<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 30, 1997
MEDICAL RESOURCES, INC.
-----------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 1-12461 13-3584552
- -------------------------------- ------- ------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction) File Number) Identification No.)
155 State Street, Hackensack, N.J. 07601
--------------------------------- ------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (201) 488-6230
------------------
AMENDMENT NO. 2
The Undersigned registrant hereby amends its Current Report on Form 8-K, dated
May 30, 1997 filed on June 16, 1997, as amended on Form 8-K/A filed on August
13, 1997, to amend Items 5 and 7 as set forth herein.
<PAGE>
Item 5. Other Events
------------
On January 16, 1997, Medical Resources, Inc. (the "Company") acquired the
business operations of South Brevard Imaging, a diagnostic imaging center
located at 1327 Oak Street, Melbourne, Florida. The acquisition was consummated
pursuant to an Asset Purchase Agreement dated as of January 16, 1997 by and
among the Company and South Brevard Imaging, A Division of Melbourne Neurologic,
P.A. Pursuant to the Agreement, a wholly owned subsidiary of the Company,
Melbourne Resources, Inc., acquired substantially all of the business assets of
South Brevard Imaging for approximately $1,125,000 in cash.
On March 10, 1997, the Company acquired the business operations of The
Magnet of Palm Beach, a diagnostic imaging center located at 4477 Medical Center
Way, West Palm Beach, Florida. The acquisition was consummated pursuant to an
Asset Purchase Agreement dated as of March 10, 1997 by and among the Company and
The Magnet of Palm Beach Ltd. Pursuant to the Agreement, a wholly owned
subsidiary of the Company, West Palm Beach Resources, Inc., acquired
substantially all of the business assets of The Magnet of Palm Beach for
approximately $2,000,000 in cash and 56,670 shares of the Company's Common Stock
valued at approximately $600,000.
On May 7, 1997, the Company acquired the business operations of Accessible
MRI of Montgomery County and Accessible MRI of Baltimore County, two diagnostic
imaging centers located at 8830 Cameron Street, Suite 101, Silver Springs,
Maryland and 110 West Road, Suite 212, Towson, Maryland, respectively. The
acquisition was consummated pursuant to an Asset Purchase Agreement dated as of
May 7, 1997 by and among the Company and Accessible MRI. Pursuant to the
Agreement, a wholly owned subsidiary of the Company, West Palm Beach Resources,
Inc., acquired substantially all of the business assets of Accessible MRI of
Montgomery County and Accessible MRI of Baltimore County for approximately
$2,830,000 in cash and 119,166 shares of the Company's Common Stock valued at
approximately $1,500,000.
On May 30, 1997, the Company acquired Capstone Management Group, Inc.
comprised primarily of ten diagnostic imaging centers located at (i) 199 Wolf
Road, Albany, New York, (ii) 1226 East Water Street, Syracuse, New York, (iii)
236 Ernston Rd., Parlin, New Jersey, (iv) 2591 Miamisburg Centerville Rd.,
Suite 102, Centerville, OH, (v) 4630 Street Rd., Trevose, Pennsylvania, (vi) 417
North 8th Street, Suite 501, Philadelphia, Pennsylvania, (vii) 590 Reed Road,
Suite 2, Broomall, Pennsylvania, (viii) 330 Middletown Blvd., Suite 402-403,
Langhorne, Pennsylvania, (ix) 891 Baltimore Pike, Springfield, Pennsylvania and
(x) 10 East Eutaw St., Baltimore, Maryland. The acquisition was consummated
pursuant to an Asset Purchase Agreement dated as of May 1, 1997 by and among the
Company and Capstone Management Group, Inc. Pursuant to the Agreement, three
wholly owned subsidiaries of the Company, MRI Capstone Resources, Inc.,
Baltimore MRI Capstone, Inc. and Albany MRI Capstone, Inc., acquired
substantially all of the business assets of Capstone Management Group, Inc. for
approximately $5,330,000 in cash and 397,204 shares of the Company's Common
Stock valued at approximately $5,000,000.
Item 7. Financial Statements and Exhibits.
----------------------------------
(a) Financial Statements of Businesses Acquired
The following financial statements and the reports thereon of independent
accountants, all appearing after the signature page to this Form 8-K, are
included herein.
SOUTH BREVARD IMAGING, A division of Melbourne Neurologic, P.A.
Independent Auditors' Report
Balance Sheet as of December 31, 1996
Statement of Income for the Year Ended December 31, 1996
Statement of Changes in Capital for the Year Ended December 31, 1996
Statement of Cash Flows for the Year Ended December 31, 1996
Notes to Financial Statements
Schedule I - Operating Expenses for the Year Ended December 31, 1996
THE MAGNET OF PALM BEACH, LTD.
Independent Auditors' Report
Balance Sheet as of December 31, 1996
Statement of Income for the Year Ended December 31, 1996
Statement of Changes in Partners' Deficit for the Year Ended December 31,
1996
Statement of Cash Flows for the Year Ended December 31, 1996
Notes to Financial Statements
Schedule I - Operating Expenses for the Year Ended December 31, 1996
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
Independent Auditors' Report
Balance Sheet as of September 30, 1996
Statement of Operations for the Year Ended September 30, 1996
Statement of Retained Earnings for the Year Ended September 30, 1996
Statement of Cash Flows for the Year Ended September 30, 1996
Notes to Financial Statements
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
Independent Auditors' Report
Balance Sheet as of September 30, 1996
Statement of Operations for the Year Ended September 30, 1996
Statement of Accumulated Deficit for the Year Ended September 30, 1996
Statement of Cash Flows for the Year Ended September 30, 1996
Notes to Financial Statements
CAPSTONE MANAGEMENT GROUP, INC.
Report of Independent Certified Public Accountants
Balance Sheet as of December 31, 1996
Statement of Loss and Stockholders' Deficit for the Year Ended December 31,
1996
Statement of Cash Flows for the Year Ended December 31, 1996
Notes to Financial Statements
(b) Pro Forma Financial Information
The Pro Forma Consolidated Balance Sheet and Consolidated Statements of
Operations ("Financial Statements") combines the individual Financial Statements
of the Company and Capstone Management Group, Inc., Accessible MRI, The Magnet
of Palm Beach, Ltd and South Brevard Imaging for the year ended December 31,
1996 and the quarter ended March 31, 1997 after giving effect to the pro forma
adjustments described in the Notes to Pro Forma Financial Statements.
The following consolidated pro forma data reflect the acquisitions as if
they occurred on January 1, 1996. The following unaudited pro forma information
does not purport to be indicative of the results which would actually have been
obtained had the acquisitions been completed during the periods presented or
which may be obtained in the future.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL RESOURCES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of March 31, 1997 As of March 31, 1997
------------------------ ----------------------------------- Pro Forma
Medical Capstone Management -------------------------
ASSETS Resources, Inc. (A) Group, Inc. Accessible MRI Adjustments Total
------ ------------------------ ------------------- ---------------- --------------- --------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 19,468,047 $ 1,041,464 $ 434,286 ($1,475,750) (B) $ 9,705,363
(8,155,734) (D)
(1,606,950) (G)
Short-term investments 10,683,535 - - - 10,683,535
Accounts receivable, net 52,433,279 2,711,557 1,053,538 (32,173) (B) 56,166,201
Other receivables 1,620,958 - 42,783 (42,783) (B) 1,620,958
Deferred tax asset 2,868,000 - - - 2,868,000
Prepaid expenses 4,824,740 176,867 7,903 (184,770) (B) 4,824,740
------------ ------------ ---------- ---------- -----------
Total current
assets 91,898,559 3,929,888 1,538,510 (11,498,160) 85,868,797
Medical diagnostic and
office equipment, net 47,728,267 7,201,869 2,141,749 (2,159,445) (B) 54,912,440
Goodwill 90,765,203 494,167 - 5,123,382 (B) 111,922,705
(1,400,731) (C)
14,655,734 (D)
1,606,950 (G)
678,000 (H)
Other assets 4,208,886 - 99,249 (48,162) (B) 4,259,973
Deferred tax asset, net 2,311,112 - - - 2,311,112
Restricted cash 1,057,693 - - - 1,057,693
Value of venture contracts 142,655 - - - 142,655
------------ ------------ ----------- ------------ -----------
Total assets $238,112,375 $ 11,625,924 $ 3,779,508 $ 6,957,568 $260,475,375
============ ============ =========== ============ ============
LIABILITIES AND
- ---------------
STOCKHOLDERS' EQUITY
--------------------
Current liabilities:
Current installments on
notes and mortgage
payable $ 7,919,983 $ 2,204,226 $ 148,560 $ 324,312 (B) $ 10,597,081
Current installments on
capital lease
obligations 7,469,959 - 441,085 - 7,911,044
Accounts payable and
accrued expenses 15,120,170 601,968 121,102 1,411,979 (B) 17,255,219
Other current liabilities 234,692 - - - 234,692
Income taxes payable 1,723,176 - - - 1,723,176
------------ ------------ ----------- ------------ ----------
Total current liabilities 32,467,980 2,806,194 710,747 1,736,291 37,721,212
Senior notes payable 52,000,000 - - - 52,000,000
Notes and mortgage payable
less current installments 10,970,014 8,509,352 196,391 (496,626) (B) 19,179,131
Obligations under capital
leases less current
installments 6,750,673 - 1,778,730 (56,079) (B) 8,473,324
Convertible debentures 1,370,000 - - - 1,370,000
Other long-term liabilities 2,539,936 - 3,287 (3,287) (B) 2,539,936
Minority interest 12,723,132 - - - 12,723,132
------------ ------------ ----------- ------------ ------------
Total liabilities 118,821,735 11,315,546 2,689,155 1,180,299 134,006,735
------------ ------------ ----------- ------------ ------------
Stockholders' equity:
Common stock 200,010 100 33 (133) (C) 205,174
5,164 (D)
Common Stock to be issued 358,594 - - - 358,594
Additional paid-in capital 112,158,370 - 117,432 (117,432) (C) 119,331,206
678,000 (H)
6,494,836 (D)
Unrealized appreciation of
investments 16,311 - - - 16,311
Retained earnings 6,557,355 310,278 972,888 (1,283,166) (C) 6,557,355
------------ ------------ ----------- ------------ ------------
Total
stockholders'
equity 119,290,640 310,378 1,090,353 5,777,269 126,468,640
------------ ------------ ----------- ------------ ------------
Total
liabilities and
stockholders'
equity $238,112,375 $ 11,625,924 $3,779,508 $ 6,957,568 $260,475,375
============ ============ ========== =========== ============
</TABLE>
See Notes to Pro Forma Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL RESOURCES, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarter Ended March 31, 1997
(Unaudited)
Medical Capstone Pro Forma
Resources, Management Accessible The Magnet of South Brevard --------------------------
Inc. Group, Inc. MRI Palm Beach, Ltd. Imaging Adjustments Total
----------- ----------- ---------- ---------------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net service revenue $40,592,640 $ 885,927 $ 887,611 $1,024,657 $528,434 $ - $43,919,269
Operating expenses of
services 24,696,363 496,950 151,293 938,729 381,667 - 26,665,002
Provisions for uncollectible
accounts receivable 2,288,998 - - - - - 2,288,998
Corporate general and
administrative 3,363,476 524,153 561,612 - - - 4,449,241
Depreciation and
amortization 2,921,454 124,025 79,886 - - (107,972) (E) 3,328,339
310,946 (F)
----------- ---------- --------- ---------- -------- ----------- -----------
Operating income (loss) 7,322,349 (259,201) 94,820 85,928 146,767 (202,974) 7,187,689
Interest (income)/expense 929,313 87,592 52,585 70,665 14,812 - 1,154,967
----------- ---------- --------- ---------- -------- ----------- -----------
Income/ (loss) before
minority interest and
income taxes 6,393,036 (346,793) 42,235 15,263 131,955 (202,974) 6,032,722
Minority interest in
joint ventures and
limited partnerships 235,016 (36,486) - - - - 198,530
----------- ---------- --------- ---------- -------- ----------- -----------
Income before income taxes 6,158,020 (310,307) 42,235 15,263 131,955 (202,974) 5,834,192
Provision for income taxes 2,556,195 - - - 52,866 - 2,609,061
----------- ---------- --------- ---------- -------- ----------- -----------
Net Income $ 3,601,825 $ (310,307) $ 42,235 $ 15,263 $ 79,089 $ (202,974) $ 3,225,131
=========== ========== ========= ========== ======== =========== ===========
Per Share Data
Primary:
Primary net income per share $ .18 $ .16
=========== ===========
Fully diluted:
Fully diluted net income per
share $ .18 $ .16
=========== ===========
Weighted average shares
outstanding
Primary 19,931,845 20,448,215
Fully diluted 20,274,345 20,790,715
</TABLE>
See Notes to Pro Forma Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL RESOURCES, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
(Unaudited)
Medical Capstone Pro Forma
Resources, Management Accessible The Magnet of South Brevard --------------------------
Inc. Group, Inc. MRI Palm Beach, Ltd. Imaging Adjustments Total
----------- ----------- ---------- ---------------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net service revenue $93,785,117 $3,187,709 $3,550,445 $4,098,626 $2,113,737 $ - $106,735,634
Operating expenses of
services 59,064,156 1,459,798 605,173 3,754,916 1,526,667 - 66,410,710
Provisions for uncollectible
accounts receivable 4,783,306 - - - - - 4,783,306
Corporate general and
administrative 7,779,385 2,096,613 2,246,449 - - - 12,122,447
Depreciation and
amortization 7,465,475 320,099 319,542 - - (431,889) (E) 8,917,012
1,243,785 (F)
----------- ----------- ----------- ---------- ---------- ----------- ------------
Operating income (loss) 14,692,795 (688,801) 379,281 343,710 587,070 (811,896) 14,502,159
Interest (income)/expense 2,968,206 206,366 210,341 282,661 59,249 - 3,726,823
----------- ----------- ----------- ---------- ---------- ----------- -----------
Income/ (loss) before
minority interest and
income taxes 11,724,589 (895,167) 168,940 61,049 527,821 (811,896) 10,775,336
Minority interest in
joint ventures and
limited partnerships 308,381 (90,057) - - - - 218,324
----------- ----------- ----------- ---------- ---------- ----------- -----------
Income before income taxes 11,416,208 (805,110) 168,940 61,049 527,821 (811,896) 10,557,012
Provision for income taxes 4,162,000 - - - 211,464 - 4,373,464
----------- ----------- ---------- ---------- ---------- ----------- -----------
Net Income $ 7,254,208 $ (805,110) $ 168,940 $ 61,049 $ 316,357 $ (811,896) $ 6,183,548
=========== =========== ========== ========== ========== =========== ===========
Per Share Data
Primary:
Primary net income per share $ .62 $ .51
=========== ===========
Fully diluted
Fully diluted net income per
share $ .59 $ .46
=========== ===========
Weighted average shares
outstanding
Primary 11,670,000 12,243,040
Fully diluted 12,903,000 13,476,040
</TABLE>
See Notes to Pro Forma Financial Statements.
<PAGE>
Notes to Pro Forma Consolidated Financial Statements
(A) The financial results of The Magnet of Palm Beach, LTD. and South Brevard
Imaging are included in the balance sheet of Medical Resources, Inc. at
March 31, 1997.
(B) Adjustment reflects the carrying value of the assets and liabilities of
Capstone and Accessible adjusted to the agreed upon purchase price of
such assets acquired and liabilities assumed which were a part of the
acquisitions.
(C) Adjustment reflects the elimination of the common stock, retained earnings
and additional paid-in capital of both Capstone and Accessible.
(D) Adjustment reflects the consideration given by the Company to acquire the
net business assets of both Capstone and Accessible.
(E) Adjustment reflects the net change in depreciation due to the acquisition
of Capstone and Accessible. The increase to fixed assets created from the
acquisition of Accessible was $250,424, the decrease to fixed assets
created from the acquisition of Capstone was $2,409,869. Fixed assets are
depreciated on a straight-line basis over 5 years.
(F) Adjustment reflects the additional amortization of goodwill due to the
acquisition of Capstone, Accessible, West Palm and South Brevard. The
goodwill created from the acquisition of Capstone, Accessible, West Palm
and South Brevard were $17,122,255, $4,068,392, $2,438,216 and
$1,246,832, respectively, is being amortized on a straight-line basis
over 20 years.
(G) Adjustment reflects the buyout of the Capstone limited partners which was
anticipated and probable at the time of the original purchase. It
represents an additional amount toward the Capstone acquisition price
above the fair value of the net assets acquired for Capstone. This
additional consideration therefore is an incremental adjustment to
goodwill.
(H) Adjustment reflects the issuance of stock warrants to 712 Advisory
Services, Inc. for consulting on the Capstone and Accessible
acquisitions. Warrants issued were 160,000 and 66,000 for Capstone and
Accessible respectively and are valued at an estimated $3 per share.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDICAL RESOURCES, INC.
By: /s/ Dennis T. Currier
____________________________________
Dennis T. Currier
Chief Financial Officer
January 7, 1998
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
=========================
AUDITED FINANCIAL STATEMENTS
WITH INDEPENDENT AUDITORS' REPORT
YEAR ENDED DECEMBER 31, 1996
<PAGE>
FINANCIAL STATEMENTS
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
DECEMBER 31, 1996
--------------------
Contents
Page
----
Independent Auditors' Report . . . . . . . . . . 1
FINANCIAL STATEMENTS
Balance Sheet . . . . . . . 2
Statement of Income . . . . . . . 3
Statement of Changes in Capital . . . . . . . 4
Statement of Cash Flows . . . . . . . 5
Notes to Financial Statements . . . . . . . 6
SUPPLEMENTARY FINANCIAL INFORMATION
Schedule I - Operating Expense . . . . . . . 13
<PAGE>
Mark J. Burger, CPA
----------------
Denise Alpert, CPA
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
South Brevard Imaging, A Division of Melbourne Neurologic, P.A.
Melbourne, Florida 32901
We have audited the accompanying balance sheet of South Brevard Imaging, a
division of Melbourne Neurologic, P.A., as of December 31, 1996 and the related
statements of income, changes in capital and cash flows for the year then ended.
These financial statements are the responsibility of South Brevard Imaging's
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of South Brevard Imaging, a
division of Melbourne Neurologic, P.A. as of December 31, 1996, and the results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying information presented on page 13
is presented for the purpose of additional analysis and is not a required part
of the basic financial statements. Such information has been subject to the
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/S/ MARK J. BURGER, P.A.
West Palm Beach, Florida
July 11, 1997
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
BALANCE SHEET
DECEMBER 31, 1996
--------------------
ASSETS
Current Assets:
Cash $ 454,883
Patient accounts receivable, less allowance for
contractual adjustments and doubtful accounts of $161,266 313,270
Inter-divisional receivable 215,877
Medical and office supplies 12,930
----------
Total Current Assets 996,960
Property and Equipment:
Medical and office equipment 2,236,330
Leasehold improvements 679,173
Medical and office furniture and fixtures 56,584
----------
2,972,087
Less: Accumulated depreciation ( 2,336,896)
----------
Net Property and Equipment 635,191
Other Assets:
Loan costs, less accumulated amortization of $5,351 14,716
Deposits 3,450
----------
Total Other Assets 18,166
----------
TOTAL ASSETS $1,650,317
----------
LIABILITIES AND CAPITAL
Current Liabilities:
Accounts payable $ 14,625
Bank overdraft 51,256
Other accrued expenses 28,255
Patient refunds payable 63,493
Accrued management and collection fees 49,601
Current portion of long-term debt 244,011
Current portion of purchase commitments 11,628
Current income taxes payable 224,344
Current portion deferred income taxes payable 99,104
----------
Total Current Liabilities 786,317
Long-term debt, less current portion 352,291
Long-term purchase commitments, less current portion 29,246
Capital 482,463
----------
Total Liabilities and Capital $1,650,317
==========
See accompanying notes.
2
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
--------------------
Revenues:
Gross patient service revenue $ 3,380,811
Less allowances and contractual adjustments ( 1,267,074)
-----------
Net Patient Service Revenue 2,113,737
Operating Expenses 1,555,412
-----------
Income from Operations 558,325
Other Income and (Expenses):
Interest expense ( 66,102)
Interest income 6,853
Gain on sale of equipment 15,000
Other income 13,745
-----------
Total Other Expenses ( 30,504)
-----------
Income Before Income Taxes 527,821
Provision for Income Tax 211,464
-----------
Net Income $ 316,357
===========
See accompanying notes.
3
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
STATEMENT OF CHANGES IN CAPITAL
YEAR ENDED DECEMBER 31, 1996
-------------------------
Capital as of January 1, 1996 $ 166,106
Net income 316,357
----------
Capital as of December 31, 1996 $ 482,463
==========
See accompanying notes.
4
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
Operating Activities
Net income $ 316,357
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 47,372
Amortization 4,013
Gain on sale of equipment ( 15,000)
Changes in Operating Assets and Liabilities:
Decrease in operating assets:
Patient accounts receivable 23,556
Deposits 250
(Decrease) increase in operating liabilities:
Income taxes payable 122,636
Bank overdraft 51,256
Accrued management and collection fees 49,601
Accounts payable and patient refunds payable 10,994
Other accrued expenses 7,614
Purchase commitments ( 12,369)
----------
Net Cash Provided by Operating Activities 606,280
Investing Activities
Proceeds from sale of equipment 15,000
Financing Activities
Repayments of long-term debt ( 175,865)
Increase in inter-divisional receivable ( 103,877)
----------
Net Cash Used in Financing Activities ( 279,742)
----------
Increase in Cash 341,538
Cash at Beginning of Year 113,345
----------
Cash at End of Year $ 454,883
==========
Supplemental Disclosure of Cash Flows Information:
Cash paid during the year for interest expense $ 66,102
==========
Cash paid during the year for income taxes $ 88,829
==========
See accompanying notes.
5
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
South Brevard Imaging, (the "Company") is a division of Melbourne Neurologic,
P.A. The Company was formed to operate a magnetic resonance imaging center
located in Brevard County, Florida. On January 16, 1997, South Brevard Imaging
sold its operating assets to Melbourne Resources, Inc. ( See Note 9. )
Method of Accounting
- --------------------
The Company utilizes the accrual method of accounting for financial statement
reporting. Under this method, revenue is recognized when earned and expenses
are recognized when incurred. A significant portion of the Company's gross
patient service revenue for the year ended December 31, 1996 is from services
rendered to patients covered by Medicare, Medicaid, and managed-care
organizations. Payments for services rendered to patients covered by these
payors are generally less than standard charges. Provisions for contractual
adjustments are made to reduce the standard charges to the contracted
reimbursement rate. Final settlements under these programs are subject to
administrative review and audit.
Use of Estimates
- ----------------
The financial statements have been prepared in conformity with generally
accepted accounting principals and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
Changes in such estimates may affect amounts reported in future periods.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, checking accounts, and money market accounts. Such cash equivalents have
maturities of less than 90 days. There are no restrictions on future uses of
cash or cash equivalents at December 31, 1996.
The Company maintains its cash accounts in a commercial bank located in
Titusville, Florida. Accounts at the bank are guaranteed by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000, per bank. As of December 31, 1996,
there was an uninsured cash balance of $405,689.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is computed using
accelerated and straight-line methods over the estimated useful lives of the
assets as follows:
Leasehold improvements 7 - 40 years
Medical and office equipment 5 - 10 years
Medical and office furniture and fixtures 5 - 10 years
See independent auditors' report.
6
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Property and Equipment - Continued
- ---------------------- ---------
Maintenance and repairs are expensed as incurred; expenditures that enhance the
value of property and equipment or extend their useful lives are capitalized.
When assets are sold or returned, the cost and related accumulated depreciation
are removed from the accounts, and the resulting gain or loss is included in
income. Depreciation expense was $47,372 for the year ended December 31, 1996.
Capital
- -------
Capital represents the inter-divisional contributed capital and the accumulated
retained earnings of the division. The Company is not a separately incorporated
entity and is not authorized under state law to issue shares of stock.
Provision for Income Taxes
- --------------------------
The Company accounts for income taxes under an asset and liability approach.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactment of changes in the tax laws or rates.
Concentration of Credit Risk
- ----------------------------
The Company grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. The
concentration of credit risk with respect to patient accounts receivables is
limited due to the large number of third party payor agreements. The mix of
receivables from patients and third-party payors at December 31, 1996 was as
follows:
Medicare 31.9 %
Commercial insurance companies 27.5
Workers Compensation Fund 17.7
Other patients and third party payors 12.3
Managed Care Organizations 8.3
Medicaid 2.3
-------
100.0 %
=======
NOTE 2 - INTANGIBLE ASSETS
Loan costs are stated at cost, net of accumulated amortization. The Company is
amortizing these items using the straight-line method over a period of five
years. Amortization expense was $4,013 for the year ended December 31, 1996.
See independent auditors' report.
7
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
-------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - PATIENT ACCOUNTS RECEIVABLE
Patient service revenue is recorded at the gross amount billed. Since an
increasing number of the Company's patients are members of various health
maintenance organizations and preferred provider networks, a portion of the
gross billings are subject to contractual adjustments. At December 31, 1996,
net patient accounts receivable were determined as follows:
Gross patient accounts receivable $ 474,536
Less allowance for contractual adjustments
and doubtful accounts ( 161,266)
----------
Net patient accounts receivable $ 313,270
==========
NOTE 4 - OPERATING LEASES
The Company leases a building from CNS Land Trust, a related party, and
equipment from others under operating leases expiring through December 31, 1998.
Annual rent expense, paid to CNS Land Trust inclusive of sales tax and pass-
through expenses, was $130,316 for the year ended December 31, 1996.
At December 31, 1996, future minimum lease payments were as follows:
Year ending December 31:
1997 $ 133,014
1998 130,316
----------
Total minimum operating lease payments $ 263,330
----------
NOTE 5 - LONG-TERM DEBT
Long-term debt at December 31, 1996, consisted
of the following:
Note payable to a bank, secured by certain assets
of the Company payable in monthly installments of
$18,301, including interest at a fixed rate of
9.75% per annum, with final payment due on September
6, 1999. $ 528,040
Note payable to a former shareholder of Melbourne
Neurologic, P.A., payable in quarterly installments
of $5,589, including interest at a fixed rate of
7.5% per annum. The note is classified as a current
liability because it became due upon the sale of
the Company's assets. ( See note 9. ) 68,262
----------
596,302
Less current portion ( 244,011)
----------
$ 352,291
==========
See independent auditors' report.
8
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - LONG-TERM DEBT - CONTINUED
Maturities of long-term debt in future years are as follows:
Year ending December 31:
1997 $ 244,011
1998 193,770
1999 158,521
-----------
Total maturities $ 596,302
-----------
NOTE 6 - TAXES ON INCOME
Provisions for federal and state income taxes in the statement of income
consisted of the following components:
Current taxes:
Federal income tax expense $ 193,373
State income tax expense 30,971
----------
Total 224,344
Deferred tax benefits:
Federal deferred tax benefits ( 11,173)
State deferred tax benefits ( 1,707)
----------
Total ( 12,880)
----------
Total provision for income taxes $ 211,464
==========
Deferred income taxes for the year ended December 31, 1996, reflects the net tax
effects of the temporary differences between the carrying amounts of assets and
the method of accounting used for federal and state income tax purposes. The
company uses the cash method of accounting for federal and state income tax
purposes.
The sources of the temporary differences and their effect on the net deferred
liability at December 31, 1996 are as follows:
Cash to accrual adjustments $ 95,219
Depreciation and amortization 7,102
-----------
Gross deferred tax liability 102,321
Vacation accrual ( 3,217)
Deferred tax asset valuation allowance -
-----------
Gross deferred tax assets ( 3,217)
-----------
Net current deferred liability $ 99,104
-----------
Management has not established a valuation allowance for the deferred asset
attributed to the vacation accrual timing difference. There has been no change
in the valuation allowance during 1996.
See independent auditors' report.
9
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
-------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - TAXES ON INCOME - CONTINUED
Melbourne Neurologic, P.A. allocates the current and deferred tax expense and
related liability as if the Company is taxed as a separate legal entity. There
are no inter-divisional tax obligations in the financial statements at December
31, 1996. There are no changes in the method of allocating the income tax
provisions and related tax assets and liabilities.
The effective tax rate on income before taxes differs from the United States
statutory rate. Since Melbourne Neurologic, P.A. is a professional service
corporation, the federal statutory rate is 36%. The following summary
reconciles taxes at the United States statutory rate with the effective income
tax rate for the Company at December 31, 1996:
Taxes on income at U.S. statutory rate 36.0%
Increase in taxes resulting from:
State income taxes net of federal benefit 3.5%
Other timing differences 0.5%
--------
Taxes on income at effective rate 40.0%
========
NOTE 7 - RELATED PARTY TRANSACTIONS
Due from related Party
- ----------------------
In 1995, the Company advanced Melbourne Neurologic, P.A. $112,000. During 1996,
Melbourne Neurologic, P.A. received advances on a portion of the Company's
patient receivables and the proceeds from the sale of depreciated assets
totaling $103,877. The total amount due from Melbourne Neurologic, P.A. at
December 31, 1996 is $215,877. Management has not charged or accrued interest
on the advances. These advances were repaid to the Company upon the sale to
Melbourne Resources, Inc.
Building Lease
- --------------
The Company has signed a lease with CNS Land Trust for the use of a building
located at 1317 Oak Street, Melbourne, Florida. The lease expires on December
31, 1998. The lease allows for two additional renewals of five years each at
the discretion of the Company.
Management and Collection Fees
- ------------------------------
Melbourne Neurologic, P.A. provides all management services to the Company. The
Company pays a management fee to Melbourne Neurologic, P.A. equal to 20% of net
cash collected and a collection fee of 5% of net cash collected. During the
year ended December 31, 1996, the Company incurred $531,553 of management and
collection fees. Accrued but unpaid management and collection fees to Melbourne
Neurologic, P.A. at December 31, 1996 amounted to $49,601.
See independent auditors' report.
10
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
-------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Purchase Commitment
- -------------------
The Company has entered into a purchase agreement to buy medical imaging film
and other imaging supplies. This agreement calls for the Company to purchase a
minimum of $117,463 of film and supplies per year for a five year period. The
agreement is expected to expire on May 31, 2000, or when the Company has
purchased film and supplies totaling $587,315. If annual volumes rise or fall
20%, the agreement is subject to re-negotiation. The Company received as part
of the purchase commitment, diagnostic imaging equipment. The ownership of the
equipment was assigned to the Company. The equipment at the date of assignment
had a total value of $58,140, which the supplier considers to be a discount off
the purchase price of medical imaging film and other imaging supplies. If the
agreement is terminated prior to completion, the Company would be obligated to
pay the residual value of the equipment determined on a straight-line basis over
the term of the contract.
The related accumulated depreciation attributed to the assigned equipment
amounted to $33,959 at December 31, 1996. Depreciation expense related to
equipment under this purchase commitment was $10,363 for the year ended December
31, 1996. The Company's total purchases under this agreement for 1996 were
$115,368, which has been reduced by $12,369; representing amortization of the
future purchase price commitment for the equipment received under this
agreement.
At December 31, 1996, the future amortization of the purchase price of the
diagnostic imaging equipment is as follows:
Year ending December 31:
1997 $ 11,628
1998 11,628
1999 11,628
2000 5,990
----------
Total purchase price commitment $ 40,874
Less current portion ( 11,628)
----------
Long-term purchase price commitment $ 29,246
==========
NOTE 9 - SUBSEQUENT EVENTS
Melbourne Resources, Inc., a subsidiary of Medical Resources, Inc., completed
the purchase of certain assets and assumed certain payables and accrued expenses
of the Company on January 16, 1997. At that time, a note payable in the amount
of $68,262 to a former shareholder of Melbourne Neurologic, P.A. became due and
was paid by the Company. Melbourne Resources, Inc., agreed to assume the
Company's obligation on a note payable to a bank with a balance of $528,040 at
December 31, 1996.
See independent auditors' report.
11
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
12
<PAGE>
SOUTH BREVARD IMAGING,
A DIVISION OF MELBOURNE NEUROLOGIC, P.A.
SCHEDULE I - OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1996
-------------------------
OPERATING EXPENSES:
Advertising $ 11,194
Amortization 4,013
Bank charges 795
Collection costs 6,790
Depreciation 47,372
Dues and subscriptions 3,556
Employee benefits 67,225
Employee lease fees 244,722
Equipment rent 277
Film supplies 115,368
HCCCB assessment 25,486
Housekeeping 5,350
Insurance 22,356
Legal and accounting 14,997
Management fees 531,554
Medical and lab supplies 92,301
Medical equipment maintenance 121,617
Miscellaneous expenses 2,752
Office supplies 5,246
Operating supplies 856
Outside storage 3,988
Postage 12,518
Professional fees 14,862
Property taxes 18,835
Rent 130,316
Repairs 12,366
Seminar and educational costs 257
Uniforms, linen and laundry 1,340
Utilities and telephone 30,911
Vehicle and transportation 6,192
-----------
TOTAL OPERATING EXPENSES $ 1,555,412
===========
See independent auditors' report.
13
<PAGE>
The Magnet of Palm Beach, Ltd.
( A Limited Partnership )
=============================
Audited Financial Statements
with Independent Auditors' Report
Year Ended December 31, 1996
<PAGE>
Financial Statements
THE MAGNET OF PALM BEACH, LTD.
(A Limited Partnership)
December 31, 1996
--------------------
Contents
Page
----
Independent Auditors' Report . . . . . . . 1
Financial Statements
Balance Sheet . . . . . . . 2
Statement of Income . . . . . . . 3
Statement of Changes in Partners' Deficit . . . . . . . 4
Statement of Cash Flows . . . . . . . 5
Notes to Financial Statements . . . . . . . 6
Supplementary Financial Information
Schedule I - Operating Expenses . . . . . . . 16
<PAGE>
Mark J. Burger, CPA
--------------------
Denise Alpert, CPA
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
MRI of Palm Beach, Inc., General Partner of
The Magnet of Palm Beach, Ltd.
West Palm Beach, Florida
We have audited the accompanying balance sheet of The Magnet of Palm Beach,
Ltd., as of December 31, 1996, and the related statements of income, changes in
partners' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of The Magnet of Palm Beach, Ltd.'s
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Magnet of Palm Beach, Ltd.,
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying information presented on page 16
is presented for the purpose of additional analysis and is not a required part
of the basic financial statements. Such information has been subject to the
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/S/ MARK J. BURGER, P.A.
West Palm Beach, Florida
July 25, 1997
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A Limited Partnership)
BALANCE SHEET
December 31, 1996
--------------------
Assets
Current Assets:
Cash $ 90,919
Patient accounts receivable, less allowance for
contractual adjustments and doubtful
accounts of $991,594 1,099,729
Other receivables 500
Medical and office supplies 48,721
Prepaid expenses 40,198
-------------
Total Current Assets 1,280,067
Property and Equipment:
Medical and computer equipment 4,114,967
Building and land 1,133,711
Leasehold improvements 346,584
Furniture and office equipment 130,946
Signs and security system 12,652
-------------
5,738,860
Less accumulated depreciation and amortization (3,860,902)
-------------
Net Property and Equipment 1,877,958
Other Assets:
Deposits 116,047
Intangible assets, net of
accumulated amortization of $39,459 41,356
-------------
Total Other Assets 157,403
-------------
TOTAL ASSETS $ 3,315,428
-------------
LIABILITIES AND PARTNERS' DEFICIT
Current Liabilities:
Accounts payable $ 44,975
Patient refunds payable 42,289
Current portion of capitalized lease obligations 524,213
Current portion of long-term debt 242,681
Accrued management and radiologist fees 882,974
Accrued expenses and payroll taxes 178,130
-------------
Total Current Liabilities 1,915,262
Capitalized Lease Obligations, less current portion 714,003
Long-Term Debt, less current portion 886,431
Partners' Deficit (200,268)
-------------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 3,315,428
=============
See accompanying notes.
2
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
-------------------------
Net Patient Service Revenue:
Gross Patient Service Revenue $7,985,904
Less allowances and contractual adjustments (3,887,278)
__________
Net Patient Service Revenue 4,098,626
Operating Expenses 3,773,418
__________
Operating Income 325,208
Other Income and (Expenses):
Interest expense (285,421)
Interest income 2,760
Other income 18,502
----------
Total Other Expenses (264,159)
__________
Net Income $61,049
==========
See accompanying notes.
3
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
YEAR ENDED DECEMBER 31, 1996
-------------------------
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital (Deficit)
as of January 1, 1996 $(604,370) $343,053 $(261,317)
Net income 18,315 42,734 61,049
------------ --------- ------------
Partners' Capital (Deficit)
as of December 31, 1996 $(586,055) $385,787 $(200,268)
------------ --------- ------------
See accompanying notes.
4
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
Operating Activities
Net income $ 61,049
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 578,007
Changes in Operating Assets and Liabilities:
(Increase) decrease in assets:
Accounts receivable 425,765)
Prepaid expenses and medical and office supplies (41,230)
(Decrease) increase in liabilities:
Accounts payable and patient refund payable 32,431
Accrued liabilities 472,369
----------
Net Cash Provided by Operating Activities 676,861
Investing Activities
Acquisition of building and land (1,133,711)
Acquisition of operating equipment (133,006)
Increase in deposits on operating equipment (9,741)
----------
Net Cash (Used) in Investing Activities (1,276,458)
Financing Activities
Receipt of related party receivable 55,704
Additions to short-term notes 120,239
Additions to long-term debt 874,395
Payment of 1995 partner distributions (200,000)
Repayments of short-term notes (13,886)
Repayments of long-term debt (83,718)
Repayments of capital leases (790,179)
Payment of finance costs related to
building acquisition (30,556)
----------
Net Cash (Used) by Financing Activities (68,001)
----------
Decrease in Cash (667,598)
Cash at Beginning of Year 758,517
----------
Cash at End of Year $ 90,919
==========
Supplemental Disclosure of Cash Flows Information:
Cash paid during the year for interest expense $ 283,644
==========
See accompanying notes.
5
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Magnet of Palm Beach, Ltd. (the "Partnership") is a limited partnership
formed to operate a comprehensive diagnostic imaging center located in Palm
Beach County, Florida. On March 10, 1997, The Magnet of Palm Beach, Ltd., sold
its operating assets to West Palm Beach Resources, Inc. ( See Note 8.)
Method of Accounting
- --------------------
The Partnership utilizes the accrual method of accounting for financial
statement reporting. Under this method, revenue is recognized when earned and
expenses are recognized when incurred. Approximately 87.8% of the gross patient
service revenue for the year 1996, relates to services rendered to patients
covered by Medicare, Medicaid, and managed care organizations. Payments for
services rendered to patients covered by these payors are generally less than
standard charges. Provisions for contractual adjustments are made to reduce the
standard charges to the contracted reimbursement rate. Final settlements under
these programs are subject to administrative review and audit.
Use of Estimates
- ----------------
The financial statements have been prepared in conformity with generally
accepted accounting principals and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
Changes in such estimates may affect amounts reported in future periods.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, checking accounts, and money market accounts. Such cash equivalents have
maturities of less than 90 days. There are no restrictions on future uses of
cash or cash equivalents at December 31, 1996.
The Partnership maintains its cash accounts in two commercial banks located in
Palm Beach County. Accounts at each bank are guaranteed by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000 per bank. There were no uninsured
cash balances at December 31, 1996.
Recoverability of Long - Lived Assets
- -------------------------------------
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Partnership
determined that no impairment loss need be recognized for applicable assets of
continuing operations.
See independent auditors' report.
6
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Depreciation is computed using
accelerated and straight-line methods over the estimated useful lives of the
assets as follows:
Building 39.5 years
Leasehold improvements 31 - 39 years
Medical and computer equipment 5 years
Furniture and office equipment 5 - 7 years
Signs and security equipment 10 years
Maintenance and repairs are expensed as incurred; expenditures that enhance the
value of property and equipment or extend their useful lives are capitalized.
When assets are sold, the cost and related accumulated depreciation are removed
from the accounts, and the resulting gain or loss is included in income.
Depreciation expense was $568,716 for the year ended December 31, 1996.
Concentration of Credit Risk
- ----------------------------
The Partnership grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements. The
concentration of credit risk with respect to patient accounts receivables is
limited due to the large number of third party payor agreements. The mix of
receivables from patients and third-party payors at December 31, 1996, was as
follows:
Third party managed-care payors 27.06 %
Health Options 20.13
Humana Health Plans 15.22
Letters of Protections 11.61
Commercial insurance and self-pay patients 11.27
Medicare 9.04
Medicaid 5.67
--------
100.00 %
========
See independent auditors' report.
7
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
- ------------
No provision for income taxes is reflected in the financial statements since the
Partnership's taxable income or loss is taxed at the partner level, rather than
the partnership level.
The following amounts represent the differences between net book income for
financial reporting purposes and net taxable income:
Net Book Income per Accompanying Financial Statements $ 61,049
Originating differences
1996 Allowance for doubtful accounts 83,653
Amortization of syndication costs 181
Reversing differences
1995 Allowance for doubtful accounts ( 50,770)
Permanent differences
Non-deductible key man life insurance premium 788
Non-deductible entertainment expenses 1,643
----------
Net Taxable Income $ 96,544
==========
NOTE 2 - PATIENT ACCOUNTS RECEIVABLE
Patient service revenue is recorded at the gross amount billed. Since a
majority of the Partnership's patients are members of various health maintenance
organizations and preferred provider networks, a significant portion of the
gross billings are subject to contractual adjustments. At December 31, 1996,
net patient accounts receivable were determined as follows:
Gross patient accounts receivable $ 2,091,323
Less: Contractual adjustments ( 907,942)
Allowance for doubtful accounts ( 83,652)
------------
Net patient accounts receivable $ 1,099,729
============
NOTE 3 - INTANGIBLE ASSETS
Organization, start-up, and finance costs are stated at cost, net of accumulated
amortization. The Partnership is amortizing these items over periods ranging
from five to fifteen years. Amortization expense was $9,291 for the year ended
December 31, 1996.
See independent auditors' report.
8
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
--------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - OPERATING AND CAPITAL LEASES
Operating Leases
- ----------------
The Partnership leases equipment and administrative office space from others
under operating leases expiring through 2003. Annual rent expense, inclusive of
sales tax and pass-through expenses, related to equipment and administrative
office space under operating leases was $76,384 for the year ended December 31,
1996.
At December 31, 1996, future minimum lease payments were as follows:
Year ending December 31:
1997 $ 70,209
1998 70,209
1999 67,239
2000 66,645
2001 66,645
Thereafter 77,752
---------
Total minimum lease payments $ 418,699
=========
Capital Leases
- --------------
The Partnership leases equipment and leasehold improvements under capital leases
which begin to expire in 1997. The following is an analysis of the leased
property under capital leases by major classes:
Classes of Property:
Medical equipment $3,733,204
Leasehold improvements 344,821
Computer equipment 88,028
Office equipment 39,870
----------
4,205,923
Less accumulated amortization (3,646,948)
----------
Adjusted net book value $ 558,975
==========
Amortization expense related to equipment and leaseholds under capital leases
was $486,204 for the year ended December 31, 1996.
See independent auditors' report.
9
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
---------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - OPERATING AND CAPITAL LEASES
Capital Leases - Continued
- --------------------------
At December 31, 1996, the present value of minimum capital lease payments were
as follows:
Year ending December 31:
1997 $ 635,354
1998 529,532
1999 214,250
2000 19,600
2001 2,441
----------
Total minimum lease payments 1,401,177
Amount representing interest imputed at 9% - 12% ( 162,961 )
----------
Present value of capital lease obligations 1,238,216
Less current portion ( 524,213 )
----------
$ 714,003
==========
NOTE 5 - LONG-TERM DEBT
Long-term debt at December 31, 1996, consisted of the following:
Installment note payable to Great Southern
Bank, bearing interest at a rate equivalent
to the prime rate as published in the Wall
Street Journal plus 1.50%, or 9.75 percent
(at December 31, 1996, the prime interest rate
was 8.25 percent). The note matures on
January 1, 1999, and is collateralized by the
accounts receivable of the Partnership, a
life insurance policy on the life of Robert A.
Cooney, M.D., and personal guarantees from certain
shareholders of MRI of Palm Beach, Inc. (the
General Partner) $ 96,242
Installment note payable to the Independent Order
of Foresters, bearing a fixed interest rate of 8.25%.
The note matures on February 1, 2011, and is
collateralized by the land and building located at
4477 Medical Center Way., West Palm Beach, FL 849,705
Installment note payable to Nationwide Insurance for
commercial liability insurance. There is no stated
interest rate for this obligation. The note matures
on November 11, 1997, when the insurance policy
expires. 18,462
See independent auditors' report.
10
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
---------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - LONG-TERM DEBT - CONTINUED
Note payable to MRI of Palm Beach, Inc., bearing
interest at 5.5% per annum. Principal and interest
are due on September 30, 1997. ( See Note 6. ) 33,109
Installment note payable to Great Southern Bank,
bearing interest at a rate equivalent to the prime
rate as published in the Wall Street Journal plus
1.50%, or 9.75 percent ( at December 31, 1996 the
prime interest rate was 8.25 percent). The note
matures on March 2, 1997, and is collateralized by the
accounts receivable of the Partnership and personal
guarantees from certain shareholders of MRI of Palm
Beach, Inc. 100,000
Installment note payable to Robert A. Cooney, M.D.
bearing interest at a rate equivalent to the prime
rate as published in the Wall Street Journal plus 2.00%,
or 10.25% ( at December 31, 1996 the prime interest rate
was 8.25 percent). The note matures on March 30, 2000,
and is collateralized by equipment.
( See Note 6. ) 31,594
---------
1,129,112
Less current portion ( 242,681)
---------
$ 886,431
=========
Maturities of long-term debt for the next five years and after are as follows:
Year ending December 31:
1997 $ 242,681
1998 93,937
1999 48,885
2000 43,811
2001 45,835
Thereafter 653,963
----------
Total maturities $ 1,129,112
==========
NOTE 6 - RELATED PARTY TRANSACTIONS
Debt
- ----
MRI loaned the Partnership $33,109 during 1996. Under the terms of the note,
interest accrues at 5.5% per annum. Principal and interest are due on September
30, 1997. Interest expense accrued but unpaid on this note was $1,777 for the
year ended December 31, 1996.
See independent auditors' report.
11
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
---------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - RELATED PARTY TRANSACTIONS - CONTINUED
Management Fees
- ---------------
The General Partner, MRI of Palm Beach, Inc. (MRI), provides all management
services to the Partnership. The Partnership pays a management fee to MRI equal
to 5% of net cash collected. During the year ended December 31, 1996, the
Partnership incurred $242,581 of management fees. Accrued, but unpaid
management fees to MRI at December 31, 1996 amounted to $337,577.
On September 25, 1996, the shareholders of MRI elected Patricia Cooney Sweeney
the sole director of MRI, replacing Robert A. Cooney, M.D. As sole director of
the MRI board, Patricia Cooney Sweeney elected herself president and secretary,
and MRI shareholder Joseph F. Cooney, vice president and treasurer.
Radiologist Fees
- ----------------
In 1996, the Partnership accrued $509,558 for radiology fees to Robert A.
Cooney, M.D., P.A. which represent 15 percent of the net cash collected by the
Partnership during 1996. In addition, the Partnership estimated and accrued
fees of $65,602 related to services rendered by Robert A. Cooney, M.D., P.A.
which have been billed by the Partnership, but have not been collected during
the year ended December 31, 1996. The Partnership paid $515,718 of the accrued
radiologist fees to Robert A. Cooney, M.D., P.A. during 1996.
Accrued, but unpaid radiologist fees due to Robert A. Cooney, M.D., P.A. at
December 31, 1996, amounted to $392,108. Management disputes that these amounts
are due and owing to Robert A. Cooney, M.D. and Robert A. Cooney, M.D., P.A. (
See Note 7 )
On October 16, 1996, Robert A. Cooney, M.D. and Robert A. Cooney, M.D., P.A.
resigned from providing radiology services to the Partnership. An unrelated
party provided radiology services to the Partnership from October 16, 1996 to
December 31, 1996.
Related Party Note Payable
- --------------------------
On March 30, 1995, Robert A. Cooney, M.D. borrowed $50,000 from Palm Beach
National Bank and Trust Company to secure financing for equipment currently
being utilized by the partnership. The loan matures on March 30, 2000. The
note bears a variable interest rate which is equal to 2.0 percentage points
above the prime rate of Large U.S. Money Center Commercial Banks as published in
The Wall Street Journal. Dr. Cooney simultaneously executed an agreement with
the Partnership mirroring his agreement with Palm Beach National Bank and Trust
Company. Interest expense paid on this note for 1996 was $3,523.
See independent auditors' report.
12
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
---------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Letters of Credit
- -----------------
The Partnership has an outstanding irrevocable standby letter of credit with
Great Southern Bank in the amount of $144,220. This letter of credit, which
expires on December 1, 1997, is collateral for the Partnership's obligations to
third parties for security deposits and future rent payments under capital
leases. The callable promissory notes described below and the accounts
receivable of the Partnership serve as collateral for this standby letter of
credit.
Litigation
- ----------
Robert A. Cooney M.D., and Robert A. Cooney, M.D., P.A., (the " Plaintiffs ")
filed a complaint on November 4, 1996 against the Partnership for damages
asserting breach of an open account, breach of contract, breach of a contract
implied in fact, and breach of a contract implied in law. Each of the
Plaintiffs' counts is premised upon a purported agreement between the Plaintiffs
and the Partnership, wherein it is alleged the parties agreed that Robert A.
Cooney, M.D., P.A. through Robert A. Cooney, M.D. would provide radiology
services to the Partnership, in exchange for payment varying from 15 percent to
20 percent of net fees collected by the Partnership. The Plaintiffs allege that
the Partnership has failed to make the agreed upon payments. In addition to the
fees set forth in Note 6 herein, the Plaintiffs are seeking to recover an
additional sum of approximately $192,000. This amount represents the difference
in the rate used to calculate the radiology fees in these financial statements
and the 20 percent rate asserted by the Plaintiffs. Management has not accrued
any of the additional fees stated above in these financial statements. The
Partnership has filed a counter claim. In its suit, management is disputing
that any fees are due and owing Robert A. Cooney, M.D. or Robert A. Cooney,
M.D., P.A. Since the partnership is vigorously defending itself, and, since it
is too early to determine the outcome of this matter, no additional amounts have
been accrued in these financial statements.
The accompanying balance sheet reflects a deposit made on July 9, 1996, in the
amount of $13,780 related to a disputed purchase contract for CT equipment worth
approximately $130,000, plus a three year service contract at an annual cost of
$104,000. The vendor has filed a suit to enforce the purchase contract.
Delivery of the equipment has not been made. The ultimate amount of the
obligation, if any, to the Partnership is not known at present.
Callable Promissory Notes
- -------------------------
During the year, certain limited partners executed promissory notes to the
Partnership to serve as collateral for the irrevocable standby letter of credit
referenced above. The notes are callable by the Partnership. If the
Partnership is required to call these notes, the notes will bear interest at an
annual interest rate of 18 percent. As of December 31, 1996, no amounts are due
as the partnership has not called these notes.
See independent auditors' report.
13
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Purchase Commitment
- -------------------
The Partnership has entered into a purchase agreement to buy medical imaging
film. This agreement calls for the Partnership to purchase a minimum of
$105,000 of film per year for a five-year period. The agreement is expected to
expire on March 16, 1998. The Partnership must reach at least 80% of their film
purchase commitment in any year of the agreement, otherwise the agreement is
subject to renegotiation. The Partnership received as part of the purchase
commitment, diagnostic imaging equipment. Ownership of the equipment transfers
to the Partnership upon completion of the commitment. At the date the agreement
was signed, the equipment had a total value of $124,500. If the agreement is
terminated prior to completion, title to the equipment does not transfer to the
Partnership.
NOTE 8 - SUBSEQUENT EVENTS
On March 10, 1997, the Partnership completed a transaction to sell substantially
all of its net assets to West Palm Resources, Inc., a subsidiary of Medical
Resources, Inc. The purchase included the patient accounts receivable and the
assumption of certain payables and accrued expenses, including of $158,616 of
the accrued radiology fees. The purchaser also assumed substantially all
capital leases and debt.
See independent auditors' report.
14
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
15
<PAGE>
THE MAGNET OF PALM BEACH, LTD.
(A LIMITED PARTNERSHIP)
SCHEDULE I - OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1996
-------------------------
OPERATING EXPENSES:
Advertising $ 39,855
Amortization 9,291
Bad debts 32,883
Bank charges 1,904
Casual labor 15,227
Collection costs 5,322
Contributions 2,361
Depreciation 568,716
Dues and subscriptions 1,124
Electronic claim fees 12,113
Employee benefits 45,882
Entertainment 16,580
Film supplies 122,107
Insurance 15,933
Key man insurance 788
Licenses and taxes 127,095
Line of credit bank charges 4,200
Maintenance contracts 344,248
Management fees 242,581
Medical supplies 126,363
Miscellaneous expenses 10,055
Office supplies 50,793
Operating supplies 1,470
Payroll taxes 64,939
Postage 14,378
Professional fees 820,049
Real Estate Taxes 12,735
Rent 83,000
Repairs 21,332
Salaries 851,770
Seminar and educational costs 11,347
Travel 1,370
Uniforms 493
Utilities and telephone 91,000
Workers compensation insurance 4,114
----------
TOTAL OPERATING EXPENSES $3,773,418
==========
See independent auditors' report.
16
<PAGE>
Accessible MRI of Montgomery
County, Inc.
====================================
Financial Statements
September 30, 1996
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
CONTENTS
--------
Page
----
Independent Auditors' Report . . . . . . . 1
Balance Sheet . . . . . . . 2
Statement of Operations . . . . . . . 3
Statement of Retained Earnings . . . . . . . 4
Statement of Cash Flows . . . . . . . 5
Notes to Financial Statements . . . . . . . 6 - 11
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Accessible MRI of Montgomery County, Inc.
We have audited the accompanying Balance Sheet of Accessible MRI of Montgomery
County, Inc. (an S corporation) as of September 30, 1996, and the related
Statements of Operations, Retained Earnings and Cash Flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 the significant estimates made by
management as well as evaluating the overall presentation of the financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Accessible MRI of Montgomery
County, Inc. as of September 30, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ellin & Tucker, Chartered
Certified Public Accountants
Baltimore, Maryland
August 6, 1997
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
BALANCE SHEET
September 30, 1996
ASSETS
------
CURRENT ASSETS:
--------------
Cash and Cash Equivalents $ 186,566
Patient Receivables, Net of Allowance
for Doubtful Accounts of $310,000 446,367
Due from Affiliate 46,204
Prepaid Expenses and Other Current Assets 14,348
----------
Total Current Assets 693,485
----------
PROPERTY AND EQUIPMENT:
----------------------
Property and Equipment, at Cost, Net
of Accumulated Depreciation (Notes 2 and 3) 206,483
Equipment Held Under Capital Leases,
Net of Accumulated Amortization (Note 4) 797,333
----------
Property and Equipment - Net 1,003,816
----------
OTHER ASSETS:
------------
Organizational Costs, Net of Accumulated
Amortization of $9,903 707
Deferred Lease Costs, Net of Accumulated
Amortization of $8,236 4,189
Deferred Start-up Costs, Net of
Accumulated Amortization of $19,600 1,400
Deposits 36,314
----------
Total Other Assets 42,610
----------
Total Assets $1,739,911
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
-------------------
Accounts Payable and Accrued Expenses $ 93,333
Current Maturities of Long-Term Debt (Note 3) 73,649
Current Maturities of Obligations
Under Capital Leases (Note 4) 160,570
----------
Total Current Liabilities 327,552
DEFERRED RENT 6,618
LONG TERM DEBT (Note 3) 60,950
OBLIGATIONS UNDER CAPITAL LEASES (Note 4) 864,693
----------
Total Liabilities 1,259,813
----------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
--------------------
Common Stock; $.01 Par Value, 5,000 Share Authorized;
3,185 Shares Issued and Outstanding 32
Additional Paid-in Capital 85,023
Retained Earnings 395,043
----------
Total Stockholders' Equity 480,098
----------
Total Liabilities and Stockholders' Equity $1,739,911
==========
(See Independent Auditors' Report and Accompanying Notes)
2
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Patient Service Fees $ 2,122,380
LESS: Adjustments 463,841
-----------
Net Patient Service Revenue 1,658,539
-----------
DIRECT EXPENSES:
- ---------------
Salaries - Technician 72,902
Radiologist Fees 121,125
Medical Supplies 90,141
Laundry and Linen 2,308
Depreciation 152,567
Nurses' Services 7,364
-----------
Total Direct Expenses 446,407
-----------
Gross Profit 1,212,132
OPERATING EXPENSES 1,083,084
-----------
Income from Operations 129,048
OTHER INCOME, NET 40,591
GAIN ON SALE OF EQUIPMENT 71,660
INTEREST EXPENSE (98,313)
-----------
Net Income $ 142,986
===========
(See Independent Auditors' Report and Accompanying Notes)
3
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
RETAINED EARNINGS - BEGINNING OF YEAR $ 252,057
Net Income 142,986
----------
RETAINED EARNINGS - END OF YEAR $ 395,043
==========
(See Independent Auditors' Report and Accompanying Notes)
4
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
OPERATING ACTIVITIES:
- --------------------
Net income $ 142,986
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on Sale of Equipment (71,660)
Depreciation and amortization 188,157
Increase in Patient Receivables (21,859)
Decrease in Other Current Assets 12,230
Increase in Deposits (11,314)
Increase in Accounts Payable and Accrued
Expenses 52,696
Decrease in Deferred Rent (1,765)
---------
Net Cash Provided by Operating
Activities 289,471
---------
INVESTING ACTIVITIES:
- --------------------
Purchases of Equipment (124,798)
Net Repayments of Advances to Affiliate 24,739
Proceeds from Sale of Equipment 275,000
---------
Net Cash Provided by Investing
Activities 174,941
---------
FINANCING ACTIVITIES:
- --------------------
Lease Costs Paid (3,153)
Principal Repayments of Long-Term Debt (49,923)
Principal Repayments of Capital Lease Obligations (469,034)
Proceeds from Long-Term Debt 208,723
---------
Net Cash Used in Financing Activities (313,387)
---------
Net Increase in Cash
and Cash Equivalents 151,025
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 35,541
---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 186,566
=========
(See Independent Auditors' Report and Accompanying Notes)
5
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Company provides magnetic resonance imaging services to patients from the
Washington, D.C. metropolitan area. Services are billed to patients or their
health insurance providers, and patient receivables are stated at the amounts
that the Company expects to collect after applicable adjustments.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company believes it is not exposed to
any significant credit risk on cash and cash equivalents.
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
----------------------
Property and Equipment are stated at cost. Depreciation is calculated using
straight-line and accelerated methods over the estimated useful lives of the
related assets. Depreciation expense for the year ended September 30, 1996
was $179,947.
(See Independent Auditors' Report.)
6
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Advertising
-----------
The Company expenses advertising costs as incurred. The total amount charged
to advertising expense during the year ended September 30, 1996 was $189,530.
Amortization
------------
Organizational costs and deferred start-up costs are being amortized using
the straight-line method over five years.
Deferred lease costs are being amortized using the straight-line method over
the terms of the related leases.
Income Taxes
------------
The Company has elected to be treated as an S corporation for income tax
purposes. Consequently, income taxes have not been provided as the tax
effects of company activities are included in the individual income tax
returns of its stockholders.
2. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at September 30, 1996 consisted of the following:
Leasehold Improvements $ 206,696
Furniture and Fixtures 23,601
Office Equipment 57,872
Auto 12,492
---------
300,661
Less: Accumulated Depreciation 94,178
---------
Property and Equipment- Net $ 206,483
=========
(See Independent Auditors' Report.)
7
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. LONG-TERM DEBT
--------------
Long-term debt at September 30, 1996 consisted of the following:
Finance Company; monthly installments of
$1,934 including interest at 12% until 1998;
guaranteed by the Company's stockholders $ 30,165
Finance Company; monthly installments of
$5,138 including interest at 11% until 1998;
collateralized by equipment; guaranteed by
the Company's stockholders 104,434
-----------
134,599
Less: Current Maturities 73,649
Long-Term Debt $ 60,950
===========
Long-term debt at September 30, 1996 matures as follows:
Year Ending September 30, 1997 $ 73,649
1998 60,950
4. CAPITAL LEASES
--------------
The Company is leasing equipment under capital leases that expire in 1997 and
2001. Equipment held under the capital leases at September 30, 1996 consisted
of the following:
Equipment $ 872,000
Less: Accumulated Depreciation 74,667
-----------
Equipment Held Under Capital Leases-Net $ 797,333
===========
(See Independent Auditors' Report.)
8
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Minimum future lease payments under these leases as of September 30, 1996 are as
follows:
Year Ending September 30, 1997 $ 236,068
1998 260,892
1999 260,892
2000 260,892
2001 217,410
-----------
Total Minimum Lease Payments 1,236,154
Less: Amount Representing Interest 210,891
-----------
Present Value of Net Minimum Lease Payments $1,025,263
===========
Payments are guaranteed by the Company's stockholders.
The Company and its affiliate (Note 7) have an agreement with their primary
medical imaging film manufacturer under which 15% discounts on all purchases of
the manufacturer's product are credited to an account maintained by the
manufacturer on behalf of the Company and its affiliate. The manufacturer makes
certain capital lease payments on behalf of the company and its affiliate from
the funds credited to this account. Amounts credited to this account are
recorded as reductions of medical supplies expense by the Company and its
affiliate. During the year ended September 30, 1996, purchase discounts of
$29,564 were credited to this account and capital lease payments of $30,757 were
charged to the account, $15,221 of which were capital lease payments made on
behalf of the Company and $15,536 of which were capital lease payments made on
behalf of the affiliate. The balance in the account at September 30, 1996 was
$3,816.
(See Independent Auditors' Report.)
9
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. COMMITMENTS
-----------
The Company is leasing office and storage space in Silver Spring, Maryland
under operating leases expiring in the year 2002. The office lease is
guaranteed by a stockholder.
Minimum future rentals under the leases are as follows:
Year Ending September 30, 1997 $ 66,355
1998 66,796
1999 68,798
2000 70,861
2001 72,985
2002 51,474
--------
Total Minimum Future Rentals $397,269
========
Rent expense for the year ended September 30, 1996 was $58,599.
The Company has contracts with various insurance providers under which agreed-
upon amounts must be accepted as payment in full for patient services.
The Company and its affiliate (Note 7) have various contracts for advertising
which commit the Company and its affiliate to a minimum of $202,000 in
advertising during 1997.
The Company and its affiliate (Note 7) have employment contracts with two
individuals which commit the Company and its affiliate to annual base salaries
of $275,000 plus incentive payments based on numbers of patients serviced. The
contracts expire in 1997.
The Company has an employment contract with another individual which commits
the Company to an annual base salary of $30,000 plus incentive payments based
on numbers of patients serviced. The contract expires in 1997.
(See Independent Auditors' Report.)
10
<PAGE>
ACCESSIBLE MRI OF MONTGOMERY COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. RETIREMENT PLAN
---------------
The Company has a 401(k) profit sharing plan covering all employees meeting
minimum service and age requirements. The Company matches 50% of the first
6% of participant contributions. Contributions made by the Company for the
year ended September 30, 1996 were $4,024.
7. RELATED PARTY TRANSACTIONS
--------------------------
Another magnetic imaging service center which is affiliated with the Company
through common ownership provides certain administrative services to the
Company. Amounts due from the affiliate result from advances to the
affiliate net of reimbursements for services.
General and administrative expenses include $25,204 in charges for services
rendered by the affiliate during the year ended September 30, 1996.
The Company has guaranteed up to $40,000 of the affiliate's debt to a
finance company.
The Company has leased office space from one of its stockholders for $2,000
per month through March 2002 (Note 5). Rent expense under the lease was
$18,000 for the year ended September 30, 1996.
8. SUPPLEMENTARY CASH FLOW INFORMATION
-----------------------------------
Cash payments during the year ended September 30,1996 included interest of
$98,313.
Capital lease obligations of $815,000 were incurred during the year ended
September 30, 1996 when the Company entered into an equipment lease.
9. SUBSEQUENT EVENT
----------------
The Company and its affiliate (Note 7) entered into an agreement to sell
substantially all of their assets in May 1997. As consideration for the
sale, the Company and its affiliate received $2,828,872 in cash and
$1,500,000 in the purchaser's common stock, and the purchaser assumed all
debt (Note 3), capital lease obligations (Note 4) and commitments (Note 5)
of the Company and its affiliate.
(See Independent Auditors' Report.)
11
<PAGE>
Accessible MRI of Baltimore
County, Inc.
======================================
September 30, 1996
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
CONTENTS
--------
Page
----
Independent Auditors' Report . . . . . . . 1
Balance Sheet . . . . . . . 2
Statement of Operations . . . . . . . 3
Statement of Accumulated Deficit . . . . . . . 4
Statement of Cash Flows . . . . . . . 5
Notes to Financial Statements . . . . . . . 6 - 11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Accessible MRI of Baltimore County, Inc.
We have audited the accompanying Balance Sheet of Accessible MRI of Baltimore
County, Inc. (an S corporation) as of September 30, 1996, and the related
Statements of Operations, Retained Earnings and Cash Flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 the significant estimates made by
management as well as evaluating the overall presentation of the financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Accessible MRI of Baltimore
County, Inc. as of September 30, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ellin & Tucker, Chartered
Certified Public Accountants
Baltimore, Maryland
August 6, 1997
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
BALANCE SHEET
September 30, 1996
ASSETS
------
CURRENT ASSETS:
--------------
Cash and Cash Equivalents $ 121,619
Patient Receivables, Net of Allowance
for Doubtful Accounts of $210,000 408,439
Due from Stockholders 9,321
Other Current Assets 13,033
-----------
Total Current Assets 552,412
-----------
PROPERTY AND EQUIPMENT:
----------------------
Property and Equipment, at Cost, Net
of Accumulated Depreciation (Notes 2 and 3) 225,041
Equipment Held Under Capital Leases,
Net of Accumulated Amortization (Note 4) 1,112,612
-----------
Property and Equipment - Net 1,337,653
-----------
OTHER ASSETS:
------------
Lease Acquisition Costs, Net of
Accumulated Amortization of $6,980 7,634
Deposits 52,880
-----------
Total Other Assets 60,514
-----------
Total Assets $ 1,950,579
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
-------------------
Accounts Payable and Accrued Expenses $ 188,450
Current Maturities of Long-Term Debt (Note 3) 106,558
Current Maturities of Obligations
Under Capital Leases (Note 4) 241,852
Due to Affiliate (Note 7) 46,204
-----------
Total Current Liabilities 583,064
DEFERRED RENT 30,747
LONG TERM DEBT (Note 3) 241,318
OBLIGATIONS UNDER CAPITAL LEASES (Note 4) 1,069,143
-----------
Total Liabilities 1,924,272
-----------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
--------------------
Common Stock; $.01 Par Value, 5,000 Share
Authorized;
115 Shares Issued and Outstanding 1
Additional Paid-in Capital 32,409
Accumulated Deficit (6,103)
-----------
Total Stockholders' Equity 26,307
-----------
Total Liabilities and Stockholders' Equity $ 1,950,579
===========
(See Independent Auditors' Report and Accompanying Notes)
2
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Patient Service Fees $ 2,687,928
LESS: Adjustments 796,022
-------------
Net Patient Service Revenue 1,891,906
-------------
DIRECT EXPENSES:
- ---------------
Salaries - Technician 83,204
Radiologist Fees 145,175
Medical Supplies 120,780
Laundry and Linen 3,212
Depreciation 166,975
Courier Service 1,504
Nurses' Services 14,665
-------------
Total Direct Expenses 535,515
-------------
Gross Profit 1,356,391
GENERAL AND ADMINISTRATIVE EXPENSES 1,163,365
-------------
Income from Operations 193,026
INTEREST EXPENSE 112,028
LOSS ON SALE OF EQUIPMENT 15,804
OTHER EXPENSE, NET 39,220
-------------
Net Income $ 25,974
=============
(See Independent Auditors' Report and Accompanying Notes)
3
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
STATEMENT OF ACCUMULATED DEFICIT
FOR THE YEAR ENDED SEPTEMBER 30, 1996
ACCUMULATED DEFICIT - BEGINNING OF YEAR $ (32,077)
Net Income 25,974
----------
ACCUMULATED DEFICIT - END OF YEAR $ (6,103)
==========
(See Independent Auditors' Report and Accompanying Notes)
4
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
OPERATING ACTIVITIES:
- --------------------
Net income $ 25,974
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on Sale of Equipment 15,804
Depreciation and amortization 187,460
Increase in Patient Receivables (163,952)
Decrease in Other Current Assets 5,945
Decrease in Deposits 147,566
Increase in Accounts Payable and Accrued
Expenses 49,403
Decrease in Deferred Rent (4,081)
---------
Net Cash Provided by Operating Activities 264,119
---------
INVESTING ACTIVITIES:
- --------------------
Purchases of Equipment (73,501)
Proceeds from Sale of Equipment 15,000
---------
Net Cash (Used) in Investing Activities (58,501)
---------
FINANCING ACTIVITIES:
- --------------------
Proceeds from Long-Term Debt 95,803
Repayment of Note to Officer (50,000)
Principal Repayments of Long-Term Debt (86,701)
Principal Repayments of Capital Lease Obligations (80,008)
Net Repayments of Advance from Affiliate (24,739)
---------
Net Cash (Used) in Financing Activities (145,645)
---------
Net Increase (Decrease) in Cash and
Cash Equivalents 59,973
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 61,646
---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 121,619
---------
(See Independent Auditors' Report and Accompanying Notes)
5
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Company provides magnetic resonance imaging services to patients from the
Baltimore metropolitan area. Services are billed to patients or their health
insurance providers, and patient receivables are stated at the amounts that the
Company expects to collect after applicable adjustments.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
- ----------------------
Property and Equipment are stated at cost. Depreciation is calculated using
straight- line and accelerated methods over the estimated useful lives of the
related assets. Depreciation expense for the year ended September 30, 1996 was
$184,955.
(See Independent Auditors' Report)
6
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Advertising
- -----------
The Company expenses advertising costs as incurred. The total amount charged to
advertising expense during the year ended September 30, 1996 was $270,162.
Amortization
- ------------
Lease acquisition costs are being amortized using the straight-line method over
the terms of the related leases.
Other Expenses
- --------------
Other expenses for the year ended September 30, 1996 include $57,500 charged to
expense when an equipment deposit was surrendered pursuant to a lease agreement
which the Company terminated.
Income Taxes
- ------------
The Company has elected to be treated as an S corporation for income tax
purposes. Consequently, income taxes have not been provided as the tax effects
of company activities are included in the individual income tax returns of its
stockholders.
2. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at September 30, 1996 consisted of the following:
Leasehold Improvements $ 199,756
Furniture and Fixtures 37,872
Office Equipment 79,633
---------
317,261
Less: Accumulated Depreciation 92,220
---------
Property and Equipment - Net $ 225,041
=========
(See Independent Auditors' Report)
7
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. LONG-TERM DEBT
--------------
Long-term debt at September 30, 1996 consisted of the following:
Finance Company; monthly installments of
$4,899 including interest at 9.9% until 1999;
collateralized by equipment and patient
receivables; guaranteed by the Company's
stockholders; $40,000 guaranteed by the
Company's affiliate (Note 7) $ 148,420
Finance Company; monthly installments of
$5,300 including interest at 9.9% until 1999;
collaterized by equipment and patient
receivables; guaranteed by the Company's
stockholders 164,482
Finance Company; monthly installments of $1,154
including interest at 9.9% until 1999;
collaterized by equipment; guaranteed by the
Company's stockholders 34,974
----------
347,876
Less: Current Maturities 106,558
----------
Long-Term Debt $ 241,318
==========
Long-term debt at September 30, 1996 matures as follows:
Year Ending September 30, 1997 $ 106,558
1998 117,595
1999 123,723
(See Independent Auditors' Report)
8
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. CAPITAL LEASES
--------------
The Company is leasing equipment under capital leases that expire in 2000 and
2001. Equipment held under the capital leases at September 30, 1996 consisted
of the following:
Equipment $ 1,285,900
Less: Accumulated Depreciation 173,288
-----------
Equipment Held Under Capital Leases - Net $ 1,112,612
===========
Minimum future lease payments under these leases as of September 30, 1996 are as
follows:
Year Ending September 30, 1997 $ 347,862
1998 362,436
1999 362,436
2000 359,865
2001 153,426
----------
Total Minimum Lease Payments 1,586,025
Less: Amount Representing Interest 275,030
----------
Present Value of Net Minimum Lease Payments $1,310,995
==========
Payments are guaranteed by the Company's stockholders.
The Company and its affiliate (Note 7) have an agreement with their primary
medical imaging film manufacturer under which 15% discounts on all purchases of
the manufacturer's product are credited to an account maintained by the
manufacturer on behalf of the Company and its affiliate. The manufacturer makes
certain capital lease payments on behalf of the Company and its affiliate from
the funds credited to this account. Amounts credited to this account are
recorded as reductions of medical supplies expense by the Company and its
affiliate. During the year ended September 30, 1996, purchase discounts of
$29,564 were credited to this account and capital lease payments of $30,757 were
charged to the account, $15,536 of which were capital lease payments made on
behalf of the Company and $15,221 of which were capital lease payments made on
behalf of the affiliate. The balance in the account as of September 30, 1996
was $3,816.
(See Independent Auditors' Report)
9
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. COMMITMENTS
-----------
The Company is leasing office and storage space in Towson, Maryland under
operating leases expiring in the year 2000. The office lease is guaranteed by a
stockholder.
Minimum future rentals under the leases are as follows:
Year ending September 30, 1997 $ 60,588
1998 63,295
1999 66,136
2000 33,805
---------
Total Minimum Future Rentals $ 223,824
=========
Rent expense for the year ended September 30, 1996 was $57,320.
The Company has contracts with various insurance providers under which agreed-
upon amounts must be accepted as payment in full for patient services.
The Company and its affiliate (Note 7) have various contracts for advertising
which commit the Company and its affiliate to a minimum of $202,000 in
advertising during 1997.
The Company and its affiliate (Note 7) have employment contracts with two
individuals which commit the Company and its affiliate to annual base salaries
of $275,000 plus incentive payments based on numbers of patients serviced. The
contracts expire in 1997.
6. PROFIT SHARING PLAN
-------------------
The Company has a 401(k) profit sharing plan covering all employees meeting
minimum service and age requirements. The Company matches 50% of the first 6%
of participant contributions. Contributions made by the Company for the year
ended September 30, 1996 were $7,048.
(See Independent Auditors' Report)
10
<PAGE>
ACCESSIBLE MRI OF BALTIMORE COUNTY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. RELATED PARTY TRANSACTIONS
--------------------------
The Company provides certain administrative services to another magnetic imaging
service center which is affiliated with the company through common ownership.
Amounts due to the affiliate result from advances from the affiliate net of
reimbursements due for services provided.
General and Administrative expenses have been reduced by $25,204 during the year
ended September 30, 1996 for services charged to the affiliate.
8. SUPPLEMENTARY CASH FLOW INFORMATION
-----------------------------------
Cash payments during the year ended September 30, 1996 included interest of
$112,301.
Capital lease obligations of $1,249,000 were incurred when the Company entered
into equipment leases.
9. SUBSEQUENT EVENT
----------------
The Company and its affiliate (Note 7) entered into an agreement to sell
substantially all of their assets in May 1997. As consideration for the sale,
the Company and its affiliate received $2,828,872 in cash and $1,500,000 in the
purchaser's common stock, and the purchaser assumed all debt (Note 3), capital
lease obligations (Note 4) and commitments (Note 5) of the Company and its
affiliate.
(See Independent Auditors' Report)
11
<PAGE>
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CAPSTONE MANAGEMENT GROUP, INC.
DECEMBER 31, 1996
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
DECEMBER 31, 1996
CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 2
FINANCIAL STATEMENTS
BALANCE SHEET 3 - 4
STATEMENT OF LOSS AND STOCKHOLDERS' DEFICIT 5 - 6
STATEMENT OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8 - 14
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders
Capstone Management Group, Inc.
We have audited the accompanying balance sheet of Capstone Management Group,
Inc. as of December 31, 1996, and the related statements of loss and
stockholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements referred to above present fairly, in
all material respects, the financial position of Capstone Management Group, Inc.
as of December 31, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
BACA PIECZKOLON & ASSOCIATES
Trevose, Pennsylvania
August 1, 1997
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
BALANCE SHEET
December 31, 1996
ASSETS
CURRENT ASSETS
Cash $ 508,226
Accounts receivable (note 3) 1,201,839
Due to/from related parties (note 10) (223,338)
Prepaid expenses 29,301
----------
Total current assets 1,516,028
INVESTMENTS (note 1B and 4) (205,364)
PROPERTY AND EQUIPMENT - AT COST
Computer and office equipment $ 62,832
Leasehold improvements 290,000
Equipment 3,619,897
Furniture and fixtures 50,145
----------
4,022,874
Less accumulated
depreciation (note 1) (304,605)
----------
3,718,269
OTHER ASSETS
Security deposits 67,437
Organization costs 50,988
Goodwill 300,000
Licenses 175,000
----------
593,425
Less accumulated
amortization (note 1) ( 35,747)
----------
557,678
----------
$5,586,611
==========
The accompanying notes are an integral part of this statement.
- 3 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
BALANCE SHEET
December 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable Corestates Bank (note 7) $ 314,871
Note payable Callowhill
Open MRI, L.P. (note 6) 42,847
Accounts payable 314,857
Pension payable (note 5) 44,817
Current maturities of
Long term debt 954,909
----------
Total current liabilities 1,672,301
LONG TERM DEBT, less current maturities (note 8) 4,854,701
STOCKHOLDERS' DEFICIT
Capital stock $ 100
Retained deficit ( 940,491)
---------
( 940,391)
----------
$5,586,611
==========
The accompanying notes are an integral part of this statement.
- 4 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
STATEMENT OF LOSS AND STOCKHOLDERS' DEFICIT
For the year ended December 31, 1996
Revenue
Revenue, net $3,187,709
Salaries and employee benefits
Salaries $1,277,793
Payroll taxes 111,781
Insurance - health 70,224 1,459,798
---------
General and administrative
Advertising and promotion 35,944
Amortization 35,330
Automobile 35,047
Bank charges 6,283
Computer and office equipment 42,403
Consumable supplies 135,075
Contributions 650
Depreciation 284,769
Dues and subscriptions 18,652
Equipment leases 20,031
Insurance - general 62,286
Legal and accounting 139,618
Maintenance - building 38,534
Marketing 50,351
Miscellaneous 15,295
Office supplies 51,206
Office expense 19,101
Pension 191,707
Postage 16,805
Printing 14,392
Project fee 10,500
Radiology fees 620,371
Rent 127,083
Service contracts 121,434
Seminars 15,293
Sub-contract - professional 35,417
Sub-contract - support 22,474
Telephone 74,363
Teleradiology 19,758
Travel and entertainment 35,940
Travel and lodging 85,209
Utilities 35,391 2,416,712
--------- ----------
Operating loss $( 688,801)
The accompanying notes are an integral part of this statement.
- 5 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
STATEMENT OF LOSS AND STOCKHOLDERS' DEFICIT - CONTINUED
For the year ended December 31, 1996
Other (income) deductions
Interest income $ ( 2,551)
Interest expense 208,917
Equity in net earnings
of invester
companies (note 1B and 4) ( 90,057) $ 116,309
-------- ----------
Net loss (805,110)
Retained deficit at January 1, 1996 (135,281)
----------
Retained deficit at December 31, 1996 $ (940,391)
==========
The accompanying notes are an integral part of this statement.
- 6 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
Cash flows from operating activities:
Net Loss $( 805,110)
-----------
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation 284,769
Amortization 35,330
Change in assets and liabilities:
Increase in accounts receivable (1,201,839)
Decrease in due to from related parties 173,455
Decrease in prepaid expenses 51,921
Decrease in Investments 152,313
Decrease in security deposits 151,480
Increase in organization costs (50,488)
Increase in Goodwill ( 300,000)
Increase in Licenses ( 175,000)
Increase in accounts payable 314,857
Decrease in Pension payable ( 10,283)
---------
Total Adjustments ( 573,485)
---------
Net cash used by operating activities: (1,378,595)
---------
Cash flows from investing activities:
Property and equipment acquisitions (3,988,807)
---------
Net cash used in investing activities (3,988,807)
---------
Cash flows from financing activities:
Increase in Note Payable - Corestates Bank 162,423
Decrease in Loan Payable - Constitution Bank ( 1,608)
Decrease in Note Payable - Callowhill
Open MRI, L.P. ( 14,283)
Increase in Long term debt 5,695,888
----------
Net cash provided by financing activities 5,842,420
----------
Net increase in cash 475,018
Cash - beginning 33,208
----------
Cash - ending $ 508,226
==========
The accompanying notes are an integral part of this statement.
- 7 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. The Company and its significant Accounting policies
---------------------------------------------------
A) The Company - Capstone Management Group, INC. is engaged in installing,
-----------
maintaining and managing imaging systems used for diagnostic purposes.
B) Investments - Investments in the companies of Albany Open MRI, L.P.,
-----------
Bensalem Open MRI, L.P., Callowhill Open MRI, L.P., Haverford Open MRI
Associates, L.P., Syracuse Open MRI, L.P., and Dayuton Open MRI LTD. are stated
at cost plus equity in undistributed net earnings since dates of investments
(note 4).
C) Property and Equipment - Property and equipment are being depreciated
----------------------
for financial accounting purposes using the Cost method over their respective
estimated useful lives ranging from three to ten years. Leasehold improvements
are being amortized over the shorter of the useful life or the remaining lease
term, typically 10 years expenditures for maintenance and repairs are charged to
operations.
D) 401(K) Plan - The company maintains a 401(K) savings plan under which
-----------
the company matches one-quarter (25%) of employee contributions to purchase plan
investments, up to 6% of qualified earnings and subject to Internal Revenue
Service limitations.
E) Pension Plan - The company maintains a Money Purchase Pension Plan under
------------
which the company contributes up to 5% of the employees earnings subject to
vesting and Internal Revenue Service limitations.
F) Revenue Recognition - Revenues are recognized on an accrual basis as
-------------------
earned and consist of (i) net patient service revenue allocated to the company
under the terms of the management and sub-lease agreements it maintains with its
affiliated physicians associations referred to below (ii) additional management
and billing service fees earned by the company for services provided to
unconsolidated limited liability corporation and limited partnerships, (iii)
equity in earnings (losses) of unconsolidated limited liability corporation and
limited partnerships.
2. Due from affiliated Physician Associations
------------------------------------------
The company has entered into arrangements with Physicians engaging in
business as professional associations "Physicians" pursuant to which the company
maintains and manages imaging systems operated by the Physicians. The
agreements have terms of up to
- 8 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
five years and are renewable at the option of the company. The Physicians'
Principal, Dr. James M. Domesek, is the majority shareholder in the company.
The Physicians are under service agreements through U.S. Radiology Associates,
P.C., Dr. James M. Domesek is the sole-shareholder of U.S. Radiology. Under the
agreements, physicians have agreed to be obligated to contract for radiology
services and to sublease each facility. The company is obligated to make
necessary leasehold improvements, provide furniture and fixtures, provide center
employees, provide radiology equipment and perform certain administrative
functions relating to the provisions of technical aspects of the centers for
which physicians pay a monthly fee. These fees, net of a contractual allowance
based upon physicians ability to pay after physicians have fulfilled their
obligations under facility subleases and radiology service contracts as set
forth above, constitute the company's revenue, net for overloded sites.
Certain revenues are subject to audit and retroactive adjustment by third
party payers. The company is aware of no pending audits or proposed negative
adjustments and no provisions for estimated retroactive adjustments have been
provided.
3. Accounts Receivable
-------------------
Accounts receivable is comprised of the following:
Accounts Receivable $ 1,733,855
Less: Allowance for Doubtful
Accounts and Contractual
Allowances 532,016
-----------
$ 1,201,839
===========
The only significant financial instrument is Accounts Receivable, which is
concentrated among third-party medical reimbursement organizations, principally
by insurance companies. Approximately 16.16% of the company's imaging revenue
was derived from the delivery of services of which the timing of payment is
substantially contingent upon the timing of the settlement of pending litigation
involving the recipient of services and third parties (letters of protection or
LOP type accounts receivable). At December 31, 1996 approximately 19.09% of
gross receivables represents amounts due from such patients. 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.
- 9 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
The company considers the aging of its accounts receivable in determining
the amount of the allowances for doubtful accounts.
4. Investments
-----------
The Company's investment in the subsequent list of Limited Partnerships and
Limited Liability Corporation which are representing various ownership
percentages are accounted for using the Equity method.
Ownership
----------
%
---
Albany Open MRI, L.P. 62.5 $( 347,622)
Bensalem Open MRI, L.P. 51.0 113,681
Callowhill Open MRI, L.P. 47.6 276,768
Haverford Open MRI Associates, L.P. 30.0 77,914
Syracuse Open MRI, L.P. 62.5 (188,436)
Dayton Open MRI LTD 90.0 (137,669)
---------
$( 205,364)
=========
5. Pension Plan
------------
The company has a money purchase pension plan covering substantially all of
its employees. The contributions are based on and a percentage of the
employee's qualifying compensation during the year of employment. The Company's
funding policy is to contribute annually the amount necessary to satisfy the
Internal Revenue Service's funding standards.
6. Note Payable - Callowhill Open MRI, L.P.
----------------------------------------
The company has an installment note payable with Callowhill Open MRI, L.P.
payable for 60 months starting January 1, 1995. The monthly payment including
interest is $1,190 and the remaining balance at December 31, 1996 is $42,847.
- 10 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
7. Line of Credit
--------------
The company has obtained a line of credit with Corestates Bank. The
Financial arrangement bears interest at one percent (1%) over the Bank's Prime
Rate and is to be used for start-up costs of new centers, acquisition of
existing centers and practices and general business purposes. The amount of the
line of credit is $500,000 of which $314,871 is outstanding at December 31,
1996. The line is secured by corporate assets and a limited personal surety of
the Principal shareholder.
8. Long term debt
--------------
Long -term debt consists of:
Capital leases $ 5,809,610
Less current maturities 954,909
----------
$ 4,854,701
==========
The capital lease payments are monthly installments with interest payable
at various rates. The leases are subject to the provisions of lease agreements
(note 9).
9. Commitments and Contingencies
-----------------------------
The company leases its corporate offices and certain centers for proceeds
generally ranging from one to seven years with revenues options for additional
periods. The leases generally require the company to pay utilities, taxes,
insurance and other costs. Rental expenses incurred under such leases were
approximately $ 127,083.
The company has entered into noncancelable lease agreements for certain
medical diagnosis equipment, furniture and fixtures, and has capitalized the
assets relating to these leases.
Future minimum payments under leases as of December 31, 1996 are as
follows:
Capital Operating
Leases Leases
1997 $1,674,726 $275,650
1998 1,674,727 276,288
1999 1,644,307 288,945
- 11 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
2000 $1,585,934 $ 289,621
2001 1,253,946 121,863
Thereafter - 85,978
---------- ----------
Total minimum lease
payments 7,833,640 $1,338,345
==========
Amount representing
interest 2,024,030
----------
Present value of net
minimum capital
lease payments $5,809,610
==========
10. Related Party Transactions
--------------------------
During the year ended December 31, 1996 the company, in accordance with the
related partnership interests realized management and billing and collections
fees of $290,000 and
$705,757 respectively.
11. Government Regulation
---------------------
The health care industry is highly regulated at the federal, state and
local levels. 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 by
limiting reimbursement levels, requiring the company to obtain certificates of
need in order to expand, limiting the types of
contracts which may be entered into with physicians who refer patients,
increasing the limitations on referrals by physicians to facilities in which
they have an investment or a compensation arrangement and other means.
12. Liability and Malpractice Insurance
-----------------------------------
The nature of the services provided by the Company exposes the Company to
greater risks of liability than are posed by other non-medical affiliated
businesses. The company maintains public liability and medical malpractice
insurance in amounts which it deems adequate to protect against this potential
risk. There can be no assurance that the amount of such insurance will be
adequate to cover all potential liabilities.
- 12 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
13. Litigation
----------
The company is from time to time involved in litigation incidental to the
conduct of its business. Management and its counsel believe that such
pending litigations will not have a material adverse effect on the company's
results of operations, cash flows, or financial condition.
14. Income Taxes
------------
Income taxes on net earnings are payable personally by the stockholders
pursuant to an election under Subchapter S of the Internal Revenue Code not to
have the Corporation taxed as a corporation. Accordingly, no provision has been
made for Federal income taxes.
15. Acquisition - Purchase
----------------------
On August 9, 1996 the Company entered into an Asset Purchase Agreement with
James K. Freyne, M.D., a physician licensed to practice medicine, specifically
radiology in the State on New Jersey, for approximately $350,000. The
acquisition has been included in the accompanying financial statements for the
period August 9, 1996 through December 31, 1996. The excess of the total
acquisition cost over the fair value of net assets acquired in the amount of
$50,000 is being amortized on a straight-line basis over forty years.
On September 6, 1996 the Company entered into an Asset Purchase Agreement
with Diagnostic of Springfield, Inc. who manages the operation of medical
diagnostic imaging services at a diagnostic imaging center located at 891
Baltimore Pike, Springfield, Pennsylvania and owns the assets used in the
operation of the Center, for approximately $1,850,000. The acquisition has been
included in the accompanying financial statements for the period September 6,
1996 through December 31, 1996. The excess of the total acquisition cost over
the fair value of net assets acquired in the amount of $250,000 is being
amortized on a straight-line basis over forty years.
- 13 -
<PAGE>
CAPSTONE MANAGEMENT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
16. Subsequent Event
----------------
On March 19, 1997 the Company announced that it was in negotiations
regarding a possible sale of the company to Medical Resources, Inc.. Medical
Resources, Inc. provides diagnostic imaging equipment, facilities and management
services to physicians through 53 outpatient centers located in New York, New
Jersey, Florida, Illinois and California. Subsequently, on May 9, 1997 the
Company entered into an Asset Purchase Agreement with Medical Resources, Inc.
for approximately $10,000,000. The closing date for this transaction was May
30, 1997 with a retroactive effective date of operations transfer of May 1,
1997.
On April 4, 1997 the Company entered into an Asset Purchase Agreement with
Scott Scheer, M.D. and Hugh Mullin, M.D. who operate
a licensed radiology diagnostic facility: Oxford Valley Imaging Center located
at 330 Middletown Boulevard Suite 402, Langhorne,
Pennsylvania and own the assets used in the operation of the center, for
approximately $200,000.
- 14 -
