<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NO. 0-20440
MEDICAL RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3584552
(STATE OF INCORPORATION) (IRS EMPLOYER)
IDENTIFICATION NO.)
155 STATE STREET, HACKENSACK, NJ 07601
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 488-6230
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
At May 26, 1998, 22,925,277 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding and the aggregate market value of the
Common Stock (based upon the NASDAQ closing price of these shares on that date)
held by non-affiliates was $50,920,781.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
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<PAGE>
Medical Resources, Inc.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 16
PART II. OTHER INFORMATION 23
2
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 13,032 $ 23,198
Cash and short-term investments, restricted 241 600
Accounts receivable, net 71,296 65,887
Other receivables 7,957 5,430
Prepaid expenses 6,970 7,027
Income taxes recoverable 6,275 6,504
Deferred tax assets, net 2,492 2,492
------------ ------------
Total current assets 108,263 111,138
Property and equipment, net 60,934 64,343
Goodwill, net 148,286 149,624
Other intangible assets, net 6,336 6,836
Other assets 3,994 4,189
Deferred tax assets, net 2,353 2,353
Restricted cash 473 473
------------ ------------
Total assets $ 330,639 $ 338,956
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Senior Notes due 2001 through 2005, classified as curret $ 78,000 $ 78,000
Notes and mortgages payable, classified as current 2,985 3,206
Capital lease obligations, classified as current 8,831 9,555
Current portion of notes and mortgages payable 14,746 13,313
Current portion of capital lease obligations 10,460 10,311
Borrowings under line of credit 6,591 3,744
Accounts payable 13,557 13,141
Accrued expenses 24,455 28,018
Common stock subject to redemption 7,187 9,734
Other current liabilities 494 290
------------- -------------
Total current liabilities 167,306 169,312
Notes and mortgages payable, less current portion 19,549 21,539
Obligations under capital leases, less current portion 14,498 16,361
Other long term liabilities 882 178
------------- -------------
Total liabilities 202,235 207,390
Minority interest 4,803 4,662
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000 shares,
21,942 issued and outstanding at March 31, 1998 and
21,889 issued and outstanding at December 31, 1997 219 219
Series C Convertible Preferred Stock, $1,000 per share stated
value; 18 shares issued and outstanding (liquidation
preference of 3% per annum) 18,377 18,242
Additional paid-in capital 140,100 138,664
Accumulated deficit (35,095) (30,221)
------------- -------------
Total stockholders' equity 123,601 126,904
------------- -------------
Total liabilities and stockholders' equity $ 330,639 $ 338,956
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS; EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net service revenues $ 67,102 $ 39,987
Imaging center and staffing operating costs:
Technical services payroll and related expenses 27,307 15,389
Medical supplies 2,999 1,390
Diagnostic equipment maintenance 2,860 1,509
Independent contractor fees 2,567 1,311
Administrative expenses 7,135 3,902
Other center level costs 3,204 1,053
Provision for uncollectible accounts receivable 3,693 1,825
Corporate general and administrative 7,679 3,364
Depreciation and amortization 6,648 2,921
Unusual charges 3,760 -
-------- --------
Operating income (loss) (750) 7,323
Interest expense, net 3,668 930
-------- --------
Income (loss) before minority interest
and income taxes (4,418) 6,393
Minority interest income 181 235
Income (loss) before income taxes (4,599) 6,158
Provision for income taxes 140 2,556
Net income (loss) (4,739) 3,602
Charges related to convertible preferred stock (135) -
-------- --------
Net income (loss) applicable to common
stockholders $ (4,874) $ 3,602
======== ========
Income (loss) per common share applicable to common
stockholders:
Basic - $ (0.22) $ 0.19
======== ========
Diluted - $ (0.22) $ 0.18
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,739) $ 3,602
--------- -------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,648 2,921
Provision for uncollectible accounts receivable 3,693 1,825
Deferred income tax provision - 526
Expense incurred in connection with warrants and
notes issued to preferred stockholders 2,094 -
Other, net 370 235
Changes in operating assets and liabilities:
Accounts receivable (9,102) (8,912)
Other receivables (2,527) 486
Prepaid expenses 57 (1,110)
Income taxes recoverable or payable 229 (340)
Other assets 175 (431)
Accounts payable and accrued expenses (2,831) (1,778)
Other current liabilities 204 118
Other long-term liabilities 704 (319)
--------- -------
Total adjustments (286) (6,779)
--------- -------
Net cash provided by (used in) operating
activities (5,025) (3,177)
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (919) (1,736)
Acquisition of diagnostic imaging centers, net of cash
acquired - (12,725)
Acquisition of temporary staffing offices, net of cash
acquired - (50)
Contingent consideration related to prior year
acquisitions (334) -
Costs associated with refinancing of assets under capital
leases - (1,461)
Sale (purchase) of short-term investments, net - (4,562)
------- --------
Net cash used in investing activities (1,253) (20,534)
------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs - 51,113
Repurchase of Common Stock subject to redemption (2,547)
Proceeds from borrowing under notes payable - 309
Borrowings under line of credit 2,847 -
Proceeds from exercise of options and warrants 128 160
Note and capital lease repayments in connection with
acquisitions - (7,001)
Note and capital lease repayments in connection with
Senior Notes transaction - (13,764)
Principal payments under capital lease obligations (2,438) (1,331)
Principal payments on notes and mortgages payable (1,878) (1,634)
Other, net - (19)
------- -------
Net cash provided by (used in) financing activities (3,888) 27,833
------- -------
Net increase (decrease) in cash and cash equivalents (10,166) 4,122
Cash and cash equivalents at beginning of year 23,198 15,346
------- -------
Cash and cash equivalents at March 31, $ 13,032 $ 19,468
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
MEDICAL RESOURCES, INC.
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited consolidated financial statements of Medical
Resources, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete consolidated financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for an entire year.
The unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission (the "SEC") for the year ended December 31, 1997.
Revenue Recognition
At each of the Company's diagnostic imaging centers, all medical services are
performed exclusively by physician groups (the "Physician Group" or the
"Interpreting Physician"), generally consisting of radiologists with whom the
Company has entered into independent contractor agreements. Pursuant to these
agreements, the Company has agreed to provide equipment, premises, comprehensive
management and administration, including responsibility for billing and
collection of receivables, and technical imaging services to the Interpreting
Physician.
Net service revenues are reported, when earned, at their estimated net
realizable amounts from patients, third party payors and others for services
rendered at contractually established billing rates which generally are at a
discount from gross billing rates. Known and estimated differences between
contractually established billing rates and gross billing rates ("contractual
allowances") are recognized in the determination of net service revenues at the
time services are rendered. Subject to the foregoing, the Company's imaging
centers recognize revenue under one of the three following types of agreements
with Interpreting Physicians:
Type I - The Company receives a technical fee for each diagnostic imaging
procedure performed at a center, the amount of which is dependent upon the
type of procedure performed. The fee included in revenues is net of
contractual allowances. The Company and the Interpreting Physician
proportionally share in any losses due to uncollectible amounts from
patients and third party payors, and the Company has established reserves
for its share of the estimated uncollectible amount.
Type II - The Company bills patients and third party payors directly for
services provided and pays the Interpreting Physicians either (i) a fixed
percentage of fees collected at the center, or (ii) a contractually fixed
amount based upon the specific diagnostic imaging procedures performed.
Revenues are recorded net of contractual allowances and the Company accrues
the Interpreting Physicians fee as an expense on the Consolidated
Statements of Operations. The Company bears the risk of loss due to
uncollectible amounts from patients and third party payors, and the Company
has established reserves for the estimated uncollectible amount.
8
<PAGE>
Type III - The Company receives from an affiliated physician association a
fee for the use of the premises, a fee per procedure for acting as billing
and collection agent and a fee for administrative and technical service
performed at the centers. The affiliated physician association contracts
with and pays directly the Interpreting Physicians. The Company's fee, net
of an allowance based upon the affiliated physician association's ability
to pay after the association has fulfilled its obligations (i.e., estimated
future net collections from patients and third party payors less facility
lease expense and Interpreting Physicians fees), constitutes the Company's
net service revenues. Since the Company's net service revenues are
dependent upon the amount ultimately realized from patient and third party
receivables, the Company's revenue and receivables have been reduced by an
estimate of patient and third party payor contractual allowances, as well
as an estimated provision for uncollectible amounts from patients and third
party payors.
Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.
The Company also recognizes revenue from temporary nurse staffing and
radiology information systems. Such revenues are recognized on an accrual basis
as earned.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Earnings Per Share
Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This statement requires the presentation of Basic Earnings per Share and
Diluted Earnings per Share. Basic earnings per share is based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is based on the weighted average number of common shares outstanding
during the period plus the potentially issuable common shares related to
outstanding stock options, warrants and convertible debt. Earnings per share
amounts for the quarter ended March 31, 1997 have been restated to conform to
the requirements of SFAS No. 128. The computations of basic earning per share
and diluted earnings per share for the quarters ended March 31, were as follows
(in thousands, except per share amounts):
1998 1997
---------------- -------------
Basic earnings per share information
- - ------------------------------------
Net income (loss) $(4,739) $ 3,602
Charges related to convertible preferred (135) -
stock ------- -------
Net income (loss) applicable to common
stockholders $(4,874) $ 3,602
======= =======
Weighted average number of common shares 21,859 19,067
====== =======
Basic earnings (loss) per share $(0.22) $0.19
====== =====
9
<PAGE>
1998 1997
------------ ------------
Diluted earnings per share information
- - --------------------------------------
Net income (loss) $(4,739) $3,602
Interest savings from conversion of convertible
subordinated debentures - 92
Charges related to convertible preferred stock (135) -
------- ------
Net income (loss) applicable to common
stockholders after assumed conversions $(4,874) $3,694
======= ======
Weighted average number of common shares 21,859 19,067
Incremental shares issuable on exercise of
warrants and options - 709
Incremental shares issuable on conversion of
convertible subordinated debentures - 1,104
------- ------
Weighted average number of diluted common shares 21,859 20,880
====== ======
Diluted earnings (loss) per share $(0.22) $0.18
====== =====
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
As a result of the 1997 net loss, the Company is currently in default of
certain financial covenants under the Company's $78,000,000 of Senior Notes.
Management and the Senior Note lenders are engaged in discussions to resolve
this matter. In the event the parties are unable to reach agreement, the lenders
are entitled, at their discretion, to exercise certain remedies including
acceleration of repayment. There can be no assurance that the Senior Note
lenders will provide the Company with an amendment or waiver of the defaults. In
addition, certain medical equipment notes, and operating and capital leases of
the Company contain provisions which allow the creditors or lessors to
accelerate their debt or terminate their leases and seek certain other remedies
if the Company is in default under the terms of agreements such as the Senior
Notes.
In the event that the Senior Note holders or the other creditors or lessors
elect to exercise their right to accelerate the obligations under the Senior
Notes or the other loans and leases, such acceleration would have a material
adverse effect on the Company, its operations and its financial condition.
Furthermore, if such obligations were to be accelerated, in whole or in part,
there can be no assurance that the Company would be successful in identifying or
consummating financing necessary to satisfy the obligations which would become
immediately due and payable. As a result of the uncertainty related to the
defaults and corresponding remedies described above, the Senior Notes and the
other loans and capital leases are shown as current liabilities on the Company's
Consolidated Balance Sheets at March 31, 1998 and December 31, 1997.
Accordingly, the Company has a deficit in working capital of $59,043,000 at
March 31, 1998. These matters raise substantial doubt about the Company's
ability to continue as a going concern. In addition to continuing to negotiate
with the Senior Note lenders in an attempt to obtain waivers or amendments of
the aforementioned defaults, the Company has taken various actions in response
to this situation, including the following: (i) it effected a workforce
reduction in March 1998 aimed at reducing the Company's overall expense levels,
and (ii) it has retained the investment banking firm of SBC Warburg Dillon Read
to assist the Company in exploring a possible sale of the Company's StarMed
temporary staffing subsidiary.
The financial statements, however, do not include any further adjustments
reflecting the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of this uncertainty.
10
<PAGE>
3. UNUSUAL CHARGES
During the first quarter of 1998, the Company recorded $3,760,000 of unusual
charges consisting of (i) $313,000 for defense costs relating to shareholder and
employee lawsuits, (ii) $2,227,000 ($1,194,000 of which was a non-cash
charge related to the issuance of 350,000 common stock warrants) for penalties
associated with delays in the registration of the Company's Common Stock issued
in connection with acquisitions or issuable upon conversion of convertible
preferred stock, (iii) $883,000 for costs associated with the investigation of
related party transactions which was concluded in April 1998 and (iv) $337,000
for management termination benefits and related costs.
The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current negotiations
regarding defaults under the Seior Notes and penalties associated with the
failure to register the Company's Common Stock as well as the outcome of certain
litigation.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, is comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Management fee receivables (net of contractual
allowances)
Due from unaffiliated physicians (Type I revenues) $38,923 $35,540
Due from affiliated physicians (Type III revenues) 6,995 8,585
Patient and third party payor accounts receivable
(Type II revenues) 31,865 27,284
Temporary staffing service accounts receivable 14,544 13,400
------- -------
Gross accounts receivable 92,327 84,809
Less: Allowance for doubtful accounts (21,031) (18,922)
------- -------
$71,296 $65,887
======= =======
</TABLE>
Accounts receivable is net of contractual allowances which represent
standard fee reductions negotiated with certain third party payors. Contractual
allowances amounted to approximately $28,850,000 and $8,462,000 for the quarters
ended March 31, 1998 and 1997, respectively.
5. SEGMENT INFORMATION
The Company operates in two industry segments--diagnostic imaging services
and temporary staffing services. The operations of the diagnostic imaging
segment involves operating and managing diagnostic imaging centers. The
Company's diagnostic imaging segment also develops and sells radiology industry
information systems through its subsidiary, Dalcon Technologies, Inc. The
operations of the temporary staffing segment involves providing temporary
staffing of registered nurses, technicians and other medical industry personnel
to acute and sub acute care facilities.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments for fiscal years beginning after
December 15, 1997. This new standard increases financial reporting disclosures,
but will have no impact on the Company's financial position or results of
operations. The Company has adopted SFAS No. 131 effective January 1, 1998.
11
<PAGE>
The following table shows net revenues, operating income (loss) and other
financial information by industry segment for the quarters ended March 31 (in
thousands):
1998 1997
---------- --------
Net revenues:
Diagnostic imaging centers.... $ 47,286 $ 26,841
Temporary staffing services... 19,816 13,146
--------- --------
Total....................... $ 67,102 $ 39,987
========= ========
Operating income (loss):
Diagnostic imaging centers.... ($ 1,742) $ 6,713
Temporary staffing services... 992 610
--------- --------
Total....................... ($ 750) $ 7,323
========= ========
Identifiable assets:
Diagnostic imaging centers.... $ 303,245 $227,617
Temporary staffing services... 27,394 10,495
--------- --------
Total....................... $ 330,639 $238,112
========= ========
Depreciation and amortization:
Diagnostic imaging centers.... $ 6,477 $ 2,790
Temporary staffing services... 171 131
--------- --------
Total....................... $ 6,648 $ 2,921
========= ========
Capital expenditures:
Diagnostic imaging centers.... $ 849 $ 1,716
Temporary staffing services... 70 20
--------- --------
Total....................... $ 919 $ 1,736
========= ========
6. COMMITMENTS AND CONTINGENCIES
Between November 1997 and January 1998, several lawsuits were commenced
against the Company, certain of the Company's Directors and certain officers
concerning the related party transactions investigated by the Special Committee
of the Board of Directors ("Special Committee"). The complaints in each action
assert that the Company and the named defendants violated Section 10(b) and
20(a) of the Securities Exchange Act of 1934, alleging that the Company omitted
and/or misrepresented material information in its public filings, including that
the Company failed to disclose that it had entered into acquisitions that were
not in the best interest of the Company, that it had paid unreasonable and
unearned acquisition and financial advisory fees to related parties, and that it
concealed or failed to disclose adverse material information about the Company.
Each action seeks unspecified compensatory damages, with interest, and the costs
and expenses incurred in bringing the action. On February 9, 1998, the above-
mentioned class actions were consolidated for all purposes in federal district
court in New Jersey. On March 31, 1998, the lead plaintiffs in the consolidated
class actions served their Consolidated Class Action Complaint, asserting that
the Company and the named defendants violated Section 10(b) of the Exchange Act,
and that certain named defendants violated Sections 20(a) and 20A of the
Exchange Act. The Company intends to defend vigorously against the allegations.
The Special Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April 6,
1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report. Accordingly, the Special Committee recommended and 712
12
<PAGE>
Advisory Services, Inc., a financial advisory firm and affiliate of the
Company's Chairman of the Board (the "Affiliate), agreed to reimburse the
Company approximately $1,424,000 in fees for transactions completed after June
1, 1997, to reimburse $112,500 of the retainer paid to the Affiliate for 1997,
to waive payment of an additional $112,500 of fees accrued by the Company for
the third and fourth quarters of 1997, and to pay a substantial amount of the
expenses associated with the Special Committee's investigations. All such
amounts have been paid or reimbursed to the Company. In addition, the Special
Committee recommended and the Affiliate agreed to allow the Company to terminate
its relationship with the Affiliate.
The Special Committee reported to the directors that it had determined
that: (i) there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings; (iii) the Affiliate
performed acquisition advisory services fully consistent with the expectations
and understanding of the committee of outside directors that had approved the
Affiliate's acquisition fees; and (iv) the acquisition advisory fees paid to the
Affiliate in connection with the Company's acquisitions in 1997 were within the
range of customary acquisition advisory fees paid to investment bankers on
transactions of similar size.
As previously announced by the Company, the U.S. Attorney for the District
of New Jersey commenced an investigation in connection with the disclosures
regarding the related party transactions referred to above. In addition, the
Company has also received an inquiry from the SEC, but there have been no formal
proceedings commenced by the SEC. The Company has cooperated fully with these
authorities and provided all information requested by them.
On November 7, 1997, the Company accepted the resignations of William D.
Farrell, as President and Chief Operating Officer of the Company and as
Director, and Gary I. Fields, as Senior Vice President and General Counsel. On
the same date, Messrs. Farrell and Fields filed a complaint in the Superior
Court of New Jersey, Law Division, Essex County, against the Company and the
members of the Company's Board of Directors, claiming retaliatory discharge
under the New Jersey Conscientious Employee Protection Act and breach of
contract. On December 17, 1997, the plaintiffs amended their complaint to add a
claim for violation of public policy. The plaintiffs allege that they were
constructively terminated as a result of their objection to certain related-
party transactions, the purported failure of the defendants to adequately
disclose the circumstances surrounding such transactions, and the Company's
public issuance of alleged false and misleading accounts concerning or relating
to such related-party transactions. The plaintiffs seek unspecified compensatory
and punitive damages, interest and costs and reinstatement of the plaintiffs to
their positions with the Company. On April 8, 1998, the Company filed its Answer
to the Amended Complaint, and asserted a counterclaim against Messrs. Farrell
and Fields for breach of fiduciary duties. The Company intends to defend
vigorously against the allegations.
On November 8, 1997, the Company removed John P. O'Malley III, the
Company's Chief Financial Officer, for failure to fulfill certain of his
functions as Chief Financial Officer. Mr. O'Malley has filed a complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and members of the Board of Directors, as defendants, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and
defamation. Mr. O'Malley alleges that the Company terminated his employment in
retaliation for voicing the concerns of shareholders and senior management
regarding related-party transactions and because the Company did not want to
make full and adequate disclosure of the facts and circumstances surrounding
such transactions. In addition, Mr. O'Malley alleges that the Company published
false and defamatory statements about him. Mr. O'Malley seeks unspecified
compensatory and punitive damages, interest and costs of bringing the action. On
April 8, 1998, the Company filed its Answer to the Complaint, and asserted a
counterclaim against Mr. O'Malley for breach of fiduciary duties. The Company
intends to defend vigorously against the allegations.
The legal proceedings described above are in their preliminary stages.
Although the Company believes it has meritorious defenses to all claims against
it, the Company is unable to predict with any certainty the ultimate outcome of
these proceedings.
13
<PAGE>
In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that such
other litigation will not have a material adverse effect on the Company's
financial position, cash flows or results of operations.
In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as partial consideration, the Company
granted rights to have such shares registered for resale pursuant to the federal
securities laws. In certain of such acquisitions, the Company has granted
specific remedies to the sellers in the event that the registration statement
covering the relevant shares is not declared effective by the SEC within an
agreed-upon period of time, including the right to require the Company to
repurchase the shares issued to such seller. In the event the Company is unable
to register such shares by the required dates, the Company would become
obligated to repurchase the shares issued in connection with such acquisition.
As of March 31, 1998, the Company had reflected $7,187,000 of Common Stock
subject to redemption on its Consolidated Balance Sheet related to shares that
the Company may be required to repurchase. During the first quarter of 1998, the
Company paid $2,547,000 to sellers who exercised their rights to have shares of
Common Stock repurchased. Furthermore, from April 1, 1998 through May 26, 1998,
the Company paid an additional $728,000 to such sellers. In addition, the
Company expects to pay an additional $5,763,000 during the remainder of 1998
($3,695,000 of which was due and payable on June 3, 1998 (the "June 1998
Repurchase Obligation") but has not yet been paid by the Company) in connection
with the settlement of certain repurchase obligations of the Company subject,
under certain circumstances, to the consent of the Senior Note holders. With
respect to the June 1998 Repurchase Obligation which remains due and payable,
the Company is in discussions with the sellers to whom such obligations are owed
and the Senior Note holders regarding the timing and satisfaction of the June
1998 Repurchase Obligation.
In addition, in connection with certain of such acquisitions, the Company has
agreed with the sellers in such acquisitions to pay (in additional shares and/or
cash) to the sellers an amount equal to the shortfall in the value of the issued
shares in the event the market value of such shares at the relevant effective
date of the registration statement or other negotiated date is less than the
market value of such shares as of the closing of the acquisition or, in other
cases, as of the execution of the relevant acquisition agreement (referred to as
"Price Protection"). Based upon the closing sales price of the Company's Common
Stock on May 26, 1998 ($3 1/16 per share), such shortfall would be approximately
$9,634,000, which amount may be reduced by up to $5,977,000 to the extent
certain sellers exercise their repurchase rights referred to above.
In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differs for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration, and in other cases, the parties have agreed
that any payment of such contingent consideration may be paid in cash or shares
of Common Stock, or a combination of both.
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement, dated
July 21, 1997, between the Company and RGC International, LDC ("RGC")
(hereinafter referred to as the "RGC Agreements"), the Company issued 18,000
shares of Series C Convertible Preferred Stock, $1,000 stated value per share
(the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the Company
was required to use its best efforts to include the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock (the "RGC Conversion
Shares") in an effective Registration Statement on Form S-3 not later than
October 1997. The RGC Agreements provide for monthly penalties ("RGC
Registration Penalties") in the event that the Company failed to register the
Conversion Shares prior to October 1997 with such penalties continuing until
such time as the Conversion Shares are registered as required by the RGC
Agreements.
As a result of the Company's continued failure to register the RGC Conversion
Shares, the Company: (i) issued warrants to RGC to acquire 1,167,000 shares of
Common Stock at an exercise prices ranging
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from $11.62 to $12.95 per share (such warrants having an estimated value, for
accounting purposes, of $3,245,000); (ii) issued interest bearing promissory
notes, due May 1, 1998 (the "RGC Penalty Notes"), in the aggregate principal
amount of $1,440,000; and (iii) is incurring additional penalties of $540,000
per month (payable at the option of RGC in cash or additional shares of Common
Stock). On May 1, 1998, the Company did not pay RGC the $1,440,000 that was then
due and payable under the RGC Penalty Notes. Additionally, on May 1, 1998, as a
result of the Company's failure to register the Conversion Shares on or before
such date, RGC was entitled under the RGC Agreements to demand a one-time
penalty of $1,800,000 (the "May 1998 Penalty") payable, at the option of RGC, in
cash or additional shares of Common Stock. The Company has not received notice
of a demand for payment or other satisfaction of the RGC Penalty Notes and the
May 1998 Penalty, and the Company and RGC are currently in discussions regarding
the restructuring of the RGC Penalty Notes, the May 1998 Penalty and the on-
going monthly penalties. There can be no assurance, however, that the Company
will be successful in restructuring such obligations on terms favorable to the
Company or its shareholders.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue Recognition
At each of the Company's diagnostic imaging centers, all medical services
are performed exclusively by physician groups (the "Physician Group" or the
"Interpreting Physician"), generally consisting of radiologists with whom the
Company has entered into independent contractor agreements. Pursuant to these
agreements, the Company has agreed to provide equipment, premises, comprehensive
management and administration, including responsibility for billing and
collection of receivables, and technical imaging services to the Interpreting
Physician.
Net service revenues for the Diagnostic Imaging segment are reported, when
earned, at their estimated net realizable amounts from patients, third party
payors and others for services rendered at contractually established billing
rates which generally are at a discount from gross billing rates. Known and
estimated differences between contractually established billing rates and gross
billing rates (referred to as "contractual allowances") are recognized in the
determination of net service revenues at the time services are rendered. Subject
to the foregoing, the Company's diagnostic imaging centers recognize revenue
under one of the three following types of agreements with Interpreting
Physicians:
Type I - The Company receives a technical fee for each diagnostic imaging
procedure performed at a center, the amount of which is dependent upon the type
of procedure performed. The fee included in revenues is net of contractual
allowances. The Company and the Interpreting Physician proportionally share in
any losses due to uncollectible amounts from patients and third party payors,
and the Company has established reserves for its share of the estimated
uncollectible amount. Type I net service revenues for the quarter ended March
31, 1998 were $24,365,000 or 52% of Diagnostic Imaging segment revenues.
Type II - The Company bills patients and third party payors directly for
services provided and pays the Interpreting Physicians either (i) a fixed
percentage of fees collected at the center, or (ii) a contractually fixed amount
based upon the specific diagnostic imaging procedures performed. Revenues are
recorded net of contractual allowances and the Company accrues the Interpreting
Physicians fee as an expense on the Consolidated Statements of Operations. The
Company bears the risk of loss due to uncollectible amounts from patients and
third party payors, and the Company has established reserves for the estimated
uncollectible amount. Type II net service revenues for the quarter ended March
31, 1998 were $19,168,000 or 41% of Diagnostic Imaging segment revenues.
Type III - The Company receives from an affiliated physician association a
fee for the use of the premises, a fee per procedure for acting as billing and
collection agent and a fee for administrative and technical services performed
at the centers. The affiliated physician association contracts with and pays
directly the Interpreting Physicians. The Company's fee, net of an allowance
based upon the affiliated physician association's ability to pay after the
association has fulfilled its obligations (i.e., estimated future net
collections from patients and third party payors less facility lease expense and
Interpreting Physicians fees), constitutes the Company's net service revenues.
Since the Company's net service revenues are dependent upon the amount
ultimately realized from patient and third party receivables, the Company's
revenue and receivables have been reduced by an estimate of patient and third
party payor contractual allowances, as well as an estimated provision for
uncollectible amounts from patients and third party payors. Type III net
service revenues for the quarter ended March 31, 1998 were $3,440,000 or 7% of
Diagnostic Imaging segment revenues.
Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.
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The fees received or retained by the Company under the three types of
agreements with Interpreting Physicians described above, expressed as a
percentage of gross billings net of contractual allowances for the imaging
services provided, range from 78% to 93% for the Type I agreements, 80% to 93%
for the Type II agreements and 80% to 89% for the Type III agreements. These
agreements generally have terms ranging from one to ten years.
The Company also recognizes revenue from temporary nurse staffing and
radiology information systems. Such revenues are recognized on an accrual basis
as earned.
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
For the quarter ended March 31, 1998, total Company net service revenues were
$67,102,000 versus $39,987,000 for the quarter ended March 31, 1997, an increase
of $27,115,000 or 68%.
Net service revenues for the Diagnostic Imaging segment increased $20,445,000,
or 76%, to $47,286,000 during the first quarter of 1998 from $26,841,000 for the
first quarter of 1997, due primarily to the timing of various 1997 acquisitions
which contributed $ 22,420,000 of the increase. Revenues at imaging centers that
were operated by the Company for all of 1997 decreased $1,975,000, or 8%, to
$22,181,000 for the quarter ended March 31, 1998 from $24,156,000 for the same
period in 1997. This decrease in revenues was the net result of higher
contractual allowances in relation to gross billings in the first quarter of
1998, partially offset by the beneficial effects of increased procedure volumes.
Contractual allowances are largely dependent upon reimbursement rates from
third party payors, including Medicare, Medicaid and managed care providers.
Management believes that it is likely that the Company's overall reimbursement
rates will continue to gradually decline for some period of time, due to factors
such as the expansion of managed care organizations and continued national
healthcare reform efforts. The Company will endeavor to mitigate the impact of
any decline in reimbursement rates by decreasing costs and increasing referral
volumes. If the rate of decline in reimbursement rates were to increase
materially, or if the Company is unsuccessful in reducing its costs or
increasing its volume, the Company's results could be materially and adversely
affected.
Diagnostic Imaging segment revenue derived from personal injury claims, mainly
involving automobile accidents, represented approximately 24% of the Diagnostic
Imaging business net service revenues for the quarter ended March 31, 1998.
Automobile insurance carriers generally pay the non-deductible non-co-pay
portion of the charge, with the remaining balance payable by the individual. The
timing of collection from the individual is partially dependent upon the outcome
and timing of any settlement or judgment of the injury claim. Accordingly, such
receivables typically require a longer period of time to collect compared to the
Company's other receivables, and in the experience of the Company incur a higher
bad debt expense. If the Company were to become less successful in its efforts
in collecting these receivables, the Company's results could be materially and
adversely affected.
Net service revenues for the Temporary Staffing segment increased to
$19,816,000 in the first quarter of 1998 from $13,146,000 in the first quarter
of 1997, an increase of $6,670,000 or 51%. Internal growth in the staffing
business, consisting primarily of the opening of new per diem offices, accounted
for $2,401,000 of the increase in revenues. Revenues at per diem offices
acquired prior to March 31, 1997 accounted for $2,735,000 of the increase and
revenues of $1,534,000 were contributed by per diem offices acquired after March
31, 1997.
Imaging center and staffing operating costs for the three months ended March
31, 1998 were $46,072,000 compared to $24,554,000 for the three months ended
March 31, 1997, an increase of $21,518,000 or 88%.
Imaging center operating costs for the Diagnostic Imaging segment increased
$16,530,000, or 120%, to $30,347,000 for the quarter ended March 31, 1998 from
$13,817,000 for the quarter ended March 31, 1997, due primarily to the addition
of operating costs of $13,932,000 from centers acquired during 1997. Operating
costs at imaging centers operated by the Company for all of 1997 increased
$2,598,000,
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or 21%, to $14,964,000 for the three months ended March 31, 1998 from
$12,366,000 for the three months ended March 31, 1997, primarily as a result of
increased payroll and related costs.
Operating costs for the Temporary Staffing segment for the three months ended
March 31, 1998 were $15,725,000 compared to $10,737,000 for the three months
ended March 31, 1997, an increase of $4,988,000 or 46%. Internal growth in the
staffing business accounted for $1,841,000 of the increase in operating costs.
Increased costs at per diem offices opened or acquired during 1997 accounted for
$3,147,000 of the additional operating costs.
Center operating margins, which represent net service revenue less imaging
center and staffing operating costs as a percent of net revenue, decreased for
the quarter ended March 31, 1998 to 31% from 39% for the quarter ended March 31,
1997. Center operating margins for the Diagnostic Imaging segment decreased for
the quarter ended March 31, 1998 to 36% from 49% for the quarter ended March 31,
1997 due primarily to higher contractual allowances as a percentage of gross
billings and generally higher payroll and administrative costs. Center operating
margins in the Temporary Staffing business increased for the three months ended
March 31, 1998 to 21% from 18% for the three months ended March 31, 1997 due
primarily to improved profitability of per diem offices opened or acquired prior
to 1997.
The provision for uncollectible accounts receivable for the quarter ended
March 31, 1998 was $3,693,000, an increase of $1,868,000 from first quarter 1997
provision of $1,825,000. This increase was essentially entirely attributable to
the Company's Diagnostic Imaging segment. The Company's Diagnostic Imaging
segment provision for uncollectible accounts receivable for the first quarter of
1998 was $3,621,000, or 8%, of related net service revenues, compared to the
first quarter of 1997 provision of $1,821,000, or 7%, of related net service
revenues. The increase in the dollar amount of the provision for uncollectible
accounts receivable was primarily due to higher revenue levels in the first
quarter of 1998.
Corporate general and administrative expense for the three months ended March
31, 1998 was $7,679,000, an increase of $4,315,000 from the $3,364,000 recorded
for the three months ended March 31, 1997. This increase was primarily due to
higher payroll and related costs as a result of the expanded business
development activities and the resulting growth experienced during 1997 in the
Diagnostic Imaging segment. In March 1998, the Company announced a workforce
reduction and follow-on attrition program that is expected to result in reduced
payroll costs of approximately $5,000,000 per annum.
Depreciation and amortization expense for the first quarter of 1998 was
$6,648,000, compared to $2,921,000 for the first quarter of 1997, or an increase
of $3,727,000 attributable almost entirely to the Company's Diagnostic Imaging
business. The increase was due primarily to higher equipment depreciation of
$2,207,000 primarily resulting from 1997 acquisitions and increased goodwill
amortization of $1,384,000.
During the first quarter of 1998, the Company recorded $3,760,000 of unusual
charges consisting of (i) $313,000 for shareholder and employee lawsuits, and
(ii) $2,227,000 ($1,194,000 of which was a non- cash charge related to the
issuance of 350,000 Common Stock warrants) for penalties associated with delays
in the registration of the Company's Common Stock issued in connection with
acquisitions or issuable upon conversion of convertible preferred stock, (iii)
$883,000 for costs associated with the investigation of related party
transactions which was concluded in April 1998 and (iv) $337,000 for management
termination benefits and related costs.
The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current negotiations
regarding defaults under the Senior Notes and penalties associated with the
failure to register the Company's Common Stock, as well as the outcome of
certain litigation.
Net interest expense for the three months ended March 31, 1998 was $3,668,000
as compared to $930,000 for the three months ended March 31, 1997, an increase
of $2,738,000. This increase was primarily attributable to higher outstanding
debt, including the issuance of $78,000,000 of
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Senior Notes during 1997, notes payable of $36,505,000 and capital lease
obligations totaling $26,612,000 assumed in connection with the Company's 1997
acquisitions.
The Company's income for the quarter ended March 31, 1998 was decreased by
$181,000 attributable to minority interests, as compared to a reduction in the
Company's income of $235,000 for the quarter ended March 31, 1997.
The provision for income taxes for the three months ended March 31, 1998
decreased $2,416,000 to $140,000 as compared to $2,556,000 for the comparable
period last year. The provision for income taxes for the three months ended
March 31, 1998 consists entirely of estimated state income taxes. During the
first quarter of 1998, a benefit for income taxes has not been recorded due to
the uncertainty regarding the recognition of the full amount of the Company's
deferred tax assets.
The Company's net loss for the quarter ended March 31, 1998 was $4,739,000
compared to net income for the quarter ended March 31, 1997 of $3,602,000. The
net loss applicable to common stockholders (used in computing loss per common
share) in the first quarter of 1998 includes charges of $135,000 as a result of
the accretion of the Company's preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company's primary source of cash flow
was from reductions in the Company's cash balances of $10,166,000 and borrowings
under the Company's line of credit of $2,847,000. The primary use of cash was
the repayment of principal amount of capital lease obligations and notes and
mortgages payable of $4,316,000, and repurchase of Common Stock subject to
redemption as a result of the exercise of puts provided by the Company in
connection with 1997 acquisitions of $2,547,000. Operating activities resulted
in a net use of cash of $5,025,000 during the first quarter of 1998 due
primarily to increases in accounts receivable.
During the first quarter of 1997, the Company's primary source of cash
flow was from financing activities, as a result of net proceeds from the Senior
Notes of $51,113,000. The primary use of cash was to fund acquisitions that
totaled $12,725,000 and to fund the repayment of certain notes and capital lease
obligations of $20,765,000. Operating activities resulted in a net use of cash
of $3,177,000 during the first quarter of 1997 due primarily to increases in
accounts receivable.
The Company has never declared a dividend on its Common Stock and under the
Company's Senior Note agreement, the payments of such dividends is not
permitted.
As a result of the 1997 net loss, the Company is currently in default of
certain financial covenants under the Company's $78,000,000 of Senior Notes.
Management and the Senior Note lenders are engaged in discussions to resolve
this matter. In the event the parties are unable to reach agreement, the
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. There can be no assurance that the Senior
Note lenders will provide the Company with an amendment or waiver of the
defaults. In addition, certain medical equipment notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek certain
other remedies if the Company is in default under the terms of agreements such
as the Senior Notes.
In the event that the Senior Note lenders or the other creditors or lessors
elect to exercise their right to accelerate the obligations under the Senior
Notes or the other loans and leases, such acceleration would have a material
adverse effect on the Company, its operations and its financial condition.
Furthermore, if such obligations were to be accelerated, in whole or in part,
there can be no assurance that the Company would be successful in identifying or
consummating financing necessary to satisfy the obligations which would become
immediately due and payable. As a result of the uncertainty related to the
defaults and corresponding remedies described above, the Senior Notes and the
other loans and capital leases are shown as current liabilities on the Company's
Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 and the
Company has a deficit in working capital more fully described below. These
matters raise
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substantial doubt about the Company's ability to continue as a going concern. In
addition to continuing to negotiate with the Senior Note lenders in an attempt
to obtain waivers or amendments of the aforementioned defaults, the Company has
taken various actions in response to this situation, including the following:
(i) it effected a workforce reduction in March 1998 aimed at reducing the
Company's overall expense levels, and (ii) it has retained the investment
banking firm of SBC Warburg Dillon Read to assist the Company in exploring a
possible sale of the Company's StarMed temporary staffing subsidiary. The
financial statements do not include any further adjustments reflecting the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty.
The Company has a working capital deficit of $59,043,000 at March 31, 1998
compared to a working capital deficit of $58,174,000 at December 31, 1997. The
deficit in both periods is primarily due to $78,000,000 of Senior Notes due 2001
through 2005 and other debt and capital leases shown as current liabilities as a
result of financial covenant defaults under such agreements.
In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as consideration, the Company agreed
to register such shares for resale pursuant to the federal securities laws. In
certain of such acquisitions, the Company has granted specific remedies to the
sellers in the event that a registration statement covering the relevant shares
is not declared effective by the SEC within an agreed-upon period of time,
including the right to require the Company to repurchase the shares issued to
such seller. In the event the Company is unable to register such shares by the
required dates, the Company would become obligated to repurchase the shares
issued in connection with such acquisition. As of June 10, 1998, the Company had
not registered any shares of Common Stock issued in connection with the
Company's 1997 acquisitions under a registration statement declared effective by
the SEC. As of March 31, 1998, the Company had reflected $7,187,000 of Common
Stock subject to redemption on its Consolidated Balance Sheets related to shares
that the Company is, has agreed to or may be required to repurchase. During the
first quarter of 1998, the Company paid $2,547,000 to sellers who exercised
their rights to have shares of Common Stock repurchased. Furthermore, from
April 1, 1998 through May 26, 1998, the Company paid an additional $728,000 to
such sellers. In addition, the Company expects to pay an additional $5,763,000
during the remainder of 1998 ($3,695,000 of which was due and payable on June 3,
1998 (the "June 1998 Repurchase Obligation") but has not yet been paid by the
Company) in connection with the settlement of certain repurchase obligations of
the Company subject, under certain circumstances, to the consent of the Senior
Notes holders. With respect to the June 1998 Repurchase Obligation which remains
due and payable, the Company is in discussions with the sellers to whom such
obligations are owed and the Senior Note holders regarding the timing and
satisfaction of the June 1998 Repurchase Obligation.
In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay to the sellers (in
additional shares and/or cash) an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or, in
other cases, as of the execution of the relevant acquisition agreement (referred
to as "Price Protection"). Based upon the closing sales price of the Company's
Common Stock on May 26, 1998 ($3-1/16 per share), such shortfall would be
approximately $9,634,000, which amount may be reduced by up to $5,977,000 to the
extent certain sellers exercise their repurchase rights referred to above.
In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differ for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration and in other cases the parties have agreed
that any payment of such contingent consideration may be paid in cash or shares
of Common Stock, or a combination of both.
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Although the Company has the option, in certain cases, to pay certain of such
amounts in shares of Common Stock, payment of significant cash funds to sellers
in the event such remedies or earnout provisions are triggered could have a
material adverse effect on the Company's cash flow and financial condition. In
addition, the Company may be required to finance all or a portion of any such
cash payments from third-party sources. No assurance can be given that such
capital will be available on terms acceptable to the Company. In addition, the
issuance by the Company of shares of Common Stock in payment of any such owed
amounts could be dilutive to the Company's stockholders.
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement, dated
July 21, 1997, between the Company and RGC International, LDC ("RGC")
(hereinafter referred to as the "RGC Agreements"), the Company issued 18,000
shares of Series C Convertible Preferred Stock, $1,000 stated value per share
(the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the Company
was required to use its best efforts to include the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock (the "RGC Conversion
Shares") in an effective Registration Statement on Form S-3 not later than
October 1997. The RGC Agreements provide for monthly penalties ("RGC
Registration Penalties") in the event that the Company fails to register the
Conversion Shares prior to October 1997 with such penalties continuing until
such time as the Conversion Shares are registered as required by the RGC
Agreements.
As a result of the Company's failure to register the RGC Conversion Shares as
of May 26, 1998, the Company: (i) issued warrants to RGC to acquire 1,167,000
shares of Common Stock at an exercise prices ranging from $11.62 to $12.95 per
share (such warrants having an estimated value, for accounting purposes, of
$3,245,000); (ii) issued interest bearing promissory notes, due May 1, 1998 (the
"RGC Penalty Notes"), in the aggregate principal amount of $1,440,000; and (iii)
is incurring additional penalties of $540,000 per month (payable at the option
of RGC in cash or additional shares of Common Stock). On May 1, 1998, the
Company did not pay RGC the $1,440,000 that was then due and payable under the
RGC Penalty Notes. Additionally, on May 1, 1998, as a result of the Company's
failure to register the Conversion Shares on or before such date, RGC was
entitled under the RGC Agreements to demand a one-time penalty of $1,800,000
(the "May 1998 Penalty") payable, at the option of RGC, in cash or additional
shares of Common Stock. As of May 26, 1998, RGC had not demanded payment or
other satisfaction of the RGC Penalty Notes and the May 1998 Penalty, and the
Company and RGC are currently in discussions regarding the restructuring of the
RGC Penalty Notes, the May 1998 Penalty and the on-going monthly penalties.
There can be no assurance, however, that the Company will be successful in
restructuring such obligations on terms favorable to the Company or its
shareholders.
In addition to matters discussed above, the Company is subject to litigation
that may require additional future cash outlays.
On May 14, 1998, management appeared before the Nasdaq Qualifications Hearing
Panel (the "Panel"). This hearing resulted from the Company's failure to file
timely its Form 10-K for 1997 and was held to determine if the Company's Common
Stock should continue to be listed on The Nasdaq Stock Market. On May 29, 1998,
the Company was advised that the Panel determined to continue the listing of the
Company's Common Stock on the Nasdaq Stock Market subject to certain conditions.
The Company must file its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 on or before June 12, 1998 and must evidence compliance with
either Nasdaq's minimum net tangible assets test or one of Nasdaq's alternative
requirements by July 24, 1998.
Based on the closing price for the Company's Common Stock on May 26, 1998
($3-1/16) and the Company's net tangible assets as of March 31, 1998, the
Company does not currently satisfy either Nasdaq's minimum net tangible assets
requirement or one of the alternative requirements for continued listing, which
include, among other things, a minimum bid price for the Common Stock of $5.00
per share. In order to satisfy the continued listing requirements, on or before
July 24, 1998, the Company intends to submit for shareholder approval a reverse
stock split, if necessary, in order to meet or exceed the $5.00 minimum bid
price. In the event the Company does not satisfy either the minimum net tangible
assets requirement or is unable to effect a reverse stock split sufficient to
meet or exceed the $5.00 per share requirement, the Panel will consider moving
the Common Stock to The Nasdaq SmallCap Market,
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provided the Company is able to demonstrate compliance with the applicable
maintenance criteria. There can be no assurance that the Common Stock will meet
the continued listing requirements for The Nasdaq Stock Market.
The Company's sources of liquidity consist of its cash balances and its
ability to enter into operating leases to fund expansions and equipment
replacement at its centers. At March 31, 1998 and May 29, 1998, the Company's
cash and cash equivalents were $13,032,000 and $10,711,000 respectively. In
addition, in March of 1998, the Company announced its intention to explore
strategic alternatives for (and the possible sale of) its StarMed temporary
staffing subsidiary, which the Company expects may result in cash proceeds to
Medical Resources, Inc. Assuming that the Company (i) reaches satisfactory
resolution with the Senior Note lenders regarding the financial covenant
defaults, and (ii) sells its Temporary Staffing and Per Diem business over the
next several months, while no assurance can be given, the Company believes that
it will have sufficient funds available to finance its working capital
requirements through 1998.
Seasonality and Inflation
The Company believes that its imaging business is generally unaffected by
seasonality. The Company's temporary staffing business usually experiences lower
revenues during the third quarter due to reduced activity during the summer
months.
The impact of inflation and changing prices on the Company has been primarily
limited to salary, medical and film supplies and rent increases and has not been
material to date to the Company's operations. Management is aware of general
inflationary expectations and growing health care cost containment pressures,
and believes that the Company may not be able to raise the prices for its
diagnostic imaging procedures by an amount sufficient to offset such negative
effects. While the Company has responded to these concerns in the past by
increasing the volume of its business there can be no assurance that the Company
will be able to increase its volume of business in the future. In addition,
current discussions within the Federal Government regarding national health care
reform are emphasizing containment of health care costs as well as expansion of
the number of eligible parties. The implementation of this reform could have a
material effect on the financial results of the Company.
Disclosure Regarding Forward Looking Statements
Statements contained in this quarterly report on Form 10-Q that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results may differ materially from that projected or suggested herein due to
certain risks and uncertainties including, without limitation: the ability of
the Company to effectively integrate the operations and information systems of
businesses acquired in 1997 and earlier; the ability of the Company to generate
net positive cash flows from operations; the payment timing and ultimate
collectibility of accounts receivable (including purchased accounts receivable)
from different payor groups (including Personal Injury-type); the economic
impact of involuntary share repurchases and other payments (including price
protection payments and penalty payments) caused by the delay in the
effectiveness of the Company's pending Registration Statement and by the recent
decline in the Company's share price; the ability of the Company to cure any
defaults under its debt agreements and/or other obligations, in general, and in
a manner that avoids significant common stock dilution; the impact of a changing
and increasing mix of managed care and personal injury claim business on
contractual allowance provisions, net revenues and bad debt provisions; the
ultimate economic impact of recent litigation including shareholder and former
management lawsuits against the Company and certain of its Directors; the
availability of debt and/or equity capital, on reasonable terms, to finance
operations as needed and to finance growth; and the effects of federal and state
laws and regulations on the Company's business over time. Additional
information concerning certain risks and uncertainties that could cause actual
results to differ materially from that projected or suggested may be identified
from time to time in the Company's Securities and Exchange Commission filings
and the Company's public announcements.
22
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) Set forth below is a list of equity securities sold by the Company during
the three months ended March 31, 1998 which, pursuant to the exemptions
covered by Section 4 (2) of the Securities Act of 1933, as amended (the
"Act"), were not registered under the Act.
In January 1998, the Company issued to RGC International, LDC ("RGC")
warrants to purchase 350,000 shares of Common Stock at an exercise price of
$12.95 per share in payment of certain monthly penalties payable to RGC as
a result of the failure by the Company to register the shares of Common
Stock issuable upon the conversion of the Series C Convertible Preferred
Stock held by RGC.
In February 1998, the Company issued to Robert Kupchak ("Kupchak") 25,624
shares of Common Stock. Kupchak had been the seller of a certain
diagnostic imaging center located in Hollywood, Florida in July 1997 and,
at the closing of such sale, received shares of Common Stock from the
Company as partial consideration for such center (the "Closing Shares").
The shares issued in February 1998 were issued as a result of the election
by Kupchak of his right to have the Company pay the shortfall
(approximately $275,000) with respect to the market value of his Closing
Shares as of February 1, 1998 compared to the market value of his Closing
Shares at the time of the closing of the relevant acquisition.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
None.
b. Reports on Form 8-K
-------------------
On January 7, 1998, the Company filed a Current Report on Form 8-K/A
amending Items 5 and 7 of the Current Report on Form 8-K dated May 30,
1997 and filed on June 16, 1997, as amended on Form 8-K/A filed on
August 13, 1997, relating to the Company's acquisition of certain
entities and including the related financial statements with respect to
such entities.
On January 12, 1998, the Company filed a Current Report in Form 8-K,
reporting under Item 5 the creation of the Board of Director's
Executive, Nominating and Compensation Committees and the election of
new directors to the Audit Committee.
On January 16, 1998, the Company filed a Current Report on Form 8-K/A
amending Items 5 and 7 of the Current Report on Form 8-K dated May 30,
1997 and filed on June 16, 1997, as amended on Forms 8-K/A filed on
August 13, 1997 and January 7, 1998.
On February 23, 1998, the Company filed a Current Report on Form 8-K/A
amending Items 5 and 7 of the Current Report on Form 8-K dated May 30,
1997 and filed on June 16, 1997, as amended on Forms 8-K/A filed on
August 13, 1997, January 7, 1998 and January 16, 1998.
On April 8, 1998, the Company filed a Current Report on Form 8-K,
reporting under Item 5 that the Company's Board of Directors voted to
adopt the recommendations contained in the report of a Special Committee
of two outside directors elected to the Board in December 1997 and
appointed to investigate certain events and review the Company's
policies regarding related party transactions.
On April 16, 1998, the Company filed a Current Report on Form 8-K,
reporting under Item 5 that the Company was unable to file its Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 by the
April 15, 1998 extended due date for such filing.
23
<PAGE>
On May 20, 1998, the Company filed a Current Report on Form 8-K,
reporting under Item 5 that (i) Peter J. Powers had resigned as a
director of the Company effective May 13, 1998 and (ii) the Company
would report a loss for the year ended December 31, 1997 and that it
expected to report a loss for the quarter ended March 31, 1998.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Resources, Inc.
BY /s/ Duane C. Montopoli
-----------------------------
Duane C. Montopoli
Chief Executive Officer
(Principal Executive Officer)
BY /s/ Geoffrey A. Whynot
------------------------------
Geoffrey A. Whynot
Chief Financial Officer and Senior
Vice President Finance
(Principal Accounting Officer)
Date: June 12, 1998
24
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