,
to a lesser extent, hardware in the diagnostic imaging industry. Although the
Company believes that its equipment can generally be upgraded as necessary,
the development of new technologies or refinements of existing technologies
might make existing equipment technologically or economically obsolete. If
such obsolescence were to occur, the Company may be compelled to acquire new
equipment, which could have a material adverse effect on its financial
condition, results from operations and cash flow. In addition, certain of the
Company's centers compete against local centers which contain more advanced
imaging equipment or provide additional modalities.
MALPRACTICE LIABILITY CLAIMS AND INSURANCE
Although the Company provides administrative, financial and technical
services and is not engaged in the practice of medicine, the diagnostic
imaging and temporary staffing businesses entail the risk of professional
liability claims. Consequently, the Company may be named as a co-defendant in
medical malpractice claims. The Company's exposure to such liability is
reduced for its imaging centers because Interpreting Physicians are required
to purchase and carry their own medical malpractice insurance. Similarly, the
Company's nursing personnel perform services in accordance with treatments
prescribed by third-party Physicians or under hospital supervision.
Nevertheless, the Company maintains general liability insurance and
professional liability insurance for both its diagnostic imaging business and
its temporary staffing business in amounts deemed adequate by management of
the Company. The Company is subject to one claim seeking $12.5 million in
damages, which is in excess of the Company's insurance coverage of $1,000,000
per incident, as well as six additional lawsuits which do not specify the
amount sought to be recovered. Adverse determinations against the Company with
respect to all such claims or the filing of malpractice claims against the
Company in the future could have a material adverse effect on the Company's
financial condition, results of operations and cash flow.
DEVELOPMENT OF NEW CENTERS
Although the primary focus of the Company's growth strategy has been on
acquisitions of existing centers rather than developing new centers, the
Company may also, from time to time, pursue the development of new centers.
Developing new centers entails the same risks as establishing a new business.
The likelihood of success of a newly developed center must therefore be
considered in light of the initial development and operating complexities,
expenses, difficulties, and delays frequently encountered by a new business
and the competitive environment in which the new business will operate. In
addition, new centers may incur significant operating losses during their
initial operations, which could materially adversely affect the Company's
operating results, cash flows and financial condition.
13
<PAGE>
EFFECTS OF FAILURE TO MAINTAIN NASDAQ NATIONAL MARKET LISTING
On May 14, 1998, management appeared before the Nasdaq Qualifications
Hearing Panel (the "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 was required to file its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 on or before June 12,
1998, which the Company was able to do, and to evidence compliance with either
Nasdaq's minimum net tangible assets test or one of Nasdaq's alternative
requirements by July 24, 1998. In order to meet one of Nasdaq's alternative
listing requirements, the Company effected a one-for-three reverse stock split
of its Common Stock on July 24, 1998. On July 28, 1998, the Panel notified the
Company that the Company had complied with Nasdaq's continued listing
qualifications and that the Common Stock would continue to be listed on The
Nasdaq Stock Market. Nevertheless, there can be no assurance that in the
future the Common Stock will meet the continued listing qualifications of The
Nasdaq Stock Market. Among other consequences, delisting from The Nasdaq Stock
Market could cause a decline in the market price of the Common Stock and
difficulty in the ability of the Company in obtaining future equity financing
or in using its Common Stock as consideration for acquisitions.
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends and has no present plans to pay
cash dividends to its stockholders and, for the foreseeable future, intends to
retain all of its earnings, if any, for use in its business. The declaration
of any future dividends by the Company is within the discretion of its Board
of Directors and will be dependent on the earnings, financial condition and
capital requirements of the Company, as well as any other factors deemed
relevant by its Board of Directors. In addition, the payment by the Company of
cash dividends is presently limited by the agreement related to the issuance
of the Senior Notes.
CERTAIN ANTI-TAKEOVER MEASURES
Certain provisions of the Company's Certificate of Incorporation, as well as
Delaware corporate law and the Company's Stockholder Rights Plan (the "Rights
Plan"), may be deemed to have anti-takeover effects and may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interest. Such provisions also may adversely affect prevailing market prices
for the Common Stock. Certain of such provisions allow the Company's Board of
Directors to issue, without additional stockholder approval, preferred stock
having rights senior to those of the Common Stock. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
matter. In September 1996, the Company adopted the Rights Plan, pursuant to
which holders of the Common Stock received a distribution of rights to
purchase additional shares of Common Stock, which rights become exercisable
upon the occurrence of certain events. Although the Rights Plan was adopted by
the Company to give its Board of Directors significantly more time to properly
consider and to respond to an acquisition proposal, it could have the effect
of discouraging or hindering an unsolicited offer to acquire the Company at
effective valuations which are above the current market capitalization of the
Company.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and may continue to be
volatile. Recently, the stock market in general and the shares of healthcare
and diagnostic imaging services companies in particular have experienced
significant price fluctuations. These broad market and industry fluctuations
may adversely affect the market price of the Common Stock. Factors such as
quarterly fluctuations in results of operations, the timing and terms of
future acquisitions and general conditions in the healthcare industry may have
a significant impact on the market price of the Common Stock.
14
<PAGE>
SALES BY SELLING STOCKHOLDERS; POTENTIAL FOR DILUTION
All of the Shares being offered hereby are offered solely by the Selling
Stockholders who are not restricted as to the prices at which they may sell
the Shares. Shares sold below the then current level at which the shares of
Common Stock are trading may adversely affect the market price of the Common
Stock. The outstanding shares covered by this Prospectus and the shares of
Common Stock covered by this Prospectus which are issuable as of September 8,
1998 upon the conversion or exercise of the Company's Series C Preferred
Stock, convertible notes and certain warrants represent 49.5% of the
outstanding shares of Common Stock as of September 8, 1998 after giving effect
to the issuance of shares of Common Stock upon the conversion or exercise of
the Series C Preferred Stock, convertible notes and certain warrants, which
shares are being offered by this Prospectus.
As of September 1, 1998, 15,500 shares of the Company's Series C Preferred
Stock were issued and outstanding. Each share of the Series C Preferred Stock
is convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser
of (i) $62.10 or (ii) the average of the daily closing bid prices for the
Common Stock for the five (5) consecutive trading days ending five (5) trading
days prior to the date of conversion. On June 18, 1998, 2,500 shares of Series
C Preferred Stock were converted into 373,220 shares of Common Stock. If
converted on September 8, 1998, the remaining 15,500 shares of Series C
Preferred Stock would have been convertible into approximately 3,119,167
shares of Common Stock. Based on the closing price of the Common Stock on
October 1, 1998 ($2.625) the outstanding Preferred Stock would have been
converted into approximately 6,116,848 shares of Common Stock. Depending on
market conditions at the time of conversion, the number of shares issuable
could prove to be significantly greater in the event of a decrease in the
trading price of the Common Stock. 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) issued warrants to RGC to acquire 389,000 shares of
Common Stock at an exercise price ranging form $34.86 to $38.85 per share,
subject to reset in November 1998 (such warrants having an estimated value for
accounting purposes, of $3,245,000); and (ii) issued interest bearing
promissory notes (the "RGC Penalty Notes") in the aggregate principal amount
of $2,450,000 due October 15, 1998. The principal amount of and interest
accrued on the RGC Penalty Notes may be converted, at the option of the
Company or RGC in certain circumstances, into additional shares of Series C
Preferred Stock or Common Stock. Pursuant to an amendment to the RGC
Agreements entered into in June 1998, the Company will no longer incur any
monthly penalties for failure to register the RGC Conversion Shares following
July 23, 1998. However, if the RGC Conversion Shares are not registered as of
September 15, 1998, RGC may demand a one-time penalty of $1,550,000 (the
"September 1998 Penalty"), payable, at the option of RGC, in cash or
additional shares of Common Stock. There can be no assurance that the Company
will be able to register the RGC Conversion Shares by such date or that the
Company will be able to pay the RGC Penalty Notes when due or the September
1998 Penalty, if such payment becomes due. Purchasers of Common Stock could
therefore experience substantial dilution upon conversion of the Series C
Preferred Stock and the RGC Penalty Notes and the exercise of such warrants.
The shares of Series C Preferred Stock are not registered and may be sold only
if registered under the Act or sold in accordance with an applicable exemption
from registration, such as Rule 144. The shares of Common Stock into which the
Series C Preferred Stock may be converted and the shares underlying such
warrants are being registered pursuant to the Registration Statement of which
this Prospectus is a part.
15
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by the
Selling Stockholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
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. From April 20, 1998 through June 18, 1998 the Company's Common
Stock 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 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 was
required to file its Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 on or before June 12, 1998, which the Company was able to do, and to
evidence compliance with either Nasdaq's minimum net tangible assets test or
one of Nasdaq's alternative requirements by July 24, 1998. In order to meet one
of Nasdaq's alternative listing requirements, the Company effected a one-for-
three reverse stock split of its Common Stock on July 24, 1998. On July 28,
1998, the Panel notified the Company that the Company had complied with
Nasdaq's continued listing qualifications and that the Common Stock would
continue to be listed on The Nasdaq Stock Market. Nevertheless, there can be no
assurance that in the future the Common Stock will meet the continued listing
qualifications of The Nasdaq Stock Market.
The following table sets forth for the periods indicated below the high and
low sales prices per share of the Common Stock as reported by NASDAQ and gives
effect to the one-for-three reverse stock split of the Common Stock effected on
July 24, 1998:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
First Quarter............................................. $19 1/8 $13 7/8
Second Quarter............................................ $30 3/4 $18 3/8
Third Quarter............................................. $27 3/4 $18 3/4
Fourth Quarter............................................ $35 1/4 $21
1997
First Quarter............................................. $37 1/2 $28 1/2
Second Quarter............................................ $53 5/8 $29 5/8
Third Quarter............................................. $60 3/4 $45 3/4
Fourth Quarter............................................ $63 $23 1/4
1998
First Quarter............................................. $33 3/8 $14 5/8
Second Quarter ........................................... $19 1/8 $ 6 3/16
Third Quarter............................................. $12 3/4 $ 2 1/2
Fourth Quarter (through October 6, 1998).................. $ 2 5/8 $ 2 1/4
</TABLE>
As of the close of business on October 6, 1998, the last reported sales price
per share of the Company's Common Stock was $2.25.
There were 435 holders of record of the Company's Common Stock at the close
of business on September 1, 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
the Senior Notes. The Company currently intends to retain earnings for future
growth and expansion opportunities.
16
<PAGE>
SELECTED CONSOLIDATED 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, and reflects StarMed as a
discontinued operation due to its August 1998 sale. The selected balance sheet
data at June 30, 1998 and 1997, and the statement of operations data for the
six months ended June 30, 1998 and 1997, have been derived from the Company's
unaudited consolidated financial statements and includes, in the opinion of
management, all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of such data. The operating results for the
six month period ended June 30, 1998 are not necessarily an indication of the
results to be expected for the year ending December 31, 1998 or for future
periods. The information in the table and the notes thereto should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------- --------------------
1997 1996 1995 1994 1993 1998 1997
-------- -------- -------- -------- ------- --------- ---------
(IN THOUSANDS EXCEPT SUPPLEMENTAL AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1)(2):
Net service revenues... $144,412 $ 64,762 $ 35,860 $ 30,607 $26,934 $ 93,648 $ 64,718
Operating income
(loss)................ (21,297) 13,700 7,194 1,169 1,648 926 12,608
Income (loss) from
continuing operations
before extraordinary
item.................. (31,968) 6,983 4,246 (938) (694) (6,930) 5,990
Income (loss) from
continuing operations
per common share:
Basic(4)............. (4.96) 1.86 1.65 (.39) (.33) (.99) .91
Diluted(4)........... (4.96) 1.72 1.64 (.39) (.33) (.99) .86
SUPPLEMENTAL DATA(1):
Number of consolidated
imaging centers at end
of period............. 98 39 11 8 8 98 78
Total procedures at
consolidated imaging
centers............... 527,477 209,970 124,302 101,460 86,686 337,995 203,774
BALANCE SHEET DATA:(1)
Working capital surplus
(deficit)(3).......... $(58,174) $ 42,775 $ 10,738 $ 5,834 $ 3,365 $ (55,892) $ 66,090
Total assets........... 338,956 164,514 44,136 40,372 40,881 331,326 310,076
Long term debt and
capital lease
obligations (excluding
current portion)...... 37,900 21,011 11,157 13,415 19,034 32,033 109,693
Convertible debentures. -- 6,988 4,350 -- -- -- --
Stockholders' equity... 126,904 106,384 16,966 11,872 12,939 123,778 131,652
</TABLE>
- --------
(1) Statement of Operations Data, Supplemental Data and Balance Sheet Data
reflect the impact of a substantial number of acquisitions during 1997 and
1996. See Note 14 of the Notes to Consolidated Financial Statements for
the Year Ended December 31, 1997.
(2) Statement of Operations Data has been restated to reflect the financial
results of StarMed as discontinued operations. See Note 16 of the Notes to
the Consolidated Financial Statements.
(3) As a result of the Company's default of certain financial covenants under
the Company's Senior Notes, the Company's Senior Notes and other loans and
capital leases also subject to acceleration as a result thereof are shown
as current liabilities as of December 31, 1997 and June 30, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
(4) Earnings per share amounts for 1997 include charges related to restricted
common stock and convertible preferred stock of $1,938,000.
Earnings per share amounts for all periods, including related quarters, have
been calculated in conformity with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share."
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING 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 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 and the six months ended June 30, 1998 were $80,818,000,
or 56% of revenues, and $50,283,000, or 54% of revenues, respectively.
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 and the six months ended June 30, 1998 were
$55,016,000, or 38% of revenues, and $36,618,000, or 39% of revenues,
respectively.
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 and the six months
ended June 30, 1998 were $8,342,000, or 6% of revenues, and $6,747,000, or
7% of revenues, respectively.
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
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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.
Until August 1998, the Company, through the Per Diem and Travel Nursing
Divisions of its wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley
Medical Resources Inc. ("StarMed"), provided temporary healthcare staffing of
registered nurses and other medical personnel to acute and sub-acute care
facilities nationwide. On August 18, 1998, the Company sold StarMed to
RehabCare Group, Inc. for $33 million (the "StarMed Sale"). Due to the StarMed
Sale, the results of operations of StarMed are herein reflected in the
Company's Consolidated Statements Of Operations as discontinued operations.
On July 24, 1998, the Company effected a one-for-three reverse stock split
of its Common Stock. The information in this Prospectus gives effect to such
reverse stock split.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
For the six months ended June 30, 1998, total Company's net service revenues
were $93,648,000 versus $64,718,000 for the six months ended June 30, 1997, an
increase of $28,930,000 or 45%.
The increase is due to the timing of various 1997 acquisitions which were
responsible for $35,093,000 of the increase. Offsetting this increase were
centers that were operated by the Company for all of 1997 which decreased
$7,340,000, or 15%, to $42,223,000 for the six months ended June 30, 1998 from
$49,563,000 for the same period in 1997, primarily as a result of higher
contractual allowances, as a percentage of gross billings, in the 1998 second
quarter, and a modality mix change toward lower priced procedures. Aggregate
procedure volumes for these imaging centers were relatively constant in the
six months ended June 30, 1998 as compared to the six months ended June 30,
1997.
Contractual allowances are largely dependent upon reimbursement rates from
third party payors, including Medicare, Medicaid and managed care providers.
Management believes that it is likely that the Company's overall reimbursement
rates will 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 intends to attempt to mitigate the impact of any
decline in reimbursement rates by decreasing costs and increasing referral
volumes. 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 volumes, the Company's results could be materially and
adversely affected.
Diagnostic Imaging revenue derived from personal injury claims, mainly
involving automobile accidents, represented approximately 18% of the
Diagnostic Imaging business net service revenues for the six months ended June
30, 1998. 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.
Operating costs for the six months ended June 30, 1998 were $61,337,000
compared to $36,284,000 for the six months ended June 30, 1997, an increase of
$25,053,000 or 69%. Primarily, this is due to an increase in operating costs
of $22,718,000 related to centers acquired during 1997. Operating costs at
imaging centers operated by the Company for all of 1997 increased $2,335,000,
or 9%, to $28,524,000 for the six months ended June 30, 1998 from $26,189,000
for the six months ended June 30, 1997, primarily as a result of increased
payroll costs.
Center operating margins, which represent net service revenue less imaging
center operating costs as a percent of net revenue, decreased for the six
months ended June 30, 1998 to 35% from 44% for the six months ended June 30,
1997, due primarily to higher contractual allowances and generally higher
payroll and administrative costs.
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The provision for uncollectible accounts receivable for the six months ended
June 30, 1998 was $7,307,000, an increase of $3,554,000 from six months ended
1997 provision of $3,753,000. The Company's provision for uncollectible
accounts receivable for the six months ended 1998 was 8% of related net
service revenues, compared to the first six months of 1997, which represented
6% of related net service revenues. The increase in the provision for
uncollectible accounts receivable, as a percentage of net service revenues,
was due to an increase in the estimated rate of bad debts, primarily related
to personal injury claim receivables. If and to the extent that personal
injury claim receivables decline as a percentage of total net service revenues
over time, and provided the Company improves its cash collections of
outstanding accounts receivables on an ongoing basis, this provision should
fall below 8% of net service revenues in the future. Although outstanding
accounts receivables increased during the second quarter of 1998, cash
collections from mid-June through early August of this year have improved and,
during this period, outstanding accounts receivable has decreased slightly.
Corporate general and administrative expense for the six months ended June
30, 1998 was $5,815,000, an increase of $3,126,000 from the $2,689,000
recorded for the six months ended June 30, 1997. 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 1997.
Results for the six months ended June 30, 1998 and 1997 include non-cash
charges of $228,000 and $2,305,000, respectively, for compensation expense
resulting from stock options granted in 1996 and early 1997 that were approved
by the Company's stockholders in May 1997. Such compensation expense
represents the difference between the exercise price of the options and the
market price of the Company Common Stock on the date of plan approval,
attributable to vested shares.
Depreciation and amortization expense for the first six months of 1998 was
$12,635,000 compared to $7,079,000 for the first six months of 1997, or an
increase of $5,556,000 attributable almost entirely to the Company's
Diagnostic Imaging business. The increase was due primarily to higher
equipment depreciation resulting from 1997 acquisitions and increased goodwill
amortization.
During the six months ended June 30, 1998, the Company recorded $5,400,000
of unusual charges consisting of (i) $3,467,000 ($1,194,000 of which was a
non-cash charge related to the issuance of 117,000 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, (ii) $713,000 for the estimated net costs
associated with the resolution of the shareholder and employee lawsuits, (iii)
$883,000 for costs associated with the investigation of related party
transactions and (iv) $337,000 for management termination benefits and related
costs.
The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current
negotiations regarding penalties associated with the failure to register the
Company's Common Stock and waivers or amendments of the financial covenants
under its Senior Notes, and the outcome of certain litigation.
Net interest expense for the six months ended June 30, 1998 was $6,912,000
as compared to $2,733,000 for the six months ended June 30, 1997, an increase
of $4,179,000. 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 1997 acquisitions.
The Company's income for the six months ended June 30, 1998 was decreased by
$643,000 attributable to minority interests, as compared to an increase in the
Company's income of $193,000 for the six months ended June 30, 1997.
The provision for income taxes for the six months ended June 30, 1998
decreased $3,777,000 to $301,000 as compared to $4,078,000 for the comparable
period last year. The provision for income taxes for the six months ended June
30, 1998 consists entirely of estimated state income taxes. During the first
six months of 1998, a benefit for income taxes has not been recorded due to
the uncertainty regarding the recognition of the full amount of the Company's
deferred tax assets.
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The Company's net loss from continuing operations for the six months ended
June 30, 1998 was $6,930,000 compared to net income from continuing operations
for the six months ended June 30, 1997 of $5,990,000.
The net loss applicable to common stockholders (used in computing loss per
common share) in the first half of 1998 includes charges of $274,000 as a
result of the accretion of the Company's preferred stock.
In July 1998, the Company decided to sell or close approximately eight
imaging centers. These centers will be sold or closed during the third and
fourth quarters of 1998. In most cases, the Company decided to sell or close
these centers due to general competitive pressures and their close proximity
to other imaging centers of the Company which have more advanced imaging
equipment. The Company expects to incur a charge of between $3,000,000 and
$4,000,000 during the third quarter of 1998 related to these imaging centers.
Such charge will consist of (i) the write-off of fixed assets and other assets
of between $2,000,000 and $2,600,000 and (ii) reserve for costs to exit
facility and equipment leases of between $1,000,000 and $1,400,000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
For the year ended December 31, 1997, the Company's net service revenues
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.
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.
Revenue derived from personal injury claims, mainly involving automobile
accidents, represented approximately 24% of 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.
Operating costs increased $54,408,000, or 156%, to $89,234,000 in 1997 from
$34,826,000 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.
Center operating margins, which represent net service revenue less imaging
center operating costs as a percent of net revenue, decreased in 1997 to 38%
from 46% 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.
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The provision for uncollectible accounts receivable in 1997 was $20,364,000,
or 14% of related net service revenues, compared to the 1996 provision of
$4,705,000 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. Management believes that the deterioration in the aging of
accounts receivable occurred primarily during the second half of 1997 and was
the result of the Company's substantial acquisition activity in 1997 and the
delay in promptly integrating the billing and collection activities with
respect to such acquisitions. In addition, the Company was without a permanent
President and Chief Financial Officer from October 1997 through February 1998,
which allowed the aging of accounts receivable to continue to worsen since
management resources were not directed at improving billing and collections.
During the fourth quarter of 1997, as the age of the specific bills
lengthened, the ability to research and pursue the old receivables worsened
and hence it was determined that a reserve was required for a substantial
number of these older receivables. Management does not expect further
deterioration to occur in 1998 although that will depend on actual collections
performance. 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 revenues to approximate 8% 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 $12,157,000, an
increase of $7,590,000 from the $4,567,000 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 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 from the levels of the fourth
quarter of 1997. This reduction in workforce is not expected to adversely
impact the ability of the Company to generate future revenue.
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 $18,733,080, compared to
$6,964,000 in 1996, or an increase of $11,769,000 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. The write-down of fixed assets primarily relates to imaging
equipment. 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 operating performance of these centers
declined during 1997 due primarily to declines in referrals and the Company
did not believe that these centers would materially improve in the future.
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
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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 $8,814,000 as compared to $2,834,000 for
1996, an increase of $5,980,000. 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 $1,221,000, as compared to
$3,575,000 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.
The Company's net loss from continuing operations for 1997 was $31,968,000
compared to net income from continuing operations for 1996 of $6,983,000.
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
$64,762,000 versus $35,860,000 for the year ended December 31, 1995, an
increase of $28,902,000 or 80.6%. 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.
Technical services payroll and related costs for the year ended December 31,
1996 amounted to $10,836,000 compared to $6,815,000 for the year ended
December 31, 1995, an increase of $4,021,000 or 59%.
Medical supplies amounted to $4,223,000 for the year ended December 31, 1996
as compared to $2,439,000 for the year ended December 31, 1995, an increase of
$1,784,000 or 73%. Of this increase $1,725,000 or 97% is attributable to
centers acquired during 1995 and 1996.
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For the year ended December 31, 1996 diagnostic equipment maintenance
increased $1,627,000 or 99% to $3,274,000 from $1,647,000 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 $6,685,000 or 127% from $5,252,000
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 $1,327,000 or 39%
from $3,378,000 from the year ended December 31, 1995 to $4,705,000 for the
year ended December 31, 1996. The 1996 provision for uncollectible accounts
consists of 7.3% of revenue as compared to 9.4% of revenue in 1995. The
decrease in the provision for uncollectible accounts receivable as a
percentage of revenues is due to acquired companies having a more favorable
collection experience due to differences in payor mix.
Corporate general and administrative expense increased by $1,573,000 or 53%
from $2,994,000 for the year ended December 31, 1995 to $4,567,000 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, particularly following the acquisition of NMR of America, Inc.
("NMR").
Depreciation and amortization expense was $6,964,000 for the year ended
December 31, 1996 compared to $4,274,000 for the year ended December 31, 1995
or an increase of $2,690,000 or 63% due primarily to depreciation expense
relating to acquired assets and increased goodwill amortization incurred in
connection with such acquisitions.
Interest expense for the year ended December 31, 1996 was $2,834,000 as
compared to $1,829,000 for the prior year, an increase of $1,005,000 or 55%.
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 $2,332,000 or 188% for the year
ended December 31, 1996 from $1,243,000 to $3,575,000. 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 33.9% in 1996 and 22.4% 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 (6.3%), the impact on
non-deductible goodwill (1.8%) and meals and entertainment, offset by other
items amounting to (8.2%). In 1995, the effective tax rate was lower than the
statutory rate primarily due to a reduction in the deferred tax asset
valuation allowance (27.7%) offset by other items amounting to 16.3%.
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For the reasons described above, the Company's net income from continuing
operations for the year ended December 31, 1996 increased $2,737,000 or 64.5%
from $4,246,000 for the year ended December 31, 1995 to $6,983,000.
STARMED SALE
On August 18, 1998, the Company sold the stock of StarMed to RehabCare
Group, Inc. for gross proceeds of $33,000,000. Due to the StarMed Sale, the
results of operations of StarMed are herein reflected in the Company's
Consolidated Statements of Operations as discontinued operations.
Net cash proceeds from the StarMed Sale were used as follows: (i)
$13,786,000 to repay StarMed's outstanding third-party debt (in accordance
with the terms of sale) (ii) $2,000,000 was placed in escrow to be available,
for a specified period of time, to fund indemnification obligations that may
be incurred by the Company (part or all of this amount may be payable to the
Company over time) and (iii) an additional $2,000,000 was placed into escrow
to be applied as a partial repayment of the Company's $78,000,000 of Senior
Notes. The remaining net proceeds of approximately $13,400,000 increased the
Company's consolidated cash balances. For accounting purposes, a pretax gain
from the StarMed Sale of approximately $5,000,000 is expected to be reported
in the third quarter of 1998.
RESULTS OF DISCONTINUED OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net service revenues for StarMed increased to $40,307,000 for the six months
ended June 30, 1998 from $25,947,000 for the six months ended June 30, 1997,
an increase of $14,360,000 or 55%. Internal growth in the staffing business,
consisting primarily of the opening of new Per Diem division offices,
accounted for $11,483,000 of the increase in revenues. Revenues at Per Diem
division offices acquired during 1997 accounted for $2,877,000 of the
increase.
Operating costs for StarMed for the six months ended June 30, 1998 were
$32,197,000 compared to $21,148,000 for the six months ended June 30, 1997, an
increase of $11,049,000 or 52%. Internal growth in the staffing business
accounted for $8,940,000 of the increase in operating costs. Increased costs
at Per Diem division offices acquired during 1997 accounted for $2,109,000 of
the additional operating costs.
Net earnings related to StarMed increased to $1,341,000 for the six months
ended June 30, 1998 from $395,000 for the six months ended June 30, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net service revenues for StarMed 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
$16,861,000 of revenues and revenues of $6,648,000 were contributed by per
diem offices acquired during 1997.
Operating costs for StarMed in 1997 were $46,831,000 compared to $24,238,000
for the year ended December 31, 1996, an increase of $22,593,000 or 93%.
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 for StarMed increased in 1997 to 19% from 16% due
primarily to improved profitability of per diem offices opened or acquired
prior to 1997.
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Net earnings related to StarMed increased to $729,000 in 1997 from $271,000
in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
StarMed 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 StarMed for the year ended
December 31, 1996 amounted to $24,238,000 compared to $12,711,000 for the year
ended December 31, 1995, an increase of $11,527,000 or 91%. Of this increase
$6,569,000 or 42% is attributable to the opening of new per Diem offices and
the staffing acquisitions and $2,622,000 increase is due to the maturation of
per diem offices opened in 1995.
Net earnings related to StarMed were $271,000 for 1996, as compared to a net
loss of $103,000 for 1995.
Net loss related to the Company's discontinued maternity apparel subsidiary
was $2,453,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company's primary source of
cash flow was from reductions in the Company's cash balances of $9,113,000 and
borrowings under the Company's lines of credit of $6,847,000. The primary use
of cash was the repayment of principal amount of capital lease obligations and
notes and mortgages payable of $10,550,000, and repurchase of Common Stock
subject to redemption as a result of the exercise of puts provided by the
Company in connection with 1997 acquisitions of $3,311,000. Operating
activities provided cash of $1,101,000 during the six months ended June 30,
1998. Cash flow from operating activities was adversely effected by an
increase of $8,874,000 in accounts receivable, net of allowance for bad debts.
The increase in accounts receivable is the result of difficulties experienced
in integrating the billing and collection systems of the centers acquired
during 1997. By July of 1998, the Company completed the planned conversion of
over 77% of its centers to the Company's proprietary radiology information
system, ICIS, and 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. The Company expects that
these efforts will result in an improved collection rate of accounts
receivable and cash flows. From mid-June through early August of this year,
cash collections have improved and, during this period, outstanding accounts
receivable has decreased slightly.
During the six months ended June 30, 1997, the Company's primary source of
cash flow was from financing activities, as a result of net proceeds from the
Senior Notes of $77,113,000. The primary use of cash was to fund acquisitions
which totaled approximately $38,732,000 and to fund the repayment of certain
notes and capital lease obligations of $28,955,000. Operating activities
provided cash of $2,935,000 during the first half of 1997.
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
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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 its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under the agreements for its $78,000,000 of Senior Notes. The
financial covenant defaults under the Senior Note agreements entitle the
lenders to exercise certain remedies including acceleration of repayment. In
addition, certain medical equipment notes, and operating and capital leases of
the Company, aggregating $14,575,000 at June 30, 1998 (the "Cross-Default
Debt"), 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 holders of the Cross Default
Debt 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 Cross Default Debt were shown as current liabilities on the
Company's Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.
Accordingly, the Company had a deficit in working capital of $55,892,000 at
June 30, 1998. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The report of the Company's
independent auditors, Ernst & Young LLP, on the consolidated financial
statements of the Company for the year ended December 31, 1997 contains an
explanatory paragraph with respect to the issues that raise substantial doubt
about the Company's ability to continue as a going concern mentioned in Note 2
to the Company's consolidated financial statements. 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 have resulted from the outcome of this
uncertainty.
Management has reached an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications. Under the terms of the agreement in principle, the Senior Note
lenders have agreed to waive all existing covenant defaults and to modify the
financial covenants applicable over the remaining term of the Senior Notes. In
consideration for these waivers and covenant modifications, the Company has
agreed to increase the effective blended interest rate on the Senior Notes
from 7.87% to 9.00%, and issue to the Senior Note lenders warrants to acquire
375,000 shares of the Company's Common Stock at an exercise price of $7.67 per
common share. In addition, the Company has agreed to prepay $2,000,000 of
principal outstanding on the Senior Notes (without premium) and to pay a fee
to the Senior Note lenders of $500,000. The agreement in principle is subject
to the execution of definitive documents, which are expected to be completed
during September 1998.
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In addition to reaching an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications, 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 by
approximately $5,000,000 per annum and (ii) sold the Company's temporary
healthcare staffing business, StarMed, for $33,000,000 in August 1998. Upon
execution of the definitive documents with respect to the Senior Notes, the
Senior Notes and the Cross Default Debt will no longer be in default and will
be shown as long-term debt beginning with the September 30, 1998 Consolidated
Balance Sheet.
The Company has a working capital deficit of $55,892,000 at June 30, 1998
compared to a working capital deficit of $58,174,000 at December 31, 1997. The
deficit in both periods 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.
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 June 30, 1998 and December
31, 1997, the Company had reflected $5,509,000 and $9,734,000, respectively,
of Common Stock subject to redemption on its Consolidated Balance Sheet
related to shares that the Company may be required to repurchase. During the
first six months, ended June 30, 1998, the Company paid $3,311,000 to sellers
who exercised their rights to have shares of Common Stock repurchased. The
Company expects to pay an additional $5,509,000 during the remainder of 1998
($3,696,000 of which was due and payable on June 3, 1998 (the "June 1998
Repurchase Obligation") but has not been paid by the Company) in connection
with the settlement of certain repurchase obligations of the Company subject,
under certain circumstances, to the consent of the Senior Note holders. With
respect to the June 1998 Repurchase Obligation which remains due and payable,
the Company is in discussions with the sellers to whom such obligations are
owed and the Senior Note lenders regarding the timing and satisfaction of the
June 1998 Repurchase Obligation.
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"). Any such Price
Protection payments will be charged to stockholders' equity. Based upon the
closing sales price of the Company's Common Stock on September 1, 1998 ($4.00
per share), such shortfall would be approximately $3,351,000, excluding Price
Protection obligations related to the shares which have repurchase
obligations, 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
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. Contingent consideration
associated with acquisitions is recorded as additional purchase price when
resolved.
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
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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, dated July 21, 1997, and the Registration Rights Agreement dated
July 21, 1997, as amended, between the Company and RGC International, LDC
("RGC") (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. As amended, the RGC Agreements provide for monthly
penalties ("RGC Registration Penalties") in the event that the Company failed
to register the Conversion Shares prior to October 1997 with such penalties
continuing until July 23, 1998.
On June 18, 1998 2,500 shares of Series C Preferred Stock were converted
into 373,220 shares of Common Stock. Accordingly, as of June 30, 1998, 15,500
shares of the Company's Series C Preferred Stock were issued and outstanding.
Each share of the Series C Preferred Stock is convertible into such number of
shares of Common Stock as is determined by dividing the stated value ($1,000)
of each share of Series C Preferred Stock plus 3% per annum from the closing
date to the conversion date by the lesser of (i) $62.10 or (ii) the average of
the daily closing bid prices for the Common Stock for the (5) five consecutive
trading days ending five (5) trading days prior to the date of conversion.
As a result of the Company's continued failure to register the RGC
Conversion Shares, the Company: (i) issued warrants to RGC to acquire 389,000
shares of Common Stock at an exercise prices ranging from $34.86 to $38.85 per
share, subject to reset in November 1998 (such warrants having an estimated
value, for accounting purposes, of $3,245,000); and (ii) issued interest
bearing promissory notes (the "RGC Penalty Notes") in the aggregate principal
amount of $2,450,000 due October 15, 1998. The principal amount of and
interest accrued on the RGC Penalty Notes may be converted, at the option of
the Company or RGC in certain circumstances, into additional shares of Series
C Preferred Stock or Common Stock. Pursuant to an amendment to the RGC
Agreements entered into June 1998, the Company will no longer incur any
monthly penalties for failure to register the RGC Conversion Shares following
July 23, 1998. However, if the RGC Conversion Shares are not registered as of
September 15, 1998 (the Company is currently in discussions with RGC to extend
such date), RGC may demand a one-time penalty of $1,550,000 (the "September
1998 Penalty"), payable, at the option of RGC, in cash or additional shares of
Common Stock. There can be no assurance that the Company will be able to
register the RGC Conversion Shares by such date, or any extended date, or that
the Company will be able to pay the RGC Penalty Notes when due or the
September 1998 Penalty, if such payment becomes due. Purchasers of Common
Stock could therefore experience substantial dilution upon conversion of the
Series C Preferred Stock and the RGC Penalty Notes and the exercise of such
warrants. The shares of Series C Preferred Stock are not registered and may be
sold only if registered under the Act or sold in accordance with an applicable
exemption from registration, such as Rule 144.
In addition to matters discussed above, the Company is subject to litigation
that may require additional future cash outlays.
During 1997, the Company incurred substantial debt in connection with
acquisitions of imaging centers. As of June 30, 1998, the Company's debt,
including capitalized lease obligations, totaled $155,369,000. The aggregate
estimated amounts of principal, interest and capital lease obligations due in
each of the years ended December 31, 1998 through 2002 on such debt, including
payments associated with the StarMed Sale, is $49,125,000 ($37,980,000 of
which has been paid through August 31, 1998), $25,713,000, $27,647,000,
$32,373,000 and $24,177,000, respectively. The Company does not expect to
incur significant additional debt in the near future and expects to rely on
its existing cash balances, of approximately $18,242,000 at August 31, 1998,
and its ability to enter into operating leases to fund expansions and
equipment replacement at its centers.
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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 June 30, 1998 and December 31, 1997, the
Company's cash and cash equivalents were $14,085,000 and $23,198,000,
respectively. As a result of improvements in the Company's billing and
collection systems, the Company expects its cash flow from operations,
including changes in accounts receivable, to increase from the level achieved
in the six months ending June 30, 1998. Assuming that the Company executes
definitive documents with respect to the Senior Notes consistent with the
agreement in principle, management believes that the positive cash flow from
operations, the Company's existing cash balances, and net cash proceeds from
the StarMed Sale will provide it with sufficient funds available to finance
its needs through 1998.
In order to meet one of Nasdaq's alternative listing requirements, the
Company effected a one-for-three reverse stock split of its Common Stock on
July 24, 1998. On July 28, 1998, the Nasdaq Qualifications Listing Panel
notified the Company that the Company had complied with Nasdaq's continued
listing qualifications and that the Common Stock would continue to be listed
on The Nasdaq Stock Market. The share data included in this Prospectus has
been adjusted to reflect the impact of the reverse stock split. There can be
no assurance that in the future the Common Stock will meet the continued
listing requirements for The Nasdaq Stock Market.
SEASONALITY AND INFLATION
The Company believes that its imaging business is generally unaffected by
seasonality. 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. Notwithstanding
the foregoing, general inflationary expectations and growing health care cost
containment pressures in the future may cause the Company not to 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.
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. If the Company determines that
certain of its suppliers will not be year 2000 compliant, then the Company
will endeavor to find alternative suppliers; however, there can be no
assurance that the Company will be able to find alternative suppliers.
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
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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.
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 Prospectus 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 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 Registration Statement of which this Prospectus
is a part and by the recent decline in the Company's share price; the ability
of the Company and its Senior Note Lenders to finalize and execute definitive
documents, in general, and consistent with their agreement-in-principle, which
cure all existing loan covenant defaults and which modify the financial
covenants applicable over the remaining term of the Senior Notes; 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 extent of Medicare reimbursement reductions effected by the
Health Care Financing Administration (HCFA) in line with its recent proposals;
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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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 94 outpatient diagnostic
imaging centers located in the Northeast (56), Southeast (24), the Midwest (9)
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 94 at
September 1, 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.
Until August 1998, the Company, through the Per Diem and Travel Nursing
Divisions of its wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley
Medical Resources Inc. ("StarMed"), provided temporary healthcare staffing of
registered nurses and other medical personnel to acute and sub-acute care
facilities nationwide. On August 18, 1998, the Company sold the stock of
StarMed to RehabCare Group, Inc. for $33 million (the "StarMed Sale"). Due to
the StarMed Sale, the results of operations of StarMed are herein reflected in
the Company's Consolidated Statements Of Operations as discontinued
operations.
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 94 centers, 82 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
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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. As of June 1998, the substantial majority of the
Company's imaging centers had been fully integrated and operating on Dalcon's
ICIS system. In addition, in February 1998, Dalcon entered into a multi-year
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 provided 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
operated from a central office in Clearwater, Florida and provided 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 had opened 31 offices, acquired 4 staffing companies operating six
additional offices and consolidated the operations of two other offices. Due
to the August 1998 sale of StarMed, the results of operations of StarMed are
herein reflected in the Company's Consolidated Statements of Operations as
discontinued operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Discontinued
Operations."
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
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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 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.
<TABLE>
<CAPTION>
OPERATED
LOCATION NAME SINCE (1) OWNERSHIP(2) MODALITIES(3)
-------- ---- -------------- ------------ -----------------------
<C> <S> <C> <C> <C>
Northeast Region(56)
Englewood, NJ...... Englewood Imaging Center December 1979 100% MR, CT, US, R, F, M
MRImaging of South
Marlton, NJ........ 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
MRImaging of Lehigh
Allentown, PA...... Valley May 1986 95.9% MR
Clifton Medical Imaging
Clifton, NJ........ 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
M.R. Institute at
Jersey City, NJ.... Midtown July 1992 100% MR
Advanced MRA Imaging
Brooklyn, NY....... Associates January 1993 100% MR, CT, US, NM, R, F, M
Seabrook Radiological
Seabrook, MD....... Center April 1995 87.1% MR, CT
Hackensack Diagnostic
Hackensack, NJ..... Imaging June 1995 100% MR, CT, US, R, F, M
Westchester Square
Bronx, NY.......... Imaging January 1996 100% MR, CT
MRI-CT Scanning of
New York, NY....... 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
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OPERATED
LOCATION NAME SINCE (1) OWNERSHIP(2) MODALITIES(3)
-------- ---- -------------- ------------ -----------------------
<C> <S> <C> <C> <C>
The MRI Center at
North Bergen, NJ...... Palisades March 1997 9.0% MR
West Hudson MRI
Kearny, NJ............ Associates March 1997 25.0% MR
Cranford Diagnostic
Cranford, NJ.......... 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
Advantage Imaging at
Totowa, NJ............ 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 Diagnostic
Parlin, NJ............ 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
Accessible MRI of
Silver Springs, MD.... Montgomery Cty May 1997 100% MR
Accessible MRI of
Towson, MD............ 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
Oxford Valley Diagnostic
Langhorn, PA.......... Center May 1997 100% MR, CT, US, NM, R, F, M
Springfield Diagnostic
Springfield, PA....... 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
Lawrence Park Radiology
Broomall, PA.......... Center May 1997 100% R
Philadelphia, PA...... Northeast Imaging May 1997 100% MR, CT, US, NM, R, F, M
South Philadelphia
Philadelphia, PA...... 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 Medical Imaging
Brooklyn, NY--Ave P... Center June 1997 100% MR, CT, US, NM, R, F, M
Brooklyn Medical Imaging
Brooklyn, NY--Midwood. Center June 1997 100% US, R, F, M
Meadows Mid-Queens
Flushing, NY.......... Imaging Center June 1997 100% MR, CT, US, R, M
Staten Island Medical
Staten Island, NY..... 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)
Magnetic Resonance
St. Petersburg, FL.... Associates July 1984 80.2% MR
Naples, FL............ Gulf Coast MRI June 1993 100% MR
Fort Myers, FL........ Fort Myers MRI Riverwalk July 1998 50% MR, CT, R, M
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
& Diagnostic Center September 1996 100% MR, CT
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
MRI Center of
Jacksonville, FL...... 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
Magnetic Imaging Center
Bradenton, FL......... of Manatee August 1997 100% MR
Open MRI of South
Hollywood, FL......... Florida August 1997 100% MR
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
OPERATED
LOCATION NAME SINCE (1) OWNERSHIP(2) MODALITIES(3)
-------- ---- -------------- ------------ -----------------------
<C> <S> <C> <C> <C>
Tampa, FL............ Northside Imaging &
Breast Care Center August 1997 100% MR
Venice Imaging & MRI
Venice, FL........... Center August 1997 100% MR, CT, US, R, F, M
The MRI Center of
Port Charlotte, FL... Charlotte County September 1997 100% MR
Midwest(9)
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 MR & Imaging
Oak Lawn, IL......... 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 Imaging
Libertyville, IL..... Center January 1995 100% MR
Centerville, OH...... Dayton Open MRI May 1997 100% MR
Advanced
Warren, OH........... Radiology/Access MRI October 1997 100% MR, CT, US, R, F, M
Boardman, OH......... Boardman X-Ray/MRI October 1997 100% MR, CT, US, R, F, M
Western Reserve Imaging
Youngstown, OH....... Center October 1997 100% CT, US, R, F, M
California(5)
Long Beach, CA....... Pacific MRI January 1997 100% MR
OceanView Radiology
San Clemente, CA..... 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
Diagnostic Imaging
San Jose, CA......... 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.
(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
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<PAGE>
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,
as of June 1998 the Company completed 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. 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.
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 94
centers, 82 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
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<PAGE>
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 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.
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<PAGE>
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 prior to entering into any such contracts 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 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
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<PAGE>
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. As of June 1998, a substantial majority of the Company's imaging centers
had been 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.
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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 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 September 1, 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 and June 30, 1998, the Company had reflected $9,734,000
and $5,509,000, respectively, of Common Stock subject to redemption on its
Consolidated Balance Sheets related to shares that the Company may be required
to repurchase. During the first six months of 1998, the Company paid
$3,311,000 to sellers who exercised their rights to have shares of Common
Stock repurchased. In addition, the Company expects to become obligated to pay
an additional $5,509,000 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
"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 September 1, 1998 ($4.00 per share), such shortfall would be
approximately $3,351,000, excluding Price Protection obligations related to
the shares which have repurchase obligations 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.
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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.
COMPETITION
The Company's business 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.
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 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.
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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.
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.
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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, 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.
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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 additional restrictions upon all or a portion of the Company's
activities, which might adversely affect the Company's business.
DISCONTINUED OPERATIONS OF STARMED
Until August 1998, the Company, through the Per Diem and Travel Nursing
Divisions of its wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley
Medical Resources Inc. ("StarMed"), provided temporary healthcare staffing of
registered nurses and other medical personnel to acute and sub-acute care
facilities nationwide. On August 18, 1998, the Company sold the stock of
StarMed to RehabCare Group, Inc. for $33 million. Due to the StarMed Sale, the
results of operations of StarMed are herein reflected in the Company's
Consolidated Statements Of Operations as discontinued operations.
StarMed commenced its Per Diem operations in March 1995 and, since that
time, it had opened 31 offices, acquired 4 staffing companies operating six
additional offices and consolidated the operations of two other offices.
StarMed's per diem staffing division provided 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 operated from a
central office in Clearwater, Florida and provided registered nurses and
operating room technicians for periods ranging from 8 to 26 weeks.
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 as of such date. 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 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.
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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 94 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. 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.
LITIGATION
As described below, 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 under "Certain Relationships
and Related Transactions", involving, among other matters, allegations against
the Company with respect to related-party transactions and securities fraud.
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 106,666
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.
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
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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. On April 1, 1998, the plaintiffs amended their complaint
to add additional factual allegations. 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 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
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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.
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.
In 1996, Lavina Orsi and Pompeo Orsi 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.
On June 2, 1998, Mr. Ronald Ash filed a complaint against the Company,
StarMed, Wesley Medical Resources, Inc., a subsidiary of the Company
("Wesley"), and certain officers and directors of the Company in the United
States District Court for the Northern District of California. The complaint,
among other things, alleges that the defendants omitted and/or misrepresented
material information in the Company's public filings and that they concealed
or failed to disclose adverse material information about the Company in
connection with the sale of Wesley to the Company by the plaintiff. The
plaintiff seeks damages in the amount of $4.25 million or, alternatively,
rescission of the sale of Wesley. The Company believes that it has meritorious
defenses to the claims asserted by plaintiff, and intends to defend itself
vigorously.
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 such
other litigation will not have a material adverse effect on the Company's
financial position, cash flows or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information with respect to each nominee for
director and each executive officer of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Sally W. Crawford.... 44 Director
Peter B. Davis....... 53 Director
Gary L. Fuhrman...... 37 Director
John H. Josephson.... 36 Director
Duane C. Montopoli... 49 Chief Executive Officer, President and Director
Gary N. Siegler...... 36 Director
Chairman of the Board and Director, Chairman of the
D. Gordon Strickland. 51 Executive Committee
Gerald H. Allen...... 50 Senior Vice President--Diagnostic Imaging Business
Senior Vice President--Legal Affairs and
Christopher J. Joyce. 34 Administration and Secretary
Chief Financial Officer and Senior Vice President--
Geoffrey A. Whynot... 39 Finance
</TABLE>
Sally W. Crawford was appointed a director of the Company by the Board of
Directors in June 1998 and is a member of the Board's Audit Committee. Ms.
Crawford was the Chief Operating Officer of Healthsource Inc. from 1985 to
1997. Prior thereto, Ms. Crawford was employed by Beacon Health where she was
the marketing director. Ms. Crawford is also a director of Harborside
Healthcare, Yankee Publishing and CYTYC Corporation.
Peter B. Davis was appointed a director of the Company by the Board of
Directors in June 1998 and is a member of the Board's Compensation Committee.
Mr. Davis is the President and the CEO of St. Joseph Hospital in Nashua, New
Hampshire. From January 1997 through June 1998, Mr. Davis was the Interim
President and CEO of Optima Healthcare, a New Hampshire joint operating
company, where he has been employed since January 1997.
Gary L. Fuhrman has been a director of the Company since 1992 and is a
member of the Board's Compensation 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 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.
Duane C. Montopoli was appointed President and Chief Executive Officer and a
director of the Company effective January 30, 1998. Mr. Montopoli is a member
of the Board's Executive Committee. 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.
Gary N. Siegler, a director since 1990, served as Chairman of the Board of
Directors of the Company from 1990 until June 1998. Mr. Siegler is a member of
the Board's Audit Committee. 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 a 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
49
<PAGE>
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.
He was appointed Chairman of the Board in June 1998. Mr. Strickland is Senior
Vice President--Investments for Tauber Enterprises, a private investment
holding company. 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.
Gerald H. Allen was appointed in March 1998 as President of the Imaging
Division of the Company (now, Senior Vice President--Diagnostic Imaging
Business) and since April 1995 has also held the positions of Senior Vice
President--Operations and Senior Vice President--Development. Mr. Allen was
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.
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 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.
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.
50
<PAGE>
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
--------------------------------------- -----------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES
COMPENSATION STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS(1) SARS(#)(2) OPTIONS COMPENSATION($)(3)
- --------------------------- ---- --------- -------- ------------ ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence J. Ramaekers 1997 $119,510(5) -- -- -- 25,000(6) --
Former Acting President
and Chief Executive Of-
ficer(4)
William D. Farrell 1997 $247,342 $150,000 -- -- -- $6,016
Former President and
Chief Operating Offi- 1996 $152,415 $150,000 -- -- 46,666 $4,093
cer(7) 1995 $131,643 $ 60,000 -- -- 45,000 $3,245
John P. O'Malley, III 1997 $626,550 -- -- -- --
Former Executive Vice 1996 $183,333 -- -- -- 67,812
President Finance and
Chief --
Financial Officer(8) --
Gary I. Fields 1997 $106,542 -- -- -- 20,000 --
Former Senior Vice Pres-
ident and General Coun-
sel(7)
Gregory Mikkelsen 1997 $179,867 $ 10,000 -- -- -- --
President and Chief Ex- 1996 $ 68,955 -- -- -- 16,666 --
ecutive
Officer of StarMed(9)
</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 25,000 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, 1997.
(9) Mr. Mikkelsen served as President and Chief Operating Officer of StarMed,
which was sold by the Company in August 1998.
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 the 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 Board of Directors. Mr.
Montopoli is eligible 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 Board of Directors within 60 days following the end of
such year. In connection with the execution of the Montopoli
51
<PAGE>
Employment Agreement, the Company granted to Mr. Montopoli ten-year options to
purchase 200,000 shares of Common Stock, 133,333 of which have an exercise
price of $31.875 and 66,666 of which have an exercise price of $43.50. Such
options were to vest in five equal annual installments beginning January 30,
1998, unless sooner accelerated by certain "change of control" events. Under
the terms of the Montopoli Employment Agreement, the Company is obligated to
pay the premiums with respect to a term life insurance policy with a death
benefit payable to Mr. Montopoli's named beneficiaries in the amount of $1
million. In the event Mr. Montopoli's employment is terminated by the Company
other than for "Cause" or "Disability" (as such terms are defined in the
Montopoli Employment Agreement), or if Mr. Montopoli terminates his employment
for "Good Reason" (as defined in the Montopoli Employment Agreement), the
Company shall (i) pay Mr. Montopoli a lump sum payment equal to his accrued
but unpaid salary and a portion of the bonus he would have received for such
year; (ii) continue his base salary for a period of 18 months; and (iii)
continue benefits under the Company's employee welfare plans during the salary
continuation period unless such benefits are provided by another employer. 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 "Litigation" and "Certain Relationships and Related
Transactions."
The Company is party to a non-competition and consulting agreement with Mr.
John P. O'Malley III which expired 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 16,666 shares of Common Stock
at an exercise price of $24.00 per share, and (ii) in exchange of his NMR
employee stock options, four separate five-year stock purchase warrants to
purchase 3,437; 9,166; 13,750; and 11,458 shares of Common Stock at exercise
prices of $12.00, $10.08, $12.54 and $14.19, 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 "Litigation" and "Certain Relationships and Related
Transactions."
The Company is a party to an employment agreement with Mr. Geoffrey A.
Whynot (the "Whynot Employment Agreement"). The term of the Whynot Employment
Agreement shall continue until terminated by either the Company or Mr. Whynot.
Pursuant to the Whynot Employment Agreement, Mr. Whynot acts as Senior Vice
President--Finance and Chief Financial Officer of the Company, and is entitled
to receive an annual base salary of $185,000. Such annual salary may be
increased from time to time in the discretion of the Board of Directors. Mr.
Whynot is also eligible to receive a bonus for each calendar year during this
term of employment provided he is employed on the last day of the calendar
year. For calendar year 1998, Mr. Whynot shall receive a bonus in an amount
not less than $100,000. For all other calendar years, the target amount of the
bonus shall be equal to 50% of Mr. Whynot's base salary for such year and the
actual amount of the bonus shall be determined by the Board of Directors at
its discretion and paid no later than March 15 of the calendar year following
the calendar year for which the bonus is awarded. In connection with the
execution of the Whynot Employment Agreement, the Company granted to Mr.
Whynot ten-year options to purchase 53,333 shares of Common Stock at an
exercise price of $31.875. Such options were to vest in four equal annual
installments beginning March 23, 1999, unless sooner accelerated by certain
"change of control" events. In the event Mr. Whynot's employment is terminated
by the Company other than for "Cause" or "Disability" (as such terms
52
<PAGE>
are defined in the Whynot Employment Agreement), or if Mr. Whynot terminates
his employment for "Good Reason" (as defined in the Whynot Employment
Agreement), the Company shall (i) pay him a lump sum payment equal to his
accrued but unpaid salary and a portion of the bonus he would have received
for such year; (ii) continue his base salary for a period of 12 months;
provided that such amounts will be offset by any compensation received from
another employer; further, provided that if such termination occurs within 12
months following a "Change in Control" (as defined in the Whynot Employment
Agreement), Mr. Whynot shall receive a lump sum payment equal to 12 months of
his then base salary, which amount shall not be subject to reduction for any
compensation earned from another employer; and (iii) continue benefits under
the Company's employee welfare plans during the salary continuation period
unless such benefits are provided by another employer. Mr. Whynot is
prohibited from competing with the Company for a period of 12 months following
the termination of the Whynot Employment Agreement.
The Company is a party to an employment agreement with Mr. Christopher J.
Joyce (the "Joyce Employment Agreement"). The term of the Joyce Employment
Agreement shall continue until terminated by either the Company or Mr. Joyce.
Pursuant to the Joyce Employment Agreement, Mr. Joyce acts as Senior Vice
President--Legal Affairs and Administration which position includes serving as
the Company's General Counsel and Secretary, and is entitled to receive an
annual base salary of $170,000. Such annual salary may be increased from time
to time in the discretion of the Board of Directors. Mr. Joyce is also
eligible to receive a bonus for each calendar year during this term of
employment provided he is employed on the last day of the calendar year. For
calendar year 1998, Mr. Joyce shall receive a bonus not less than 50% of Mr.
Joyce's base salary for such year. For all other calendar years, the target
amount of the bonus shall be equal to 50% of Mr. Joyce's base salary for such
year and the actual amount of the bonus shall be determined by the Board of
Directors, in its discretion, and paid no later than March 15 of the calendar
year following the calendar year for which the bonus is awarded. In connection
with the execution of the Joyce Employment Agreement, the Company granted to
Mr. Joyce ten-year options to purchase 40,000 shares of Common Stock at an
exercise price of $31.875. Such options were to vest in four equal annual
installments beginning April 6, 1999, unless sooner accelerated by certain
"change of control" events. In the event Mr. Joyce's employment is terminated
by the Company other than for "Cause" or "Disability" (as such terms are
defined in the Joyce Employment Agreement), or if Mr. Joyce terminates his
employment for "Good Reason" (as defined in the Joyce Employment Agreement),
the Company shall (i) pay him a lump sum payment equal to his accrued but
unpaid salary and a portion of the bonus he would have received for such year;
(ii) continue his base salary for a period of 9 months; and (iii) continue
benefits under the Company's employee welfare plans during the salary
continuation period unless such benefits are provided by another employer. Mr.
Joyce is prohibited from competing with the Company for a period of nine
months following the termination of the Joyce Employment Agreement.
Following the Company's 1998 Annual Meeting of Stockholders on July 23, 1998
at which the stockholders approved the Company's 1998 Stock Option Plan (the
"1998 Plan"), the Compensation Committee of the Board cancelled all of the
options granted to Messrs. Montopoli, Whynot and Joyce in connection with
their employment agreements described above. In exchange for such
cancellation, on July 23, 1998, the Compensation Committee granted Messrs.
Montopoli, Whynot and Joyce options to purchase 150,000, 41,666 and 31,333
shares of Common Stock, respectively (the "New Options"), under the 1998 Plan.
The exercise price of $8.625 for all of the New Options granted to Messrs.
Whynot and Joyce and 100,000 of the new Options granted to Mr. Montopoli
equalled the fair market value of the Common Stock on the date of grant. The
remaining 50,000 New Options granted to Mr. Montopoli were granted at an
exercise price of $20.25, which represented $11.625 over the fair market value
of the Common Stock on the date of grant. The Compensation Committee believes
that such cancellation and exchange was warranted in order to continue to
provide an appropriate incentive for Messrs. Montopoli, Whynot and Joyce to
promote the success of the Company's business, and because each of these
executives joined the Company only recently and after the end of the last
fiscal year.
STOCK OPTION PLANS
The information in this Prospectus, including the information below
concerning the Company's stock option plans, gives effect to the one-for-three
reverse stock split of the Common Stock on July 24, 1998.
53
<PAGE>
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 80,000 shares of
Common Stock, of which 47,334 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 133,333 shares
of Common Stock, of which 43,410 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 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 74,666 shares of
Common Stock, of which 51,721 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 333,333 shares of Common Stock, of which 160,109 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
54
<PAGE>
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, 5,000 options were granted under the 1996 B Plan.
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 580,333 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.
1998 Stock Option Plan
In July 1998, the Company's Board of Directors adopted and approved the 1998
Stock Option Plan (the "1998 Plan"). The 1998 Plan is designed to serve as an
incentive for retaining qualified and competent directors, employees and
consultants. The 1998 Plan provides for the award of options to purchase up to
500,000 shares of Common Stock, of which 361,166 shares were subject to
outstanding options as of September 1, 1998. The 1998 Plan is administered by
the Compensation Committee of the Board of Directors. The Compensation
Committee has, subject to the provisions of the 1998 Plan, full authority to
select eligible employees, consultants and directors of the Company and its
subsidiaries that may participate in the 1998 Plan and the type, extent and
terms of the options granted to them. The 1998 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
1998 Plan will have such vesting schedules and expiration dates as the
Compensation Committee shall establish in connection with each participant in
the 1998 Plan, which terms shall be reflected in an option agreement executed
in connection with the granting of the option.
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In July 1998, the Company's Board of Directors adopted and approved the 1998
Non-Employee Director Stock Option Plan (the "Directors Plan"). The Directors
Plan is designed to serve as an incentive for retaining qualified persons who
are neither employees nor officers of the Company to service as members of the
Board of Directors. The Directors Plan provides for the award of options to
purchase up to 66,666 shares of Common Stock, of which 20,000 shares were
subject to outstanding options as of September 1, 1998. The Directors Plan can
be administered by either the Board of Directors or the Compensation
Committee. Unless otherwise determined by the Compensation Committee, the
Directors Plan provides for automatic grants of options to purchase up to
3,333 shares of Common Stock at the time a person becomes a non-employee
director and on an annual basis thereafter. The options granted pursuant to
the Directors Plan are not intended to be incentive stock options (as defined
in Section 422 of the Internal Revenue Code of 1986). Options granted pursuant
to the Directors Plan will have exercise prices equal to the fair market value
of the Common Stock on the date of grant, will expire ten years from the date
of grant and generally vest in equal quarterly installments over a one-year
period.
55
<PAGE>
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
INDIVIDUAL GRANTS REALIZABLE
(1) VALUE AT
----------------- ASSUMED ANNUAL
PERCENT OF TOTAL RATES OF STOCK
OPTIONS/SARS PRICE APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM (2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------- ----------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Ramaekers...... 8,333(3) (4) $54.375 5/2/99 $ 7,507 $ 40,798
8,333(3) (4) $ 63.00 5/2/99 $ 0 $ 0
8,333(3) (4) $ 75.00 5/2/99 $ 0 $ 0
William D. Farrell...... -- -- -- -- -- --
John P. O'Malley, III... -- -- -- -- -- --
Gary I. Fields.......... 8,333 (4) $ 36.00 5/19/02 $ 82,884 $ 183,153
11,666 (4) $ 42.00 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 25,000 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.
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>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
IN VALUE OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997 ($)(1)
EXERCISE REALIZED ------------------------------------ -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence J. Ramaekers... -- -- 25,000(2) -- $ 0 --
William D. Farrell...... 17,500 $891,065 7,777 -- $113,744 --
John P. O'Malley, III... 3,437(3) $192,197 55,486(4) 8,889 $619,796 $23,334
Gary I. Fields.......... -- -- -- -- -- --
Gregory Mikkelsen....... 2,700 $136,513 2,855 11,111 $ 0 $ 0
</TABLE>
- --------
(1) On December 31, 1997 the last reported sales price for the Common Stock on
the Nasdaq Market was $28.13.
56
<PAGE>
(2) Represents warrants to purchase 25,000 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 "Management--Employment
Agreements."
(4) Of such total amount of shares, 51,040 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 "Management--Employment Agreements."
57
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth as of September 8, 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:
<TABLE>
<CAPTION>
BENEFICIAL COMMON STOCK PERCENTAGE OF
OWNER OWNED(1) OUTSTANDING
---------- ------------ -------------
<S> <C> <C>
Gary N. Siegler(2)(3)............................... 1,442,698 17.4%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
Duane C. Montopoli(4)............................... 49,400 *
Gary L. Fuhrman(5).................................. 37,530 *
John H. Josephson(6)................................ 14,790 *
D. Gordon Strickland................................ 2,000 *
Sally W. Crawford................................... 5,000 *
Geoffrey A. Whynot.................................. 4,500 *
Christopher J. Joyce................................ 500 *
Peter M. Collery(2)(7).............................. 1,030,662 13.0%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
Fir Tree Partners(8)................................ 953,666 12.0%
1211 Avenue of the Americas
29th Floor
New York, New York 10036
StarMed Investors, L.P.(2).......................... 480,362 6.1%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
HHH Investments Limited Partnership(9).............. 443,333 5.6%
920 King Street
Wilmington, DE 19801
TJS Partners, L.P.(10).............................. 790,247 9.9%
115 East Putnam Avenue
Greenwich, CT 06830
William D. Farrell.................................. 8,277 *
John P. O'Malley, III(11)........................... 56,991 *
Gary I. Fields...................................... 2,333 *
All executive officers and Directors as a group (9 1,556,418 18.6%
in
number) (2)(3)(4)(5)(6)............................
</TABLE>
- --------
* 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.
58
<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 481,401 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 202,887 shares underlying outstanding options which are
exercisable immediately or within 60 days, 67,632 shares owned by The
Gary N. Siegler Foundation, a charitable foundation, and warrants to
acquire 175,000 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 30,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(5) Includes 12,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(6) Includes 13,333 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(7) Includes 17,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(8) Based solely upon information contained in a Schedule 13D, as amended,
filed with the SEC. According to the Schedule 13D, Mr. Jeffrey
Tannenbaum, in his capacity as the sole shareholder, executive officer,
director and principal of Fir Tree Partners, may also be deemed to be the
beneficial owner of the shares held by Fir Tree Partners.
(9) 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 June 17, 1998,
the total in the table excludes (i) an aggregate of 127,508 shares of
Common Stock owned by three corporations, the sole shareholders of which
are the limited partners of HHH Investments Limited Partnership ("HHH"),
(ii) 13,333 shares of Common Stock owned by The Francis D. Hussey, Jr.
Pension Plan (the "Pension Plan") and (iii) 3,333 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.
(10) Based solely upon information contained in a Schedule 13D filed with the
SEC. According to the Schedule 13D, Mr. Thomas J. Salvatore, in his
capacity as the general partner of TJS Management, L.P., the general
partner of TJS Partners, L.P., may also be deemed to be the beneficial
owner of the shares held by TJS Partners, L.P.
(11) Includes 4,444 shares underlying outstanding options which are
exercisable immediately or within 60 days and warrants to acquire 51,040
shares of Common Stock.
59
<PAGE>
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 the
placement agent, Arnhold and S. Bleichroeder, Inc. ("ASB"), of which Gary
Fuhrman, a director of the Company, is an executive officer and director. In
addition, ASB acted as placement agent for the private placement of certain of
the Company's debentures in 1996 and 1995 for which it was paid placement
agent fees and expenses in 1996 and 1995 of $356,650 and $247,500,
respectively. Also during 1997, for legal services rendered to the Company,
the Company paid legal fees and expenses in the amount of $971,000 to Werbel &
Carnelutti, of which Stephen Davis, a former director of the Company, is a
partner. Mr. Davis' firm also performed legal services for the Company during
1996 and 1995. 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 Mr. Gary
N. Siegler, a director of the Company and former Chairman of the Board of the
Company, 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 of which Mr.
Gary N. Siegler is the sole stockholder, sole director and president (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 225,000 shares of the Company's Common stock
exercisable at prices ranging from $30.93 to $37.77 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 addition, during
1996, the Company paid transaction related advisory fees and expenses to the
Affiliate of $363,000 and issued to the Affiliate warrants to purchase 40,000
shares of Common Stock at $27.00 per share for services rendered to the
Company in connection with the Company's acquisition of NMR, a public offering
by the Company of its Common Stock and other transactions.
In order to compensate officers, directors, employees and consultants to the
Company for services rendered or to be rendered 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 489,555 shares
of the Company's Common Stock had been issued to Mr. Siegler and Mr. Koffler.
Included in this amount were stock options to purchase 250,000 shares and
5,000 shares of the Company's Common Stock which were granted to Mr. Siegler
and Mr. Koffler, respectively, under the 1997 Plan. As discussed below, Mr.
Siegler and Mr. Koffler 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 Mr. Siegler. 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 Mr. Siegler).
In February 1995, the Company consummated the acquisition (the "Maternity
Acquisition") of Maternity Resources, Inc. ("Maternity"), a manufacturer and
retailer of maternity apparel. The Maternity Acquisition was
60
<PAGE>
consummated pursuant to a stock purchase agreement (the "Maternity Agreement")
among the Company, Maternity and the securityholders of Maternity (the
"Maternity Sellers"). Pursuant to the Maternity Agreement, the Company
acquired 100% of the issued and outstanding common stock and preferred stock
of Maternity from the Maternity Sellers in exchange for an aggregate of
160,000 shares of Common Stock and preferred stock of the Company. Messrs.
Gary N. Siegler, a director of the Company, and Peter M. Collery, a former
director of the Company, were directors and executive officers of, and
securityholders in, the Maternity Sellers.
INDEPENDENT COMMITTEE INVESTIGATION INTO RELATED-PARTY TRANSACTIONS
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. Mr. Siegler, 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. Mr. Siegler
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 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 reported 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.
61
<PAGE>
The Committee also recommended and the Board of Directors has adopted the
following measures to improve corporate governance:
. To avoid any appearance of possible conflicts of interest, the Board
adopted a policy disfavoring related-party transactions. The policy can
be subject to exceptional circumstances, but even exceptional
circumstances will be considered only in the informed judgment of the
Board or an independent committee, assisted by independent counsel.
. The Chief Executive Officer of the Company, with the assistance of the
Company's general counsel and in consultation with the Board of
Directors, will be responsible for the selection of all outside counsel,
bearing in mind the policy disfavoring related-party transactions. To
avoid any appearance of possible conflicts of interest, corporate counsel
advising on issues of corporate governance and disclosure will have no
relationship to any member of the Board of Directors. Without limiting
the generality of the foregoing, no director of the Company will be a
member of or counsel to such law firm. Corporate counsel advising on such
issues will not otherwise provide legal services to any member of the
Board of Directors, including entities affiliated with Board members.
. Absent exceptional circumstances, all related-party contracts, unless
manifestly immaterial, will be filed publicly with appropriate SEC
filings.
. The Compensation Committee has been authorized and directed to formulate
clear written standards for reimbursement of director expenses, subject
to review by the Board of Directors.
In addition to the foregoing, 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.
Mr. Siegler and Mr. Koffler also agreed voluntarily to relinquish 255,000
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.
62
<PAGE>
DESCRIPTION OF CAPITAL 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"). As of September 8, 1998, the
Company had outstanding 7,929,950 shares of Common Stock.
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may, from time to time, determine. Each
stockholder is entitled to one vote for each share of Common Stock held by
such stockholder. The Company's Certificate of Incorporation does not provide
for cumulative voting. The Common Stock is not entitled to preemptive rights
and is not subject to redemption. Upon liquidation, dissolution, or winding-up
of the Company, the assets legally available for distribution to stockholders
are distributed ratably among the holders of Common Stock outstanding at that
time after payment of liquidation preferences, if any, on any outstanding
Preferred Stock. Each outstanding share of Common Stock is fully paid and
nonassessable.
Preferred Stock Purchase Rights. Pursuant to the Company's Stockholder
Rights Plan, holders of the Common Stock possess three rights (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
acquirors 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 stockholder the terms of any proposed takeover.
PREFERRED STOCK
The Company's Certificate of Incorporation provides that the Company may,
without further action by the Company's stockholders, issue shares of
Preferred Stock in one or more series. The Board of Directors is authorized to
establish from time to time the number of shares to be included in any such
series and to fix the relative rights and preferences of the shares of any
such series, including without limitation dividend rights, dividend rate,
voting rights, redemption rights and terms, liquidation preferences and
sinking fund provisions. The Board of Directors may authorize and issue
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of Common Stock. In addition,
the issuance of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company.
Series C Preferred Stock. On July 21, 1997, the Company completed a private
placement of $18,000,0000 of a newly designated Series C Convertible Preferred
Stock (the "Series C Preferred Stock") to one institutional investor, RGC
International Investors, LDC. The face amount of the Preferred Stock accrues
at a rate of 3% per annum from the closing date to the conversion date. The
Preferred Stock is convertible from time to time into the Company's Common
Stock at a price equal to the lesser of (i) an amount equal to 100% of the
average of the closing bid prices of the Company's Common Stock for the five
consecutive trading days ending on the fifth trading day preceding a notice of
conversion and (ii) $62.10. The Company has agreed to file a registration
statement under the Securities Act of 1933 covering the shares of Common Stock
issuable upon conversion of
63
<PAGE>
the Preferred Stock issued in the private placement. Subject to certain
limitations, the Company may require the conversion of all the outstanding
Preferred Stock beginning 180 days following the date such registration
statement is declared effective by the Securities and Exchange Commission.
TRANSFER AGENT
The Transfer Agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, New York, New York.
SELLING STOCKHOLDERS
The Shares offered hereby consist of (i) 38,887 outstanding shares of Common
Stock which were issued upon conversion of certain convertible debentures sold
by the Company in a February 1996 private placement, (ii) 16,665 shares of
Common Stock which were issued upon conversion of certain convertible
debentures sold by the Company in a June 1995 private placement, (iii) up to
1,420,625 shares of Common Stock issued or issuable in connection with certain
of the Company's acquisitions in 1997, (iv) approximately 6,490,068 shares
issued or issuable upon conversion of the Preferred Stock (based upon the
closing price existing as of October 1, 1998), (v) approximately 848,544
shares issuable upon the conversion of $2,259,250 in aggregate principal
amount of convertible promissory notes (based upon the conversion price
existing as of October 1, 1998) issued in connection with certain of the
Company's acquisitions in 1997 (the "Convertible Notes"), (vi) 447,333 shares
of Common Stock issuable pursuant to the exercise of warrants issued or
issuable to certain Selling Stockholders, and (vii) 4,592 other shares of
Common Stock owned by the Selling Stockholders.
The following table sets forth as of October 1, 1998, information regarding
the beneficial ownership of the Company's Common Stock held by each Selling
Stockholder who may sell the Shares pursuant to this Prospectus as of such
date, the number of Shares pursuant to this Prospectus as of such date, the
number of Shares offered hereunder by each such Selling Stockholder and the
net ownership of shares of Common Stock, if all such Shares so offered are
sold by each Selling Stockholder.
64
<PAGE>
<TABLE>
<CAPTION>
TOTAL NUMBER
OF
SHARES TO BE TOTAL SHARES TO BE
OFFERED FOR OWNED UPON COMPLETION
SHARES OWNED SELLING OF THIS OFFERING(2)
PRIOR TO THIS STOCKHOLDER'S --------------------------------
NAME OF SELLING STOCKHOLDER OFFERING(1) ACCOUNT(2) NUMBER PERCENT
- --------------------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Siegler, Collery & Co.
Profit Sharing Plan.... 4,166 4,166 0 0%
The SC Fundamental Value
Fund, L.P. ............ 133,896 21,666 112,230 1.4%
SC Fundamental Value
BVI, Ltd. ............. 65,236 11,666 53,570 *
Gary L. Fuhrman(3)...... 37,530(4) 13,888 23,642(4) *
Peter M. Collery(5)..... 1,030,662(6)(7) 2,083 1,028,579(6)(7) 13.0%
Gary N. Siegler(8)...... 1,442,698(6)(9) 2,083 1,440,615(6)(9) 17.4%
Grove Diagnostic Imaging
Center, Inc. .......... 14,672 14,672 0 0%
Accessible MRI of
Baltimore County Inc. . 39,722 563,380(10) 0 0%
Robert Wasserman........ 1,666 1,666 0 0%
Robert Kupchak.......... 21,054 21,054 0 0%
Mark Novick(12)......... 112,675 112,675 0 0%
Dennis Rossi(12)........ 32,864 32,864 0 0%
Art Taylor(12).......... 22,160 22,160 0 0%
Eliezer Offenbacher(12). 16,432 16,432 0 0%
Aldonna McCarthy(12).... 7,136 7,136 0 0%
Ronald W. Ash........... 38,879 38,879 0 0%
Sandra Lowson........... 6,861 6,861 0 0%
Bronx MRI Associates.... 14,673 281,690(10) 0 0%
Queens MRI Associates... 19,564 375,587(10) 0 0%
Vascular Services,
Inc. .................. 2,445 46,948(10) 0 0%
RGC International
Investors, LDC(11)..... 6,879,068 6,879,068 0 0%
Regional Imaging Consul-
tants Corp.(12)........ 375,587 375,587 0 0%
Grajo Imaging, Inc.(12). 238,498 238,498 0 0%
Advance Radiology--Imag-
ing Services of Trum-
bull, Inc.(12)......... 43,192 43,192 0 0%
Parvez Shirazi.......... 2,926 2,926 0 0%
David L. Condra......... 17,205 17,205 0 0%
Sirrom Investments,
Inc.................... 18,516 18,516 0 0%
The MRI Center of Jack-
sonville, Inc. ........ 35,833 35,833 0 0%
DVI Financial Services
Inc. .................. 33,333(13) 33,333(13) 0 0%
J. Alix & Associ-
ates(14)............... 25,000(15) 25,000(15) 0 0%
</TABLE>
- --------
* Less than 1 percent.
(1) Except as otherwise noted, all shares or rights to these shares are
beneficially owned and sole voting and investment power is held by the
party named.
(2) Assumes that none of the Selling Stockholders sells shares of Common
Stock not being offered hereunder or purchases additional shares of
Common Stock.
(3) Mr. Fuhrman is a Director of the Company and is a Director and Senior
Vice President of Arnhold and S. Bleichroder, Inc. ("ASB"). ASB acted as
financial advisor to the Company in connection with the private
placements of the Company's 11% Convertible Subordinated Debentures due
2000, 10.5% Convertible Subordinated Debentures due 2001 and Preferred
Stock in May 1995, February 1996 and July 1997, respectively.
(4) Includes 12,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(5) Mr. Collery is a former Director of the Company.
(6) Messrs. Siegler and Collery are the trustees of the Siegler, Collery &
Co. Profit Sharing Plan and are controlling shareholders of the general
partner and investment manager of SC Fundamental Value Fund, L.P. and SC
Fundamental Value BVI, Ltd., respectively. In addition, Messrs. Siegler
and Collery may be deemed to control other entities which beneficially
own shares of the Company's Common Stock. All such shares are included in
such number.
65
<PAGE>
(7) Includes 17,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(8) Mr. Siegler is a Director of the Company.
(9) Includes 202,888 shares underlying outstanding options which are
exercisable immediately or within 60 days, 67,632 shares owned by The
Gary N. Siegler Foundation, a charitable foundation, and warrants to
acquire 175,000 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.
(10) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by such Selling
Stockholders. Such Selling Stockholders are parties to certain
acquisition agreements with the Company, in which the Company has agreed
to pay (in additional shares and/or cash) to the Selling Stockholders an
amount equal to the shortfall in the market value of the shares issued to
such Selling Stockholders at the closings of the relevant acquisitions in
the event the market value of such shares at the relevant effective date
of this Registration Statement 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. The actual number of
shares of Common Stock issuable pursuant to such provisions is
indeterminate and is subject to adjustment depending on the future market
price of the Common Stock. The actual number of shares of Common Stock
offered hereby, and included in the Registration Statement of which this
Prospectus is a part, include such additional number of shares of Common
Stock as may be issued or issuable pursuant to such provisions. For
purpose of estimating the number of shares of Common Stock to be included
in this table, the Company calculated the number of shares issuable upon
the exercise of such remedies as of October 2, 1998 (based upon a market
price of $2.6625 which is 100% of the average of the daily closing prices
of the Common Stock reported on the Nasdaq National Market for the five
consecutive trading days preceding October 2, 1998).
(11) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by such Selling
Stockholder upon conversion of, or issued in respect of, the Preferred
Stock held by such Selling Stockholder, including 389,000 shares of
Common Stock issuable pursuant to the exercise of warrants issued or
issuable to the holder of such Preferred Stock and other shares of Common
Stock which may be issuable to the holder of such Preferred Stock
pursuant to the terms of the Preferred Stock. The actual number of shares
of Common Stock issuable upon conversion of, or issued in respect of,
Preferred Stock is indeterminate, is subject to adjustment and could be
materially less or more than such estimated number depending on factors
which cannot be predicted by the Company at this time, including, among
other factors, the future market price of the Common Stock. The actual
number of shares of Common Stock offered hereby, and included in the
Registration Statement of which this Prospectus is a part, includes such
additional number of shares of Common Stock as may be issued or issuable
upon conversion of the Preferred Stock by reason of the floating rate
conversion price mechanism or other adjustment mechanisms described
therein, or by reason of any stock split, stock dividend or similar
transaction involving the Common Stock, in order to prevent dilution, in
accordance with Rule 416 under the Act. Pursuant to the terms of the
Preferred Stock, if the outstanding Preferred Stock had been actually
converted on September 8, 1998 the conversion price would have been $5.14
(100% of the average of the daily closing bid prices of the Common Stock
for the five consecutive trading days ending on the fifth trading day
immediately preceding such date) at which price the outstanding Preferred
Stock would have been converted into approximately 3,119,167 shares of
Common Stock. Based on the closing price of the Common Stock on October
1, 1998 ($2.625) the outstanding Preferred Stock would have been
converted into approximately 6,116,848 shares of Common Stock. On June
18, 1998, 2,500 shares of Preferred Stock were converted into 373,220
shares of Common Stock. Pursuant to the terms of the Preferred Stock, the
shares of Preferred Stock are convertible by any holder only to the
extent that the number of shares of Common Stock thereby issuable,
together with the number of shares of Common Stock owned by such holder
and its affiliates (but not including shares of Common Stock underlying
unconverted shares of Preferred Stock), would not exceed 4.9% of the then
outstanding Common Stock as determined in accordance with Section 13(d)
of the Exchange Act. Accordingly, the number of shares of Common Stock
set forth in the table for this Selling Stockholder exceeds the number of
shares of Common Stock that this Selling Stockholder could own
beneficially at any given time through their ownership of the Series C
66
<PAGE>
Preferred Stock. In that regard, beneficial ownership of this Selling
Stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Exchange Act. RGC International Investors, LDC is a
party to an investment management agreement with Rose Glen Capital
Management, L.P., a limited partnership of which the general partner is
RGC General Partner Corp. Messrs. Wayne Block, Gary Kaminsky and Steve
Katznelson own all of the outstanding capital stock of RGC General Partner
Corp., and are parties to a shareholders' agreement pursuant to which they
collectively control RGC General Partner Corp. Through RGC General Partner
Corp., such individuals control Rose Glen Capital Management, L.P. Such
individuals disclaim beneficial ownership of the Company's Common Stock
owned by the Selling Shareholder.
(12) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by such Selling
Stockholders upon conversion of the Convertible Notes held by such
Selling Stockholders. The actual number of shares of Common Stock
issuable upon conversion of the Convertible Notes is indeterminate, is
subject to adjustment and could be materially less or more than such
estimated number depending on factors which cannot be predicted by the
Company at this time, including, among other factors, the future market
price of the Common Stock. The actual number of shares of Common Stock
offered hereby, and included in the Registration Statement of which this
Prospectus is a part, include such additional number of shares of Common
Stock as may be issued or issuable upon conversion of the Convertible
Notes by reason of the floating rate conversion price mechanism, or by
reason of any stock split, stock dividend or similar transaction
involving the Common Stock, in order to prevent dilution, in accordance
with Rule 416 under the Act. Pursuant to the terms of the Convertible
Notes, if the Convertible Notes had been actually converted on October 2,
1998 the conversion price would have been $2.6625 (100% of the average of
the daily closing prices of the Common Stock reported on the Nasdaq
National Market for the five consecutive trading days immediately
preceding such date) at which price the Convertible Notes would have been
converted into approximately 848,544 aggregate shares of Common Stock.
(13) Represents shares of Common Stock issuable pursuant to warrants issued or
issuable to the Selling Stockholder.
(14) J. Alix & Associates was retained by the Company on November 2, 1997 to
provide interim management services to the Company.
(15) Constitutes 25,000 shares underlying outstanding warrants exercisable by
the Selling Stockholder.
67
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders, or their respective pledgees, donees, transferees
or other successors in interest, may sell some or all of the Shares in one or
more transactions (which may involve block transactions) on the Nasdaq
National Market or on such other market on which the Common Stock may from
time to time be trading, in privately negotiated transactions, through the
writing of options on the Shares, short sales or any combination thereof. The
sale price to the public may be the market price prevailing at the time of
sale, a price related to such prevailing market price or such other price as
the Selling Stockholders determine from time to time. The Shares may also be
sold pursuant to Rule 144.
The Selling Stockholders, or their respective pledgees, donees, tranferees
or other successors in interest, may also sell the Shares directly to market
makers acting as principals and/or broker/dealers, who may act as agent or
acquire the Shares as principal. Any broker/dealer participating in such
transactions as agent may receive a commission from the Selling Stockholders
(and, if they act as agent for the purchaser of such Shares, from such
purchaser). Usual and customary brokerage fees will be paid by the Selling
Stockholders. Broker/dealers may agree with the Selling Stockholders to sell a
specified number of Shares at a stipulated price per Share and, to the extent
such broker/dealer is unable to do so acting as agent for the Selling
Stockholders, to purchase as principal any unsold Shares at the price required
to fulfill the respective broker/dealer's commitment to the Selling
Stockholders. Broker/dealers who acquire Shares as principals may thereafter
resell such Shares from time to time in transactions (which may involve cross
and block transactions and which may involve sales to and through other
broker/dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices, and in
connection which such resales may pay to or receive commissions from the
purchasers of such Shares. If applicable, the Selling Stockholders also may
have distributed or may distribute Shares to one or more of their limited
partners which are unaffiliated with the Company; such limited partners may,
in turn, distribute such shares as described above. There can be no assurance
that all or any of the Shares offered hereby will be sold by the Selling
Stockholders.
The Company is bearing all costs relating to the registration of the Shares,
provided that any commissions or other fees payable to broker/dealers in
connection with any sale of the Shares will be borne by the Selling
Stockholders or other party selling such Shares. The Company has agreed to
indemnify certain of the Selling Stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the Act,
or to contribute to payments the Selling Stockholders, or their transferees or
assignees, may be required to make in respect thereof.
The Selling Stockholders must comply with the requirements of the Act and
the Exchange Act and the rules and regulations thereunder in the offer and
sale of the Shares. In particular, during such times as the Selling
Stockholders may be deemed to be engaged in a distribution of the Common
Stock, and therefore be deemed to be an underwriter under the Act, it must
comply with the Exchange Act, as amended, and will, among other things:
(a) not engage in any stabilization activities in connection with the
Company's securities;
(b) furnish each broker/dealer through which Shares may be offered such
copies of this Prospectus, as amended from time to time, as may be required
by such broker/dealer; and
(c) not bid for or purchase any securities of the Company or attempt to
induce any person to purchase any securities of the Company other than as
permitted under the Exchange Act.
LEGAL MATTERS
The validity of the shares of the Company's Common Stock offered hereby will
be passed upon for the Company by Christopher J. Joyce, Esq., Senior Vice
President--Legal Affairs and Administration of the Company.
68
<PAGE>
EXPERTS
The consolidated balance sheet of Medical Resources, Inc. as of December 31,
1997 and the consolidated statements of operations, stockholders' equity, and
cash flows and the financial statement schedule for the years ended December
31, 1997 and 1995, appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon (which contains an explanatory paragraph with respect to
the issues that raise substantial doubt about the Company's ability to
continue as a going concern mentioned in Note 2 to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated balance sheet of the Company as of December 31, 1996 and
the related consolidated statements of operations, cash flows and changes in
stockholders' equity for the year ended December 31, 1996, included in this
Prospectus and Registration Statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants as set forth in their
report thereon included herein. The consolidated financial statements referred
to above are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy and
information statements filed by the Company may be inspected and copied at the
Public Reference Section of the Commission at 450 Fifth Street, N.W.
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W.,
Washington D.C. 20549 at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding the Company; the address of such site is http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Act"), with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement, including all exhibits
thereto, may be obtained from the Commission's principal office in Washington
D.C. upon payment of the fees prescribed by the Commission or may be examined
without charge at the offices of the Commission as described above.
The Company's securities are quoted on the Nasdaq National Market. Reports
and other information about the Company may be inspected at the offices
maintained by the National Association of Securities Dealers, Inc., NASDAQ
Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
69
<PAGE>
MEDICAL RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP--Independent Auditors......................... F-2
Report of Coopers & Lybrand L.L.P.--Independent Accountants............... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995...................................................... F-6
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995................................... F-8
Notes to Consolidated Financial Statements................................ F-9
Schedule II--Valuation and Qualifying Accounts............................ F-48
Unaudited Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997..................................................................... F-49
Unaudited Consolidated Statements of Operations for the Six Months Ended
June 30, 1998 and 1997................................................... F-50
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997................................................... F-51
Notes to Unaudited Consolidated Financial Statements...................... F-52
</TABLE>
F-1
<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 on page F-1 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 except for Note 16,
as to which the date is August 18, 1998
F-2
<PAGE>
MEDICAL RESOURCES, INC.
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 on page F-
1 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-3
<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
------------ ------------
<S> <C> <C>
ASSETS
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
======== ========
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, 7,296 issued and outstanding at December
31, 1997 and 6,198 issued and 6,109 outstanding at
December 31, 1996.................................. 73 62
Common stock to be issued; 200 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.......................... 138,810 103,052
Unrealized appreciation of investments.............. -- 26
Retained earnings (deficit)......................... (30,221) 2,956
Less 89 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............................... $144,412 $64,762 $35,860
Imaging center operating costs:
Technical services payroll and related expenses.. 33,552 10,836 6,815
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.......................... 22,878 11,937 5,252
Other center level costs......................... 8,947 3,354 1,430
Provision for uncollectible accounts receivable.... 20,364 4,705 3,378
Corporate general and administrative............... 12,157 4,567 2,994
Depreciation and amortization...................... 18,733 6,964 4,274
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)........................ (21,297) 13,700 7,194
Interest expense, net.............................. 8,814 2,834 1,829
--------- ------- -------
Income (loss) from continuing operations before
minority interest and income taxes................ (30,111) 10,866 5,365
Minority interest (loss)........................... 636 308 (124)
--------- ------- -------
Income (loss) from continuing operations before
income taxes...................................... (30,747) 10,558 5,489
Provision for income taxes......................... 1,221 3,575 1,243
--------- ------- -------
Income (loss) from continuing operations........... (31,968) 6,983 4,246
Discontinued operations, net of tax:
Income (loss) from discontinued operations (net
of income tax provision of $1,079, $587 and
$103, respectively)............................. 729 271 (1,180)
Loss on sale of discontinued business (net of tax
benefit of $656)................................ -- -- (1,376)
--------- ------- -------
Income (loss) from discontinued operations....... 729 271 (2,556)
--------- ------- -------
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...................................... $ (4.96) $ 1.86 $ 1.65
Discontinued operations.......................... .11 .07 (.99)
--------- ------- -------
Net income (loss) per share...................... $ (4.85) $ 1.93 $ 0.66
--------- ------- -------
Diluted--
Net income (loss) per share before discontinued
operations...................................... $ (4.96) $ 1.72 $ 1.64
Discontinued operations.......................... .11 .06 (.99)
--------- ------- -------
Net income (loss) per share...................... $ (4.85) $ 1.78 $ 0.65
========= ======= =======
</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)
-------- -------- -------
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-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>
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-7
<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 $ 24 $ 18,407 $ (6,558)
Issuance of Common Stock
related to acquisition
of diagnostic imaging
centers................ 3,448 2 $ 1,721 1,725
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 26 1,721 20,886 (4,298) (1,368)
Issuance of Common Stock
related to acquisition
of diagnostic imaging
centers................ 47,938 19 47,919
Warrants issued related
to acquisition of
diagnostic imaging
centers................ 975 975
Net proceeds from public
offering of 1,226,667
shares of Common Stock. 25,944 12 25,932
Public offering issuance
costs.................. (780) (780)
Conversion of
subordinated debentures
into Common Stock...... 5,735 4 5,731
Exercise of stock
options................ 2,022 1 2,021
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 62 1,721 103,052 2,956 (1,433) 26
Issuance of Common Stock
related to acquisition
of diagnostic imaging
centers................ 10,673 4 (1,721) 10,957 1,433
Issuance of Common Stock
related to acquisition
of staffing offices.... 2,000 -- 2,000
Issuance of Common Stock
related to acquisition
of Dalcon Technologies. 1,934 -- 1,934
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
Conversion of
debentures............. 6,635 5 6,630
Exercise of stock
options and warrants... 2,696 1 2,695
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 1 2,675
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 $ 73 $ -- $18,242 $138,810 $(30,221) $ -- $ --
======== ==== ======= ======= ======== ======== ======= =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
General
Medical Resources, Inc., (herein referred to as "MRI" and collectively with
its subsidiaries, affiliated partnerships and joint ventures, referred to
herein as the "Company") specializes in the operation and management of
diagnostic imaging centers. The Company 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.
Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On August 18, 1998, the Company sold the stock of StarMed to
RehabCare Group, Inc. for gross proceeds of $33,000,000 (the "StarMed Sale").
Due to the StarMed Sale, the results of operations of StarMed are herein
reflected in the Company's Consolidated Statements of Operations as
discontinued operations. See Note 16 of Notes to Consolidated Financial
Statements.
During July 1998, the Company's shareholders approved a reverse stock split
of the Company's outstanding shares of Common Stock. As a result of the
reverse stock split, each three outstanding shares of Common Stock were
automatically converted into one share of new Common Stock. The Company
effected the reverse stock split in order to meet the minimum bid price
requirement for continued listing on the Nasdaq Stock Market. The share data
included herein have been adjusted to reflect the impact of the reverse stock
split.
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.
F-9
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net service revenues are reported, when earned, at their estimated net
realizable amounts from patients, third party 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:
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 the sale of 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.
F-10
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-11
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
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
======== =======
</TABLE>
Amortization expense from continuing operations for goodwill was $5,626,000,
$1,039,000 and $161,000 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.
F-12
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 earnings 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............. $(31,968) $6,983 $ 4,246
Income (loss) from discontinued operations........... 729 271 (2,556)
-------- ------ -------
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............. 6,832 3,760 2,577
======== ====== =======
Net income (loss) per share before discontinued
operations.......................................... $ (4.96) $ 1.86 $ 1.65
Discontinued operations.............................. 0.11 0.07 (0.99)
-------- ------ -------
Basic earnings per share............................. $ (4.85) $ 1.93 $ 0.66
======== ====== =======
DILUTED EARNINGS PER SHARE INFORMATION
Income (loss) from continuing operations............. $(31,968) $6,983 $ 4,246
Loss from discontinued operations.................... 729 271 (2,556)
-------- ------ -------
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............. 6,832 3,760 2,577
Incremental shares issuable on exercise of warrants
and options......................................... -- 139 17
Incremental shares issuable on conversion of
convertible subordinated debentures................. -- 404 --
-------- ------ -------
Weighted average number of diluted common shares..... 6,832 4,303 2,594
======== ====== =======
Net income (loss) per share before discontinued
operations.......................................... $ (4.96) $ 1.72 $ 1.64
Discontinued operations.............................. 0.11 0.06 (0.99)
-------- ------ -------
Diluted earnings (loss) per share.................... $ (4.85) $ 1.78 $ 0.65
======== ====== =======
</TABLE>
Warrants, options and the Series C Convertible Preferred Stock are not
dilutive in 1997.
F-13
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under the agreements for its $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, aggregating $16,685,000 at December 31, 1997 (the "Cross-
F-14
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Default Debt"), 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 holders of the Cross
Default Debt 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 Cross Default Debt were shown as current liabilities on the
Company's Consolidated Balance Sheets at December 31, 1997. Accordingly, the
Company had a deficit in working capital of $58,174,000 at December 31, 1997.
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 (see Note 16 of Notes to Consolidated Financial
Statements for further discussion). 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 have resulted from the outcome of this uncertainty.
See Note 16 of Notes to Consolidated Financial Statements for further
discussion.
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. The write-down of fixed assets
primarily relates to imaging equipment. 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 (see
discussion of litigation in Note 11 of the Notes to the Consolidated Financial
Statements), (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 272,000 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 accrues for
legal fees as incurred.
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
F-15
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-16
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 from continuing operations related to
property and equipment amounted to $11,955,000, $5,419,000 and $3,775,000 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>
F-17
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
-------- -------
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 Notes 2 and 16 of the Notes to the Consolidated Financial
Statements.
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
F-18
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($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 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 $18.00 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 $18.00 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 $19.62 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.
F-19
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate maturities (after 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):
<TABLE>
<S> <C>
1998................................................................. $94,519
1999................................................................. 6,209
2000................................................................. 8,385
2001................................................................. 4,245
2002................................................................. 2,105
thereafter........................................................... 595
</TABLE>
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 33,333 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 15,556 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.
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) 7,296,333 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, holders of the Common Stock
possess three rights (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
F-20
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 by
dividing the Stated Value of the Convertible Preferred Shares, plus 3% per
annum to the date of conversion, by the lesser of (i) $62.10 and (ii) 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 $36.75 (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. Effective May 1998, in exchange for certain concessions
with respect to penalties, the Company waived the above-described right to
block conversion. 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 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 648,000 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 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
F-21
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 in
December 1997 warrants to RGC to acquire 272,333 shares of Common Stock at an
exercise price of $34.86 per share (such warrants were recorded as a 1997
expense and had an estimated value for accounting purposes of $2,051,000);
(ii) in lieu of RGC Registration Penalties accruing during the month of
January 1998, issued warrants to RGC to acquire 116,667 shares of Common Stock
at an exercise price of $38.85 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 (the "RGC Penalty Notes"), in
the aggregate principal amount of $1,440,000. The value of the warrants issued
to RGC was determined for accounting purposes using the Black-Scholes option
pricing model using the following assumptions: dividend yield 0%; expected
volatility 62%; expected life of one and one-half years and a risk-free
interest rate of 5.6%. 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 of 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.
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
F-22
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 580,313 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):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
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..................................... (4.85) 1.93 0.66
Pro forma....................................... (4.98) 1.79 0.64
Diluted income (loss) per share:
As reported..................................... (4.85) 1.78 0.65
Pro forma....................................... (4.98) 1.66 0.64
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
All Plans:
Dividend yield.............................................. 0% 0% 0%
Expected volatility......................................... 70% 52% 52%
Expected life (years)....................................... 2 2 2
</TABLE>
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 $12.60, $7.02 and
$3.45, respectively.
F-23
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, January 1, 1995..................... 131,225 $14.76
Granted........................................ 157,500 15.96
Exercised...................................... (4,305) 12.00
Forfeited...................................... (21,195) 13.50
--------
Outstanding, December 31, 1995................... 263,225 15.63
Granted........................................ 357,713 23.82
Granted as transfer of NMR Options............. 44,229 15.15
Exercised...................................... (81,066) 16.26
Forfeited...................................... (40,195) 19.74
--------
Outstanding, December 31, 1996................... 543,906 20.28
Granted........................................ 133,000 25.38
Exercised...................................... (78,285) 15.51
Forfeited...................................... (105,167) 21.99
--------
Outstanding, December 31, 1997................... 493,454 22.53
========
Exercisable at:
December 31, 1995.............................. 100,403 15.93
December 31, 1996.............................. 303,237 19.20
December 31, 1997.............................. 376,547 20.94
</TABLE>
The exercise price for options outstanding as of December 31, 1997 ranged
from $12.00 to $36.00. The following table summarizes information about stock
options outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------- -----------------
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE
-------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
$12.00 to 15.00.................. 67,993 6 years $ 13.92 65,381 $ 14.10
$16.50........................... 101,667 5 years $ 16.50 101,667 $ 16.50
$19.50 to 19.65.................. 71,757 6 years $ 19.50 43,756 $ 19.53
$22.53 to 25.50.................. 137,738 9 years $ 25.26 120,555 $ 25.50
$27.00 to 30.00.................. 30,633 8 years $ 28.38 19,522 $ 27.45
$31.14 to 33.39.................. 58,667 4 years $ 31.32 22,888 $ 31.62
$34.89 to 36.00.................. 25,000 4 years $ 35.64 2,778 $ 36.00
------- -------
$12.00 to 36.00.................. 493,455 376,547
======= =======
</TABLE>
All the options described above were issued with exercise prices at or above
fair market value on the date of grant.
F-24
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. All the warrants described below were issued with exercise prices
at or above fair market value on the date of grant.
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 NUMBER OF RANGE OF
EXPIRING IN SHARES EXERCISE PRICE
----------- --------- ----------------
<S> <C> <C>
1998.............................................. -- --
1999.............................................. 31,062 $13.50 to $75.00
2000.............................................. -- --
2001.............................................. 217,125 10.08 to 36.00
2002.............................................. 553,333 28.50 to 37.77
2003.............................................. 17,188 13.89
2004.............................................. 24,653 17.10 to 28.62
-------
843,361
=======
</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 $30.93 to $37.77 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 $9 3/16.
Warrants issued in connection with the acquisition of a diagnostic
imaging center located in Jacksonville, Florida to purchase 10,667 shares
of the Company's Common Stock at an exercise price of $30.93 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 45,667 shares of the Company's Common Stock at an
exercise price of $31.80 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 19,000 shares of the
Company's Common Stock at an exercise price of $31.92 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.
Warrants issued in connection with the acquisition of ATI Centers, Inc.
to purchase 56,000 shares of the Company's Common Stock at an exercise
price of $33.18 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.
F-25
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warrants issued in connection with the acquisition of a diagnostic
imaging center located in Rancho Cucamonga, California to purchase 18,333
shares of the Company's Common Stock at an exercise price of $33.75 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 22,000 and 53,333 of the Company's Common Stock at
an exercise price of $37.77 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.
Effective December 30, 1997, the Company issued warrants to RGC to purchase
272,333 shares of the Company's Common Stock with an exercise price of $34.86
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 17,778 shares of the Company's Common Stock at an exercise price of
$28.62 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 25,000 shares of the Company's Common Stock
consisting of 12,500 warrants with an exercise price of $24.00 per share and
12,500 warrants with an exercise price of $36.00 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 1,562 with an exercise price of
$24.00 per share and 1,562 warrants with an exercise price of $36.00 per
share. As of December 31, 1997, warrants to purchase 14,062 shares of the
Company's Common Stock at $24.00 a share and 14,062 at $36.00 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 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 5,729 shares of the Company's Common Stock at
an exercise price of $21.81 per share to a radiology group providing
services to one of its centers. As of December 31, 1997, none of the
warrants to purchase 5,729 shares of the Company's Common Stock had been
exercised.
F-26
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warrants issued to purchase 1,604 shares of the Company's Common Stock at
an exercise price of $21.81 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 1,604 shares of the Company's Common Stock have been
cancelled and are no longer outstanding.
Warrants issued to acquire 22,917 shares of the Company's Common Stock at
$34.92 per share to a financial consulting firm. As of December 31, 1997,
the warrants to purchase 22,917 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 43,542
shares of the Company's Common Stock at $27.81 per share. As of December
31, 1997, warrants to purchase 18,333 shares of the Company's Common Stock
remain outstanding.
Warrants granted to a non-employee director of NMR to purchase 917 shares
of the Company's Common Stock at an exercise price of $17.10 per share. As
of December 31, 1997, warrants to purchase 333 shares of the Company's
Common Stock remain outstanding.
Warrants issued to purchase 5,729 shares of the Company's Common Stock at
an exercise price of $13.50 per share to a professional corporation
providing legal services to NMR. As of December 31, 1997, all of the
warrants to purchase 5,729 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 17,188
shares of the Company's Common Stock at an exercise price of $13.08, and
6,875 shares of common stock at an exercise price of $17.10. As of December
31, 1997, none of the warrants to purchase 17,188 and 6,875 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 40,000 shares of the
Company's Common Stock at an exercise price of $27.00 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 40,000 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 13,333 shares of the Company's
Common Stock at an exercise price of $24.00 per share (the "$24.00 Warrants")
and (ii) six year warrants to purchase 66,667 shares of the Company's Common
Stock at an exercise price of $28.50 per share (the "$28.50 Warrants"), and
(iii) in exchange for his NMR employee stock options, three separate five year
warrants to purchase (A) 11,458 shares at $27.81, (B) 22,917 shares at $12.54
and (C) 11,458 shares of the Company's Common Stock at $14.19. As of December
31, 1997, 13,333 of the $24.00 Warrants, 56,000 of the $28.50 Warrants,
warrants to purchase 22,917 shares at $12.54 and 11,458 shares of the
Company's Common Stock at $14.19 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 16,667 shares of
the Company's Common Stock at an exercise price of $24.00 per share and (ii)
in exchange for his NMR employee stock options, four separate five year
warrants to purchase 3,438 shares at $12.00, 9,167 shares at $10.08, 13,750
shares at $12.54 and 11,458 shares of the Company's Common Stock at $14.19. As
of December 31, 1997, the warrants to purchase 16,667 shares at $24.00 per
share, 9,167 shares at $10.08 per share, 13,750 at $12.54 per share and 11,578
shares of the Company's Common Stock at $14.19 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
F-27
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with the NMR Acquisition and such value is being amortized over the term of
the officers' covenant not to compete agreements. The 188,147 warrants the
Company issued in exchange for previously outstanding NMR options or warrants
and the 40,000 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.
1,984,667 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) from continuing operations 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 valuation allowances....................... $(9,479) $3,575 $ 2,751
Income tax valuation allowance related to
continuing operations............................. 10,700 -0- (1,508)
------- ------ -------
Income tax provision from continuing
operations.................................... $ 1,221 $3,575 $ 1,243
======= ====== =======
Tax provision from discontinued operations......... $ 1,079 $ 587 $ 103
======= ====== =======
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-
======= ====== =======
</TABLE>
The components of the Company's income tax provision (benefit) from
continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
FEDERAL STATE TOTAL
------- ------ -------
<S> <C> <C> <C>
Current provision.................................. $ 993 $ 990 $ 1,983
Deferred benefit................................... (879) 117 (762)
------- ------ -------
Income tax provision............................... $ 114 $1,107 $ 1,221
======= ====== =======
<CAPTION>
DECEMBER 31, 1996
------------------------
<S> <C> <C> <C>
Current provision.................................. $ 3,263 $1,185 $ 4,448
Deferred benefit................................... (733) (140) (873)
------- ------ -------
Income tax provision............................... $ 2,530 $1,045 $ 3,575
======= ====== =======
<CAPTION>
DECEMBER 31, 1995
------------------------
<S> <C> <C> <C>
Current provision.................................. $ 2,778 $ 722 $ 3,500
Deferred benefit................................... (1,871) (386) (2,257)
------- ------ -------
Income tax provision............................... $ 907 $ 336 $ 1,243
======= ====== =======
</TABLE>
F-28
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the enacted federal statutory income tax to the
Company's recorded effective income tax rate for continuing operations 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...................... -- (1.2) 2.1
State income tax expense (benefit) net of federal
benefit............................................. (1.2) 6.3 4.0
Meals and entertainment.............................. .4 .3 .3
Change in valuation allowance........................ 34.8 -- (27.7)
Goodwill amortization................................ 2.8 1.8 --
Other................................................ 1.2 (7.3) 9.9
----- ---- -----
Effective tax rate................................... 4.0 % 33.9 % 22.4 %
===== ==== =====
</TABLE>
The significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
<TABLE>
<CAPTION>
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
Goodwill and other intangible assets written off for
book purposes, but amortized for tax purposes......... 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. The
valuation allowance represents the amount required to reduce all deferred
income tax assets to an amount representing the expected federal income tax
loss carryback available to the Company.
At December 31, 1997, the Company has available federal net operating loss
carryforwards of approximately $8,028,000 expiring in years 1999 through 2009.
F-29
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
At December 31, 1997, the Company had income taxes recoverable of $6,504,000
which represents estimated 1997 income tax payments made during 1997 that the
Company will be refunded upon filing of its 1997 tax return.
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.
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.
F-30
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
ORIGINAL
YEAR ENDED DECEMBER 31, LEASES SUBLEASES NET
----------------------- ------- --------- -------
<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>
F-31
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 court 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
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.
F-32
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. See discussion of reserves for net costs
associated with such litigation in Note 3.
In 1996, Lavina Orsi and Pompeo Orsi 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. The plaintiff alleges
negligent operations, improper supervision and hiring practices and the
failure to operate the premises in a safe manner, as a result of which the
individual suffered physical injury. The Company's general liability and
professional negligence insurance carriers have been notified, and it has been
agreed that the general liability insurance will pursue the defense of this
matter, however, such insurers have reserved the right to claim that the scope
of the matter falls outside the Company's coverage. The parties to this matter
are engaged in discovery. The Company believes it has meritorious defenses to
all claims against it and therefore is of the opinion that the Company will
not incur any material settlement cost, net of insurance proceeds (if any).
Accordingly, the Company has made no accrual for any costs associated with
such litigation under SFAS No. 5.
In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that such
other litigation will not have a material adverse effect on the Company's
financial position, cash flows or results of operations. Accordingly, the
Company has made no accrual for any costs associated with such litigation
under SFAS No. 5.
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. During 1997, the Company entered into an agreement to fix the
repurchase price per common share related to certain shares covered by a
repurchase agreement to the then current market price in exchange for
additional time to obtain registration of such shares. The increased amount of
such repurchase obligation of $1,696,000 (solely related to the fixing of the
repurchase price pursuant to the terms of the original repurchase agreement)
was charged to retained earnings and shown as an increase in Common Stock
subject to redemption on the Consolidated Balance Sheet. 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 59,667 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 138,000 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"). Any such Price Protection payments will
be charged to stockholders' equity. Based upon the closing sales price of the
Company's Common Stock on May 26, 1998 ($9 3/16 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
F-33
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Contingent consideration associated with acquisitions is
recorded as additional purchase price when resolved.
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
225,000 shares of the Company's Common Stock exercisable at between $30.93 and
$37.77 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 compensate officers, directors, employees and consultants to the
Company for services rendered or to be rendered 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 489,555 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 250,000 shares
and 5,000 shares of the Company's Common Stock which were granted in May 1997
to the Chairman and Mr. Koffler, respectively, under the Company's 1997 Stock
Option Plan (the "1997 Plan"). The exercise price for the options granted to
the Chairman and Mr. Koffler is $39.38, the fair market value of the Common
Stock on the date of grant. As discussed below, the Chairman and Mr. Koffler
agreed in April 1998 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.
F-34
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MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In order to address and satisfy the concerns management had communicated,
the Company instituted a special investigation to review all related-party
transactions (including those referred to above in this note 12) 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.
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 255,000
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. The 255,000 stock
options were granted at prices equal to the then current market price, and
accordingly, no expense was recorded upon issue nor income reflected upon
relinquishment for accounting purposes.
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 40,000 shares of the
Company's common stock exercisable at $27.00 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.
F-35
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. 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
-----------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
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.................................. -- --
<CAPTION>
DECEMBER 31, 1996
-----------------
CARRYING FAIR
AMOUNT 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.
14. 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
F-36
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 71,667 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 10,667 warrants, with an exercise price of
$30.93, 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 45,667
warrants, with an exercise price of $31.80, 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 18,890 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 ($31.77 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 19,000 warrants, with an exercise price of $31.92, 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.
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 14,672 shares of the Company's Common Stock valued at
$500,000. The shares of the Company's Common Stock are subject to registration
F-37
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rights. The excess of the purchase price and direct acquisition costs,
including 18,333 warrants with an exercise price of $33.75 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 132,401 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 ($53.775 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 105,921 shares of Common Stock (obligations
related to repurchase of 26,480 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 37,192 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 68,729 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 53,333 warrants, with an exercise price of $37.77, 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 56,000 warrants, with an exercise price of
$33.18, 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
39,722 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 ($37.77 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 22,000 warrants, with an exercise price of $37.77, 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 45,741 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
F-38
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or assets of Wesley are sold by the Company prior to the completion of 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. See Note 16.
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
50,785 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 12,513 shares of the Company's stock valued at $674,000 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 ($54.00 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
30,748 shares of the Company's stock valued at $1,650,000 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
2,446 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 ($51.00 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
F-39
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $1,541,000 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 of $5,446,000. 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 14,472 shares of the Company's stock
valued at $693,000 plus the assumption of indebtedness of $3,854,000 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 ($47.88 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. 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 25,094 shares of the Company's
stock valued at $1,340,000 plus the assumption of indebtedness of $29,000 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's 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 34,238 shares of the Company's stock valued at $1,750,000 plus the
assumption of indebtedness of $197,000. 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
($51.00 per share) and the market price at effectiveness of the registration
statement. The sellers have the right to require the Company to 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
F-40
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 35,722 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
the imaging center acquisitions are included as part of continuing operations
in the Consolidated Statements of Operations 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 when resolved.
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, 64,704 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. See
Note 16.
F-41
<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 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 76,250 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.
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 64,021 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. See Note 16.
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 0.2292 shares of the
Company's Common Stock resulting in the issuance of 1,485,500 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 40,000 warrants,
with an exercise price of $27.00, 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 177,725 shares of the Company's Common Stock
upon registration of the shares in accordance with its terms at a conversion
price of $25.32. 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 6,289 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
the imaging center acquisitions are included as part of
F-42
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
continuing operations in the Consolidated Statements of Operations from the
date of purchase. Contingent consideration associated with acquisitions is
recorded as additional purchase price.
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 160,000
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.
F-43
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
("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 400,000 shares of the
Company's Common Stock valued at $3,449,000. Of the 400,000 shares, 200,000
shares were issued at closing with the remaining 200,000 shares to be issued
within two years of closing (200,000 of such shares were issued in 1997). The
centers achieved certain earnings objectives and as a result, an additional
66,667 shares were issued in September 1997, to New England MRI, in accordance
with the additional consideration provisions in the purchase agreement. The
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 continuing
operations for the years ended December 31, 1997 and 1996, assuming the 1997
imaging center acquisitions had occurred on January 1, 1997 and 1996 and the
1996 imaging center acquisitions had occurred on January 1, 1996 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue, net...................................... $185,309 $192,131
Operating income (loss)........................... (17,323)(a) 26,190
Income (loss) before income taxes................. (30,134) 10,360
Net income (loss) from continuing operations...... (31,355) 6,376
Basic net income (loss) per share from continuing
operations....................................... $ (4.87) $ 1.70
</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.
F-44
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly consolidated financial
results of continuing operations for the years ended December 31, 1997 and
1996 (in thousands except per share amounts) (see Note 16):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Revenue, net............................. $26,841 $37,877 $42,022 $37,672
Operating income (loss).................. 6,713 5,896 9,159 (43,065)
Net income (loss) from continuing
operations.............................. 3,362 2,628 3,909 (43,805)
Basic earnings (loss) per share from
continuing operations................... 0.53 0.39 0.56 (6.06)
Diluted earnings (loss) per share from
continuing operations................... 0.50 0.36 0.49 (6.06)
1996
Revenue, net............................. $11,367 $12,899 $17,088 $23,408
Operating income......................... 2,064 2,771 3,704 5,161
Net income from continuing operations.... 1,235 1,538 1,775 2,435
Basic earnings per share from continuing
operations.............................. 0.45 0.51 0.49 0.43
Diluted earnings per share from
continuing operations................... 0.44 0.47 0.45 0.40
</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. The fourth quarter of 1997 also includes additional charges related
to increases in the estimated provision for uncollectible accounts receivable
and higher contractual allowance estimates.
Quarterly results are generally affected by the timing of acquisitions.
16. SUBSEQUENT EVENTS
AGREEMENT IN PRINCIPLE REGARDING SENIOR NOTE DEFAULTS
Management has reached an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications. Under the terms of the agreement in principle, the Senior Note
lenders have agreed to waive all existing covenant defaults and to modify the
financial covenants applicable over the remaining term of the Senior Notes. In
consideration for these waivers and covenant modifications, the Company has
agreed to increase the effective blended interest rate on the Senior Notes
from 7.87% to 9.00%, and issue to the Senior Note lenders warrants to acquire
375,000 shares of the Company's Common Stock at an exercise price of $7.67 per
common share. In addition, the Company has agreed to prepay $2,000,000 of
principal outstanding on the Senior Notes (without premium) and to pay a fee
to the Senior Note lenders of $500,000. The agreement in principle is subject
to the execution of definitive documents, which are expected to be completed
during September 1998. There can be no assurance, however, that definitive
documents effecting the agreement in principle will be executed.
Upon execution of the definitive documents with respect to the Senior Notes,
the Senior Notes and the Cross Default Debt will no longer be in default and
will be shown as long-term debt in future financial statements of the Company.
F-45
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SALE OF STARMED
Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On August 18, 1998, the Company sold the stock of StarMed to
RehabCare Group, Inc. for gross proceeds of $33,000,000 (the "StarMed Sale").
Due to the StarMed Sale, the amounts in the accompanying Consolidated
Statements of Operations and related notes thereto have been restated to
reflect StarMed as a discontinued operation.
Net cash proceeds from the StarMed Sale were used as follows: (i)
$13,786,000 to repay StarMed's outstanding third-party debt (in accordance
with the terms of sale) (ii) $2,000,000 was placed in escrow to be available,
for a specified period of time, to fund indemnification obligations that may
be incurred by the Company (part or all of this amount may be payable to the
Company over time) and (iii) an additional $2,000,000 was placed into escrow
to be applied as a partial repayment of the Company's $78,000,000 of Senior
Notes. The remaining net proceeds of approximately $13,400,000 increased the
Company's consolidated cash balances. For accounting purposes, a pretax gain
from the StarMed Sale of approximately $5,000,000 is expected to be reported
in the third quarter of 1998.
The following table shows summary balance sheets for StarMed as of December
31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............................. $ 455 $ --
Accounts receivable, net............................... 12,657 5,287
Other Current Assets................................... 279 185
------- -------
Total current assets................................. 13,391 5,472
Property and equipment, net.............................. 428 275
Goodwill, net............................................ 10,442 8,026
Other assets............................................. 218 --
------- -------
Total assets........................................... $24,479 $13,773
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current notes and mortgages payable $ 850 $ 1,275
Borrowings under line of credit........................ 3,744 --
Debt due parent........................................ 4,000 3,554
Accounts payable and accrued expenses 2,229 884
------- -------
Total current liabilities............................ 10,823 5,713
Notes and mortgages payable, less current portion........ 2,827 3,635
Debt due parent.......................................... 6,279 --
Equity................................................... 4,550 4,425
------- -------
Total liabilities and stockholder's equity............. $24,479 $13,773
======= =======
</TABLE>
F-46
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows summary statements of operations for StarMed for
the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net service revenues............................ $57,974 $29,023 $16,133
Office level operating costs and provision for
uncollectible accounts receivable.............. 47,123 24,316 13,543
Corporate general and administrative............ 8,089 3,212 1,984
Depreciation and amortization................... 601 502 293
------- ------- -------
Operating income.............................. 2,161 993 313
Interest expense, net........................... 353 135 --
------- ------- -------
Income before income taxes...................... 1,808 858 313
Provision for income taxes...................... 1,079 587 416
------- ------- -------
Net income (loss)............................... $ 729 $ 271 $ (103)
======= ======= =======
</TABLE>
See note 14 for discontinued operations relating to Maternity Resources, Inc.
for 1995.
In June 1998, an individual filed a complaint against the Company, StarMed,
Wesley Medical Resources, Inc., a subsidiary of the Company ("Wesley"), and
certain officers and directors of the Company in the United States District
Court for the Northern District of California. The complaint, among other
things, alleges that the defendants omitted and/or misrepresented material
information in the Company's public filings and that they concealed or failed
to disclose adverse material information about the Company in connection with
the sale of Wesley to the Company by the plaintiff. The plaintiff seeks
damages in the amount of $4.25 million or, alternatively, recession of the
sale of Wesley. The Company believes that it has meritorious defenses to the
claims asserted by plaintiff, and intends to defend itself vigorously. In July
1998, the Company and the named defendants filed a motion to dismiss the
plaintiff's complaint on numerous grounds. The legal proceeding described
above is in its 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 such proceeding.
F-47
<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 ADDITIONS/(DEDUCTIONS) OF PERIOD
----------- ------------ ---------- ---------------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31,
1995
Total Allowances for
Doubtful Accounts.... $ 2,881 $ 3,378 $ 0 (1)
(427)(2) $ 5,832
Year ended December 31,
1996
Total Allowances for 5,832 4,705 78 (1)
Doubtful Accounts.... (247)(2) 10,368
Year ended December 31,
1997
Total Allowances for 10,368 20,364 292 (1)
Doubtful Accounts.... (12,102)(2) 18,922
</TABLE>
- --------
(1) Represents provision for bad debts of discontinued operations.
(2) Uncollectible accounts written off, net of recoveries.
F-48
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 14,085 $ 23,198
Cash and short-term investments, restricted........... 1,744 600
Accounts receivable, net.............................. 74,761 65,887
Other receivables..................................... 10,497 5,430
Prepaid expenses...................................... 6,004 7,027
Income taxes recoverable.............................. 4,155 6,504
Deferred tax assets, net.............................. 2,492 2,492
-------- --------
Total current assets................................ 113,738 111,138
Property and equipment, net............................. 57,072 64,343
Goodwill, net........................................... 147,580 149,624
Other intangible assets, net............................ 6,220 6,836
Other assets............................................ 3,890 4,189
Deferred tax assets, net................................ 2,353 2,353
Restricted cash......................................... 473 473
-------- --------
Total assets........................................ $331,326 $338,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior Notes due 2001 through 2005, classified as
current.............................................. $ 78,000 $ 78,000
Notes and mortgages payable, classified as current.... 2,725 3,206
Capital lease obligations, classified as current...... 7,671 9,555
Current portion of notes and mortgages payable........ 14,842 13,313
Current portion of capital lease obligations.......... 9,507 10,311
Borrowings under line of credit....................... 10,591 3,744
Accounts payable...................................... 11,925 13,141
Accrued expenses...................................... 25,978 28,018
Common stock subject to redemption.................... 5,509 9,734
Other current liabilities............................. 2,882 290
-------- --------
Total current liabilities........................... 169,630 169,312
Notes and mortgages payable, less current portion....... 20,294 21,539
Obligations under capital leases, less current portion.. 11,739 16,361
Other long term liabilities............................. 515 178
-------- --------
Total liabilities................................... 202,178 207,390
Minority interest....................................... 5,370 4,662
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000
shares, 7,687 issued and outstanding at June 30, 1998
and 7,296 issued and outstanding at December 31,
1997................................................. 77 73
Series C Convertible Preferred Stock, $1,000 per share
stated value; 16 and 18 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively
(liquidation preference of 3% per annum)............. 16,016 18,242
Additional paid-in capital............................ 143,770 138,810
Accumulated deficit................................... (36,085) (30,221)
-------- --------
Total stockholders' equity.......................... 123,778 126,904
-------- --------
Total liabilities and stockholders' equity.......... $331,326 $338,956
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-49
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Net service revenues......................................... $93,648 $64,718
Imaging center operating costs:
Technical services payroll and related expenses............ 21,510 12,590
Medical supplies........................................... 5,919 3,884
Diagnostic equipment rental and maintenance................ 8,724 4,131
Independent contractor fees................................ 4,349 2,825
Administrative expenses.................................... 16,920 10,248
Other center level costs................................... 3,915 2,606
Provision for uncollectible accounts receivable.............. 7,307 3,753
Corporate general and administrative......................... 5,815 2,689
Stock-option based compensation.............................. 228 2,305
Depreciation and amortization................................ 12,635 7,079
Unusual charges.............................................. 5,400 --
------- -------
Operating income........................................... 926 12,608
Interest expense, net........................................ 6,912 2,733
------- -------
Income (loss) from continuing operations before minority
interest and income taxes................................. (5,986) 9,875
Minority interest (benefit).................................. 643 (193)
------- -------
Income (loss) from continuing operations before income
taxes..................................................... (6,629) 10,068
Provision for income taxes................................... 301 4,078
------- -------
Income (loss) from continuing operations................... (6,930) 5,990
Income from discontinued operations, net of tax.............. 1,341 395
------- -------
Net income (loss).......................................... (5,589) 6,385
Charges related to convertible preferred stock............... (274) --
------- -------
Net income (loss) applicable to common stockholders........ $(5,863) $ 6,385
======= =======
Income (loss) per common share applicable to common
stockholders:
Basic--
Continuing operations.................................... $ (0.99) $ 0.91
Discontinued operations.................................. 0.19 0.06
------- -------
Net income (loss) per common share..................... $ (0.80) $ 0.97
======= =======
Diluted--
Continuing operations.................................... $ (0.99) $ 0.86
Discontinued operations.................................. 0.19 0.06
------- -------
Net income (loss) per common share..................... $ (0.80) $ 0.92
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-50
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ (5,589) $ 6,385
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 12,969 7,341
Provision for uncollectible accounts receivable........... 7,455 3,762
Deferred income tax provision............................. -- 649
Stock-option based compensation........................... 228 2,305
Expense incurred in connection with warrants and notes
issued to preferred stockholders......................... 3,334 --
Other, net................................................ 708 (425)
Changes in operating assets and liabilities:
Accounts receivable....................................... (16,330) (15,333)
Other receivables......................................... (5,067) (2,272)
Prepaid expenses.......................................... 1,023 (2,014)
Income taxes recoverable or payable....................... 2,349 (886)
Other assets.............................................. 336 (1,219)
Accounts payable and accrued expenses..................... (3,244) 5,997
Other current liabilities................................. 2,592 1,331
Other long-term liabilities............................... 337 (2,686)
-------- --------
Total adjustments......................................... 6,690 (3,450)
-------- --------
Net cash provided by operating activities............... 1,101 2,935
-------- --------
Cash flows from investing activities:
Purchase of property and equipment, net of disposals....... (1,086) (4,233)
Acquisition of diagnostic imaging centers, net of cash
acquired.................................................. -- (37,908)
Acquisition of temporary staffing offices, net of cash
acquired.................................................. -- 176
Investment in Diagnostic Imaging Center Joint Venture...... -- (1,000)
Contingent consideration related to prior year
acquisitions.............................................. (1,201) --
Costs associated with refinancing of assets under capital
leases.................................................... -- (1,461)
Sale (purchase) of short-term investments, net............. -- 5,848
Increase in restricted cash................................ (1,144) --
-------- --------
Net cash used in investing activities................... (3,431) (38,578)
-------- --------
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs.......... -- 77,113
Proceeds from sale/leaseback transactions.................. -- 7,856
Repurchase of Common Stock subject to redemption........... (3,311) --
Proceeds from borrowing under notes payable................ 103 309
Borrowings under line of credit............................ 6,847 1,500
Proceeds from exercise of options and warrants............. 128 308
Note and capital lease repayments in connection with
acquisitions.............................................. -- (7,659)
Note and capital lease repayments in connection with Senior
Notes transaction......................................... -- (13,764)
Note and capital lease repayments in connection with
sale/leaseback transaction................................ -- (2,314)
Principal payments under capital lease obligations......... (5,743) (1,791)
Principal payments on notes and mortgages payable.......... (4,807) (3,427)
Other, net................................................. -- (19)
-------- --------
Net cash (used in) provided by financing activities..... (6,783) 58,112
-------- --------
Net increase (decrease) in cash and cash equivalents....... (9,113) 22,469
Cash and cash equivalents at beginning of year............. 23,198 15,346
-------- --------
Cash and cash equivalents at end of period................. $ 14,085 $ 37,815
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-51
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
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 herein for the year ended December 31, 1997.
During July 1998, the Company's shareholders approved a reverse stock split
of the Company's outstanding shares of Common Stock. As a result of the
reverse stock split, each three outstanding shares of Common Stock were
automatically converted into one share of new Common Stock. The Company
effected the reverse stock split in order to meet the minimum bid price
requirement for continued listing on the Nasdaq Stock Market. The share data
included herein have been adjusted to reflect the impact of the reverse stock
split.
The Company
The Company operates and manages primarily fixed-site, free-standing
outpatient medical diagnostic imaging centers (herein referred to as
"centers"), and provides diagnostic imaging network management services to
managed care providers. The Company, through its wholly-owned subsidiary,
Dalcon Technologies, Inc., also develops and markets software products and
systems for the diagnostic imaging industry.
Until August 1998, the Company, through the Per Diem and Travel Nursing
divisions of its wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley
Medical Resources Inc. ("StarMed"), provided temporary healthcare staffing of
registered nurses and other medical personnel to acute and sub-acute care
facilities nationwide. On August 18, 1998, the Company sold the stock of
StarMed to RehabCare Group, Inc. for gross proceeds of $33,000,000 (the
"StarMed Sale"). Due to the StarMed Sale, the results of operations of StarMed
are herein reflected in the Company's Consolidated Statements of Operations as
discontinued operations (see Note 6).
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
F-52
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
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:
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 Physician 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 service
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 the sale of radiology information
systems. Such revenues are recognized on an accrual basis as earned.
Reclassification and Restatement
The Consolidated Statement of Operations for the three month and six month
periods ended June 30, 1997 have 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. In addition, certain prior year amounts have been reclassified to
conform to the current year presentation.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires an entity to report comprehensive income and its
components and increases financial reporting disclosures. This standard has no
impact of the Company's financial position, cash flows or results of
operations since the Company's comprehensive income is the same as its
reported net income.
F-53
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
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." This statement 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 period.
Diluted earnings per share is based on the weighted average number of common
shares outstanding during the period plus the potentially issuable common
shares related to outstanding stock options, warrants and convertible debt.
Earnings per share amounts for the three and six months ended June 30, 1997
have been restated to conform to the requirements of SFAS No. 128.
The computations of basic earning per share and diluted earnings per share
for the three and six months ended June 30, 1998 and 1997 were as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------
1998 1997 1998 1997
--------- ----------------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
INFORMATION
Income (loss) from continuing
operations........................... $ (1,442) $ 2,628 $ (6,930) $ 5,990
Income from discontinued operations... 592 155 1,341 395
--------- -------- -------- -------
Net income (loss)..................... (850) 2,783 (5,589) 6,385
Charges related to convertible
preferred stock...................... (139) -- (274) --
--------- -------- -------- -------
Net income (loss) applicable to common
stockholders......................... $ (989) $ 2,783 $ (5,863) $ 6,385
========= ======== ======== =======
Weighted average number of common
shares............................... 7,321 6,745 7,304 6,549
Net income (loss) per share before
discontinued operations.............. $ (0.22) $ 0.39 $ (0.99) $ 0.91
Discontinued operations............... 0.08 0.02 0.19 0.06
--------- -------- -------- -------
Basic earnings (loss) per share....... $ (0.14) $ 0.41 $ (0.80) $ 0.97
========= ======== ======== =======
DILUTED EARNINGS (LOSS) PER SHARE
INFORMATION
Income (loss) from continuing
operations........................... $ (1,442) $ 2,628 $ (6,930) $ 5,990
Income from discontinued operations... 592 155 1,341 395
--------- -------- -------- -------
Net income (loss)..................... (850) 2,783 (5,589) 6,385
Interest savings from conversion of
convertible subordinated debentures.. -- 23 -- 43
Charges related to convertible
preferred stock...................... (139) -- (274) --
--------- -------- -------- -------
Net income (loss) applicable to common
stockholders after assumed
conversions.......................... $ (989) $ 2,806 $ (5,863) $ 6,428
========= ======== ======== =======
Weighted average number of common
shares............................... 7,321 6,745 7,304 6,549
Incremental shares issuable on
exercise of warrants and options..... -- 432 -- 461
Incremental shares issuable on
conversion of convertible
subordinated debentures.............. -- 103 -- --
--------- -------- -------- -------
Weighted average number of diluted
common shares........................ 7,321 7,280 7,304 7,010
========= ======== ======== =======
Net income (loss) per share before
discontinued operations.............. $ (0.22) 0.36 $ (0.99) 0.86
Discontinued operations............... 0.08 0.02 0.19 0.06
--------- -------- -------- -------
Diluted earnings (loss) per share..... $ (0.14) $ 0.38 $ (0.80) $ 0.92
========= ======== ======== =======
</TABLE>
F-54
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
As a result of its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under the agreements for its $78,000,000 of Senior Notes. The
financial covenant defaults under the Senior Note agreements entitle the
lenders to exercise certain remedies including acceleration of repayment. In
addition, certain medical equipment notes, and operating and capital leases of
the Company, aggregating $14,575,000 at June 30, 1998 (the "Cross-Default
Debt"), 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 holders of the Cross Default
Debt 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 Cross Default Debt were shown as current liabilities on the
Company's Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.
Accordingly, the Company had a deficit in working capital of $55,892,000 at
June 30, 1998. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The report of the Company's
independent auditors, Ernst & Young LLP, on the consolidated financial
statements of the Company for the year ended December 31, 1997 contains an
explanatory paragraph with respect to the issues that raise substantial doubt
about the Company's ability to continue as a going concern mentioned in Note 2
to the Company's consolidated financial statements. 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 have resulted from the outcome of this
uncertainty.
Management has reached an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications. Under the terms of the agreement in principle, the Senior Note
lenders have agreed to waive all existing covenant defaults and to modify the
financial covenants applicable over the remaining term of the Senior Notes. In
consideration for these waivers and covenant modifications, the Company has
agreed to increase the effective blended interest rate on the Senior Notes
from 7.87% to 9.00%, and issue to the Senior Note lenders warrants to acquire
375,000 shares of the Company's Common Stock at an exercise price of $7.67 per
common share. In addition, the Company has agreed to prepay $2,000,000 of
principal outstanding on the Senior Notes (without premium) and to pay a fee
to the Senior Note lenders of $500,000. The agreement in principle is subject
to the execution of definitive documents, which are expected to be completed
during September 1998. There can be no assurance, however, that definitive
documents effecting the agreement in principle will be executed.
In addition to reaching an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications, 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 by
approximately $5,000,000 per annum and (ii) sold the Company's temporary
healthcare staffing business, StarMed, for $33,000,000 in August 1998. Upon
execution of the definitive documents with respect to the Senior Notes, the
Senior Notes and the Cross Default Debt will no longer be in default and will
be shown as long-term debt in future financial statements of the Company.
3. UNUSUAL CHARGES
During the three months ended June 30, 1998, the Company recorded $1,640,000
of unusual charges consisting of (i) $1,240,000 for penalties associated with
delays in the registration of the Company's Common Stock issuable upon
conversion of convertible preferred stock and (ii) $400,000 for defense costs
relating to shareholder and employee lawsuits.
F-55
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
During the six months ended June 30, 1998, the Company recorded $5,400,000
of unusual charges consisting of (i) $3,467,000 ($1,194,000 of which was a
non-cash charge related to the issuance of 117,000 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, (ii) $713,000 for defense costs relating to
shareholder and employee lawsuits, (iii) $883,000 for costs associated with
the investigation of related party transactions which was concluded in April
1998 and (iv) $337,000 for management termination benefits and related costs.
The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current
negotiations regarding penalties associated with the failure to register the
Company's Common Stock and waivers or amendments of the financial covenants
under its Senior Notes, and the outcome of certain litigation.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Management fee receivables (net of contractual
allowances)
Due from unaffiliated physicians (Type I revenues).. $ 39,477 $ 35,540
Due from affiliated physicians (Type III revenues).. 7,198 8,585
Patient and third party payor accounts receivable
(Type II revenues)................................... 34,678 27,284
Temporary staffing service accounts receivable........ 15,533 13,400
-------- --------
Gross accounts receivable............................. 96,886 84,809
Less: Allowance for doubtful accounts................. (22,125) (18,922)
-------- --------
$ 74,761 $ 65,887
======== ========
</TABLE>
Accounts receivable is net of contractual allowances, which represent
standard fee reductions negotiated with certain third party payors.
Contractual allowances amounted to approximately $30,415,000 and $20,094,000
for the three months ended June 30, 1998 and 1997, respectively, and
approximately $59,265,000 and $31,093,000 for the six months ended June 30,
1998 and 1997, respectively.
5. COMMITMENTS AND CONTINGENCIES
Between November 1997 and January 1998, several lawsuits were commenced
against the Company, certain of the Company's Directors and certain officers
concerning certain related party transactions that have since been
investigated by a 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 court 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.
F-56
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The Special 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 Special Committee recommended and
712 Advisory Services, Inc., a financial advisory firm and affiliate of the
Company's Chairman of the Board (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 Special Committee's investigations. All such
amounts have been paid or reimbursed to the Company. In addition, the Special
Committee recommended and the Affiliate agreed to allow the Company to
terminate its relationship with the Affiliate.
The Special Committee reported 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.
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, the
Company has also received an inquiry from the SEC, but there have been no
formal proceedings 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
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
F-57
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
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.
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 1996, Lavina Orsi and Pompeo Orsi 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. The plaintiff alleges
negligent operations, improper supervision and hiring practices and the
failure to operate the premises in a safe manner, as a result of which the
individual suffered physical injury. The Company's general liability and
professional negligence insurance carriers have been notified, and it has been
agreed that the general liability insurance will pursue the defense of this
matter, however, such insurers have reserved the right to claim that the scope
of the matter falls outside the Company's coverage. The parties to this matter
are engaged in discovery. The Company believes it has meritorious defenses to
all claims against it and therefore is of the opinion that the Company will
not incur any material settlement cost, net of insurance proceeds (if any).
Accordingly, the Company has made no accrual for any costs associated with
such litigation under SFAS No. 5.
In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that such
other litigation will not have a material adverse effect on the Company's
financial position, cash flows or results of operations. Accordingly, the
Company has made no accrual for any costs associated with such litigation
under SFAS No. 5.
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. During 1997, the Company entered into an agreement to set the
purchase price per common share related to certain shares covered a repurchase
agreement to the then current market price in exchange for additional time to
obtain registration of such shares. The increased amount of such repurchase
obligation of $1,696,000 was charged to retained earnings and shown as an
increase in Common Stock subject to redemption on the Consolidated Balance
Sheet. As of June 30, 1998 and December 31, 1997, the Company had reflected
$5,509,000 and $9,734,000, respectively, of Common Stock subject to redemption
on its Consolidated Balance Sheet related to shares that the Company may be
required to repurchase. During the first six months, ended June 30, 1998, the
Company paid $3,311,000 to sellers who exercised their rights to have shares
of Common Stock repurchased. The Company expects to pay an additional
$5,509,000 during the remainder of 1998 ($3,696,000 of which was due and
payable on June 3, 1998 (the "June 1998 Repurchase Obligation") but has not
been paid by the Company) in connection with the settlement of certain
repurchase obligations of the Company subject, under certain circumstances, to
the consent of the Senior Note holders. With respect to the June 1998
Repurchase Obligation which remains due and payable, the Company is in
discussions with the sellers to whom such obligations are owed and the Senior
Note lenders regarding the timing and satisfaction of the June 1998 Repurchase
Obligation.
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"). Any such Price
Protection payments will be charged to stockholders' equity. Based upon the
closing sales price
F-58
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
of the Company's Common Stock on September 1, 1998 ($4.00 per share), such
shortfall would be approximately $3,351,000, excluding Price Protection
obligations related to the shares which have repurchase obligations, 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
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. Contingent consideration associated with acquisitions is
recorded as additional purchase price when resolved.
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement dated
July 21, 1997, as amended, between the Company and RGC International, LDC
("RGC") (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. As amended, the RGC Agreements provide for monthly
penalties ("RGC Registration Penalties") in the event that the Company failed
to register the Conversion Shares prior to October 1997 with such penalties
continuing until July 23, 1998.
On June 18, 1998 2,500 shares of Series C Preferred Stock were converted
into 373,000 shares of Common Stock. Accordingly, as of June 30, 1998, 15,500
shares of the Company's Series C Preferred Stock were issued and outstanding.
Each share of the Series C Preferred Stock is convertible into such number of
shares of Common Stock as is determined by dividing the stated value ($1,000)
of each share of Series C Preferred Stock plus 3% per annum from the closing
date to the conversion date by the lesser of (i) $62.10 or (ii) the average of
the daily closing bid prices for the Common Stock for the (5) five consecutive
trading days ending five (5) trading days prior to the date of conversion.
As a result of the Company's continued failure to register the RGC
Conversion Shares, the Company: (i) issued warrants to RGC to acquire 389,000
shares of Common Stock at an exercise prices ranging from $34.86 to $38.85 per
share, subject to reset in November 1998 (such warrants having an estimated
value, for accounting purposes, of $3,245,000); and (ii) issued interest
bearing promissory notes (the "RGC Penalty Notes") in the aggregate principal
amount of $2,450,000 due the earlier of (x) January 4, 1999 and (y) the later
of (A) five business days following the sale of StarMed and (B) October 15,
1998 in the event the sale of StarMed occurs before October 15, 1998. The
principal amount of and interest accrued on the RGC Penalty Notes may be
converted, at the option of the Company or RGC in certain circumstances, into
additional shares of Series C Preferred Stock or Common Stock. Pursuant to an
amendment to the RGC Agreements entered into June 1998, the Company will no
longer incur any monthly penalties for failure to register the RGC Conversion
Shares following July 23, 1998. However, if the RGC Conversion Shares are not
registered as of September 15, 1998
F-59
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(the Company is currently in discussions with RGC to extend such date), RGC
may demand a one-time penalty of $1,550,000 (the "September 1998 Penalty"),
payable, at the option of RGC, in cash or additional shares of Common Stock.
There can be no assurance that the Company will be able to register the RGC
Conversion Shares by such date, or any extended date, or that the Company will
be able to pay the RGC Penalty Notes when due or the September 1998 Penalty,
if such payment becomes due. Purchasers of Common Stock could therefore
experience substantial dilution upon conversion of the Series C Preferred
Stock and the RGC Penalty Notes and the exercise of such warrants. The shares
of Series C Preferred Stock are not registered and may be sold only if
registered under the Act or sold in accordance with an applicable exemption
from registration, such as Rule 144.
6. DISCONTINUED OPERATIONS
On August 18, 1998, the Company sold the stock of StarMed to RehabCare
Group, Inc. for gross proceeds of $33,000,000 (the "StarMed Sale"). Due to the
StarMed Sale, the results of operations of StarMed are herein reflected in the
Company's Consolidated Statements of Operations as discontinued operations.
Net cash proceeds from the StarMed Sale were used as follows: (i)
$13,786,000 to repay StarMed's outstanding third-party debt (in accordance
with the terms of sale) (ii) $2,000,000 was placed in escrow to be available,
for a specified period of time, to fund indemnification obligations that may
be incurred by the Company (part or all of this amount may be payable to the
Company over time) and (iii) an additional $2,000,000 was placed into escrow
to be applied as a partial repayment of the Company's $78,000,000 of Senior
Notes. The remaining net proceeds of approximately $13,400,000 increased the
Company's consolidated cash balances. For accounting purposes, a pretax gain
from the StarMed Sale of approximately $5,000,000 is expected to be reported
in the third quarter of 1998.
The following table shows summary balance sheets for StarMed as of June 30,
1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 6,022 $ 455
Accounts receivable, net............................. 14,934 12,657
Other current assets................................. 613 279
------- -------
Total current assets............................... 21,569 13,391
Property and equipment, net............................ 458 428
Goodwill, net.......................................... 9,993 10,442
Other assets........................................... 118 218
------- -------
Total assets....................................... $32,138 $24,479
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current notes and mortgages payable.................. $ 492 $ 850
Borrowings under line of credit...................... 10,591 3,744
Debt due parent...................................... 4,000 4,000
Accounts payable and accrued expenses................ 2,110 2,229
------- -------
Total current liabilities.......................... 17,193 10,823
Notes and mortgages payable, less current portion...... 2,702 2,827
Debt due parent........................................ 6,352 6,279
Equity................................................. 5,891 4,550
------- -------
Total liabilities and stockholder's equity......... $32,138 $24,479
======= =======
</TABLE>
F-60
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The following table shows summary statements of operations for StarMed for
the three and six month periods ended June 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net service revenues.................. $ 20,490 $ 12,801 $ 40,307 $ 25,947
Office level operating costs and
provisions for uncollectible accounts
receivable........................... 16,400 10,408 32,197 21,148
Corporate general and administrative.. 3,056 1,822 5,912 3,488
Depreciation and amortization......... 163 132 334 263
--------- --------- -------- --------
Operating income.................... 871 439 1,864 1,048
Interest expense, net................. 223 73 406 116
--------- --------- -------- --------
Income before income taxes............ 648 366 1,458 932
Provision for income taxes............ 56 211 117 537
--------- --------- -------- --------
Net income............................ $ 592 $ 155 $ 1,341 $ 395
========= ========= ======== ========
</TABLE>
In June 1998, an individual filed a complaint against the Company, StarMed,
Wesley Medical Resources, Inc., a subsidiary of the Company ("Wesley"), and
certain officers and directors of the Company in the United States District
Court for the Northern District of California. The complaint, among other
things, alleges that the defendants omitted and/or misrepresented material
information in the Company's public filings and that they concealed or failed
to disclose material adverse information about the Company in connection with
the sale of Wesley to the Company by the plaintiff. The plaintiff seeks
damages in the amount of $4.25 million or, alternatively, recission of the
sale of Wesley. The Company believes that it has meritorious defenses to the
claims asserted by plaintiff, and intends to defend itself vigorously. In July
1998, the Company and the named defendants filed a motion to dismiss the
plaintiff's complaint on numerous grounds. The legal proceeding described
above is in its 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 such proceeding.
7. SUBSEQUENT EVENT
In July 1998, the Company decided to sell or close approximately eight
imaging centers. These centers will be sold or closed during the third and
fourth quarters of 1998. In most cases, the Company decided to sell or close
these centers due to general competitive pressures and their close proximity
to other imaging centers of the Company which have more advanced imaging
equipment. The Company expects to incur a charge of between $3,000,000 and
$4,000,000 during the third quarter of 1998 related to these imaging centers.
Such charge will consist of (i) the write-off of fixed assets and other assets
of between $2,000,000 and $2,600,000 and (ii) reserve for costs to exit
facility and equipment leases of between $1,000,000 and $1,400,000.
F-61
