<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 JUNE 30, 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 July 31, 1998, 7,922,000 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 $53,367,000
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
<PAGE>
MEDICAL RESOURCES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 3-4
Consolidated Statements of Operations for the three
and six months ended June 30, 1998 and 1997 5-6
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 7-8
Notes to Consolidated Financial Statements 9-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-26
PART II. OTHER INFORMATION 27
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(in thousands, Except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,085 $ 23,198
Cash and short-term investments, restricted 1,744 600
Accounts receivable, net 74,761 65,887
Other receivables 10,497 5,430
Prepaid expenses 6,004 7,027
Income taxes recoverable 4,155 6,504
Deferred tax assets, net 2,492 2,492
---------- ---------
Total current assets 113,738 111,138
Property and equipment, net 57,072 64,343
Goodwill, net 147,580 149,624
Other intangible assets, net 6,220 6,836
Other assets 3,890 4,189
Deferred tax assets, net 2,353 2,353
Restricted cash 473 473
---------- ---------
Total assets $ 331,326 $ 338,956
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Medical Resources, Inc.
Consolidated Balance Sheets (continued)
As of June 30, 1998 and December 31, 1997
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- -----------
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities:
Senior Notes due 2001 through 2005, classified as current $ 78,000 $ 78,000
Notes and mortgages payable, classified as current 2,725 3,206
Capital lease obligations, classified as current 7,671 9,555
Current portion of notes and mortgages payable 14,842 13,313
Current portion of capital lease obligations 9,507 10,311
Borrowings under line of credit 10,591 3,744
Accounts payable 11,925 13,141
Accrued expenses 25,978 28,018
Common stock subject to redemption 5,509 9,734
Other current liabilities 2,882 290
--------- --------
Total current liabilities 169,630 169,312
Notes and mortgages payable, less current portion 20,294 21,539
Obligations under capital leases, less current portion 11,739 16,361
Other long term liabilities 515 178
--------- --------
Total liabilities 202,178 207,390
Minority interest 5,370 4,662
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000 shares,
7,687 issued and outstanding at June 30, 1998 and
7,296 issued and outstanding at December 31, 1997 77 73
Series C Convertible Preferred Stock, $1,000 per share stated
value; 16 and 18 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively (liquidation
preference of 3% per annum) 16,016 18,242
Additional paid-in capital 143,770 138,810
Accumulated deficit (36,085) (30,221)
--------- --------
Total stockholders' equity 123,778 126,904
--------- --------
Total liabilities and stockholders' equity $ 331,326 $ 338,956
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Medical Resources, Inc.
Consolidated Statements of Operations
For the Three Months ended June 30, 1998 and 1997
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------- --------------
1998 1997
----------- --------------
<S> <C> <C>
Net service revenues $ 46,626 $ 37,877
Imaging center operating costs:
Technical services payroll and related expenses 9,928 7,937
Medical supplies 2,920 2,494
Diagnostic equipment rental and maintenance 4,491 2,448
Independent contractor fees 2,046 1,514
Administrative expenses 8,292 5,793
Other center level costs 2,084 1,727
Provision for uncollectible accounts receivable 3,686 1,932
Corporate general and administrative 2,599 1,543
Stock-option based compensation 114 2,305
Depreciation and amortization 6,158 4,288
Unusual charges 1,640 -
----------- --------------
Operating income 2,668 5,896
Interest expense, net 3,426 1,847
----------- --------------
Income (loss) from continuing operations before minority
interest and income taxes (758) 4,049
Minority interest (benefit) 462 (428)
----------- --------------
Income (loss) from continuing operations before income taxes (1,220) 4,477
Provision for income taxes 222 1,849
----------- --------------
Income (loss) from continuing operations (1,442) 2,628
Income from discontinued operations, net of tax 592 155
----------- --------------
Net income (loss) (850) 2,783
Charges related to convertible preferred stock (139) -
----------- --------------
Net income (loss) applicable to common
stockholders $ (989) $ 2,783
=========== ==============
Income (loss) per common share applicable to common
stockholders:
Basic -
Continuing operations $(0.22) $ 0.39
Discontinued operations 0.08 0.02
----------- --------------
Net income (loss) per common share $ (0.14) $ 0.41
=========== ==============
Diluted -
Continuing operations $ (0.22) $ 0.36
Discontinued operations 0.08 0.02
----------- --------------
Net income (loss) per common share $ (0.14) $ 0.38
=========== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
Medical Resources, Inc.
Consolidated Statements of Operations
For the Six Months ended June 30, 1998 and 1997
(in thousands, except per share amounts)
(unaudited)
Six Months ended June 30,
-------------------------
1998 1997
------ -------
<S> <C> <C>
Net service revenues $ 93,648 $ 64,718
Imaging center operating costs:
Technical services payroll and related expenses 21,510 12,590
Medical supplies 5,919 3,884
Diagnostic equipment rental and maintenance 8,724 4,131
Independent contractor fees 4,349 2,825
Administrative expenses 16,920 10,248
Other center level costs 3,915 2,606
Provision for uncollectible accounts receivable 7,307 3,753
Corporate general and administrative 5,815 2,689
Stock-option based compensation 228 2,305
Depreciation and amortization 12,635 7,079
Unusual charges 5,400 -
-------- --------
Operating income 926 12,608
Interest expense, net 6,912 2,733
-------- --------
Income (loss) from continuing operations before minority
interest and income taxes (5,986) 9,875
Minority interest (benefit) 643 (193)
-------- --------
Income (loss) from continuing operations before income taxes (6,629) 10,068
Provision for income taxes 301 4,078
-------- --------
Income (loss) from continuing operations (6,930) 5,990
Income from discontinued operations, net of tax 1,341 395
-------- --------
Net income (loss) (5,589) 6,385
Charges related to convertible preferred stock (274) -
-------- --------
Net income (loss) applicable to common
stockholders $ (5,863) $ 6,385
========== =========
Income (loss) per common share applicable to common
stockholders:
Basic -
Continuing operations $ (0.99) $ 0.91
Discontinued operations 0.19 0.06
-------- --------
Net income (loss) per common share $ (0.80) $ 0.97
========== =========
Diluted -
Continuing operations $ (0.99) $ 0.86
Discontinued operations 0.19 0.06
-------- --------
Net income (loss) per common share $ (0.80) $ 0.92
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
Medical Resources, Inc.
Consolidated Statements of Cash Flows
For the Six Months ended June 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
------------------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,589) $ 6,385
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,969 7,341
Provision for uncollectible accounts receivable 7,455 3,762
Deferred income tax provision - 649
Stock-option based compensation 228 2,305
Expense incurred in connection with warrants and notes
issued to preferred stockholders 3,334 -
Other, net 708 (425)
Changes in operating assets and liabilities:
Accounts receivable (16,330) (15,333)
Other receivables (5,067) (2,272)
Prepaid expenses 1,023 (2,014)
Income taxes recoverable or payable 2,349 (886)
Other assets 336 (1,219)
Accounts payable and accrued expenses (3,244) 5,997
Other current liabilities 2,592 1,331
Other long-term liabilities 337 (2,686)
--------- ----------
Total adjustments 6,690 (3,450)
--------- ----------
Net cash provided by operating activities 1,101 2,935
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment, net of disposals (1,086) (4,233)
Acquisition of diagnostic imaging centers, net of cash acquired - (37,908)
Acquisition of temporary staffing offices, net of cash acquired - 176
Investment in Diagnostic Imaging Center Joint Venture - (1,000)
Contingent consideration related to prior year acquisitions (1,201) -
Costs associated with refinancing of assets under capital leases - (1,461)
Sale (purchase) of short-term investments, net - 5,848
Increase in restricted cash (1,144) -
--------- ----------
Net cash used in investing activities (3,431) (38,578)
--------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
Medical Resources, Inc.
Consolidated Statements of Cash Flows (continued)
For the Six Months ended June 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------
1998 1997
------ -----
<S> <C> <C>
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs - 77,113
Proceeds from sale/leaseback transactions - 7,856
Repurchase of Common Stock subject to redemption (3,311) -
Proceeds from borrowing under notes payable 103 309
Borrowings under line of credit 6,847 1,500
Proceeds from exercise of options and warrants 128 308
Note and capital lease repayments in connection with
acquisitions - (7,659)
Note and capital lease repayments in connection with
Senior Notes transaction - (13,764)
Note and capital lease repayments in connection with
sale/leaseback transaction - (2,314)
Principal payments under capital lease obligations (5,743) (1,791)
Principal payments on notes and mortgages payable (4,807) (3,427)
Other, net - (19)
------------- -------------
Net cash (used in) provided by financing activities (6,783) 58,112
------------- -------------
Net increase (decrease) in cash and cash equivalents (9,113) 22,469
Cash and cash equivalents at beginning of year 23,198 15,346
------------- -------------
Cash and cash equivalents at end of period $ 14,085 $ 37,815
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<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 and in
conjunction with Form S-1 filed with the SEC on July 23, 1998.
During July 1998, the Company's shareholders approved a reverse stock split
of the Company's outstanding shares of Common Stock. As a result of the reverse
stock split, each three outstanding shares of Common Stock were automatically
converted into one share of new Common Stock. The Company effected the reverse
stock split in order to meet the minimum bid price requirement for continued
listing on the Nasdaq Stock Market. The share data included in this Form 10-Q
have been adjusted to reflect the impact of the reverse stock split.
The Company
The Company operates and manages primarily fixed-site, free-standing
outpatient medical diagnostic imaging centers (herein referred to as "centers"),
and provides diagnostic imaging network management services to managed care
providers. The Company, through its wholly-owned subsidiary, Dalcon
Technologies, Inc., also develops and markets software products and systems for
the diagnostic imaging industry.
Through the Per Diem and Travel Nursing divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On July 8, 1998, the Company entered into a definitive agreement to
sell the StarMed business, in the form of a stock sale, to RehabCare Group, Inc.
(NASDAQ:RHBC) for $33,000,000 (the "StarMed Sale"). Closing of the StarMed
Sale, which is subject to the satisfaction of customary conditions and approval
by the Company's Senior Note lenders, is expected to occur in August of this
year. Due to the pending StarMed Sale, the results of operations of StarMed are
herein reflected in the Company's Consolidated Statements of Operations as
discontinued operations (see Note 6).
Revenue Recognition
At each of the Company's diagnostic imaging centers, all medical services are
performed exclusively by physician groups (the "Physician Group" or the
"Interpreting Physician"), generally consisting of radiologists with whom the
Company has entered into independent contractor agreements. Pursuant to these
agreements, the Company has agreed to provide equipment, premises, comprehensive
management and administration, including responsibility for billing and
collection of receivables, and technical imaging services to the Interpreting
Physician.
Net service revenues are reported, when earned, at their estimated net
realizable amounts from patients, third party payors and others for services
rendered at contractually established billing rates which generally are at a
discount from gross billing rates. Known and estimated differences between
contractually established billing rates
9
<PAGE>
and gross billing rates ("contractual allowances") are recognized in the
determination of net service revenues at the time services are rendered. Subject
to the foregoing, the Company's imaging centers recognize revenue under one of
the three following types of agreements with Interpreting Physicians:
Type I - The Company receives a technical fee for each diagnostic imaging
procedure performed at a center, the amount of which is dependent upon the
type of procedure performed. The fee included in revenues is net of
contractual allowances. The Company and the Interpreting Physician
proportionally share in any losses due to uncollectible amounts from
patients and third party payors, and the Company has established reserves
for its share of the estimated uncollectible amount.
Type II - The Company bills patients and third party payors directly for
services provided and pays the Interpreting Physicians either (i) a fixed
percentage of fees collected at the center, or (ii) a contractually fixed
amount based upon the specific diagnostic imaging procedures performed.
Revenues are recorded net of contractual allowances and the Company accrues
the Interpreting Physician fee as an expense on the Consolidated Statements
of Operations. The Company bears the risk of loss due to uncollectible
amounts from patients and third party payors, and the Company has
established reserves for the estimated uncollectible amount.
Type III - The Company receives from an affiliated physician association
a fee for the use of the premises, a fee per procedure for acting as
billing and collection agent and a fee for administrative and technical
service performed at the centers. The affiliated physician association
contracts with and pays directly the Interpreting Physicians. The Company's
fee, net of an allowance based upon the affiliated physician association's
ability to pay after the association has fulfilled its obligations (i.e.,
estimated future net collections from patients and third party payors less
facility lease expense and Interpreting Physicians fees), constitutes the
Company's net service revenues. Since the Company's net service revenues
are dependent upon the amount ultimately realized from patient and third
party receivables, the Company's revenue and receivables have been reduced
by an estimate of patient and third party payor contractual allowances, as
well as an estimated provision for uncollectible amounts from patients and
third party payors.
Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.
The Company also recognizes revenue from the sale of radiology information
systems. Such revenues are recognized on an accrual basis as earned.
Reclassification and Restatement
The Consolidated Statement of Operations for the three month and six month
periods ended June 30, 1997 have been restated to include a non-cash charge of
$2,305,000 for compensation expense resulting from stock options granted in 1996
and early 1997 that were approved by the Company's stockholders in May 1997. In
addition, certain prior year amounts have been reclassified to conform to the
current year presentation.
Earnings Per Share
Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This statement requires the presentation of Basic Earnings per Share
and Diluted Earnings per Share. Basic earnings per share is based on the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is based on the weighted average number of common shares
outstanding during the period plus the potentially issuable common shares
related to outstanding stock options, warrants and convertible debt. Earnings
per share amounts for the three and six months ended June 30, 1997 have been
restated to conform to the requirements of SFAS No. 128.
10
<PAGE>
The computations of basic earning per share and diluted earnings per share
for the three and six months ended June 30, 1998 and 1997 were as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
1998 1997 1998 1997
---------- ------------ ---------- ---------
Basic earnings (loss) per share information
- --------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations (1,442) 2,628 (6,930) 5,990
Income from discontinued operations 592 155 1,341 395
------ ------ ------- ------
Net income (loss) $ (850) $2,783 $(5,589) $6,385
Charges related to convertible preferred stock (139) - (274) -
------ ------ ------- ------
Net income (loss) applicable to common $ (989) $2,783 $(5,863) $6,385
stockholders ====== ====== ======= ======
Weighted average number of common shares 7,321 6,745 7,304 6,549
Net income (loss) per share before discontinued operations $(0.22) $ 0.39 $ (0.99) $ 0.91
Discontinued operations 0.08 0.02 0.19 0.06
------ ------ ------- ------
Basic earnings (loss) per share $(0.14) $ 0.41 $ (0.80) $ 0.97
====== ====== ======= ======
Diluted earnings (loss) per share information
- ----------------------------------------------------
Income (loss) from continuing operations (1,442) 2,628 (6,930) 5,990
Income from discontinued operations 592 155 1,341 395
------ ------ ------ ------
Net income (loss) $ (850) $2,783 $(5,589) $6,385
Interest savings from conversion of convertible
subordinated debentures - 23 - 43
Charges related to convertible preferred stock (139) - (274) -
------ ------ ------- ------
Net income (loss) applicable to common $ (989) $2,806 $(5,863) $6,428
stockholders after assumed conversions ====== ====== ======= ======
Weighted average number of common shares 7,321 6,745 7,304 6,549
Incremental shares issuable on exercise of warrants
and options - 432 - 461
Incremental shares issuable on conversion of
convertible subordinated debentures - 103 - -
------ ------ ------- ------
Weighted average number of diluted common shares 7,321 7,280 7,304 7,010
====== ====== ======= ======
Net income (loss) per share before discontinued operations $(0.22) 0.36 $ (0.99) 0.86
Discontinued operations 0.08 0.02 0.19 0.06
------ ------ ------- ------
Diluted earnings (loss) per share $(0.14) $ 0.38 $ (0.80) $ 0.92
====== ====== ======= ======
</TABLE>
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
As a result of its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under its $78,000,000 of Senior Notes. Management and the Senior Note
lenders are engaged in discussions to resolve this matter. In the event the
parties are unable to reach agreement, the lenders are entitled, at their
discretion, to exercise certain remedies including acceleration of repayment.
There can be no assurance that the Senior Note lenders will provide the Company
with an amendment or waiver of the defaults. In addition, certain medical
equipment notes, and operating and capital leases of the Company 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 June 30, 1998 and December 31, 1997.
Accordingly, the Company has a deficit in working capital of $55,892,000 at June
30, 1998. These matters raise substantial doubt about the Company's ability to
11
<PAGE>
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)
has entered into a definitive agreement to sell the StarMed business, in the
form of a stock sale, for $33,000,000.
The financial statements, however, do not include any further adjustments
reflecting the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of this uncertainty.
3. UNUSUAL CHARGES
During the three months ended June 30, 1998, the Company recorded $1,640,000
of unusual charges consisting of (i) $1,240,000 for penalties associated with
delays in the registration of the Company's Common Stock issuable upon
conversion of convertible preferred stock and (ii) $400,000 for defense costs
relating to shareholder and employee lawsuits.
During the six months ended June 30, 1998, the Company recorded $5,400,000
of unusual charges consisting of (i) $3,467,000 ($1,194,000 of which was a non-
cash charge related to the issuance of 117,000 common stock warrants) for
penalties associated with delays in the registration of the Company's Common
Stock issued in connection with acquisitions or issuable upon conversion of
convertible preferred stock, (ii) $713,000 for defense costs relating to
shareholder and employee lawsuits, (iii) $883,000 for costs associated with the
investigation of related party transactions which was concluded in April 1998
and (iv) $337,000 for management termination benefits and related costs.
The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current negotiations
regarding penalties associated with the failure to register the Company's Common
Stock and waivers or amendments of the financial covenants under its Senior
Notes, and the outcome of certain litigation.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, is comprised of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Management fee receivables (net of contractual allowances)
Due from unaffiliated physicians (Type I revenues) $ 39,477 $ 35,540
Due from affiliated physicians (Type III revenues) 7,198 8,585
Patient and third party payor accounts receivable (Type II
revenues) 34,678 27,284
Temporary staffing service accounts receivable 15,533 13,400
-------- --------
Gross accounts receivable 96,886 84,809
Less: Allowance for doubtful accounts (22,125) (18,922)
-------- --------
$ 74,761 $ 65,887
======== ========
</TABLE>
Accounts receivable is net of contractual allowances, which represent
standard fee reductions negotiated with certain third party payors. Contractual
allowances amounted to approximately $30,415,000 and $20,094,000 for the three
months ended June 30, 1998 and 1997, respectively, and approximately $59,265,000
and $31,093,000 for the six months ended June 30, 1998 and 1997, respectively.
5. COMMITMENTS AND CONTINGENCIES
Between November 1997 and January 1998, several lawsuits were commenced
against the Company, certain of the Company's Directors and certain officers
concerning certain related party transactions that have since
12
<PAGE>
been investigated by a Special Committee of the Board of Directors ("Special
Committee"). The complaints in each action assert that the Company and the named
defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of
1934, alleging that the Company omitted and/or misrepresented material
information in its public filings, including that the Company failed to disclose
that it had entered into acquisitions that were not in the best interest of the
Company, that it had paid unreasonable and unearned acquisition and financial
advisory fees to related parties, and that it concealed or failed to disclose
adverse material information about the Company. Each action seeks unspecified
compensatory damages, with interest, and the costs and expenses incurred in
bringing the action. On February 9, 1998, the above-mentioned class actions were
consolidated for all purposes in federal district court in New Jersey. On March
31, 1998, the lead plaintiffs in the consolidated class actions served their
Consolidated Class Action Complaint, asserting that the Company and the named
defendants violated Section 10(b) of the Exchange Act, and that certain named
defendants violated Sections 20(a) and 20A of the Exchange Act. The Company
intends to defend vigorously against the allegations.
The Special Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April 6,
1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report. Accordingly, the Special Committee recommended and 712
Advisory Services, Inc., a financial advisory firm and affiliate of the
Company's Chairman of the Board (the "Affiliate), agreed to reimburse the
Company approximately $1,424,000 in fees for transactions completed after June
1, 1997, to reimburse $112,500 of the retainer paid to the Affiliate for 1997,
to waive payment of an additional $112,500 of fees accrued by the Company for
the third and fourth quarters of 1997, and to pay a substantial amount of the
expenses associated with the Special Committee's investigations. All such
amounts have been paid or reimbursed to the Company. In addition, the Special
Committee recommended and the Affiliate agreed to allow the Company to terminate
its relationship with the Affiliate.
The Special Committee reported to the directors that it had determined
that: (i) there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings; (iii) the Affiliate
performed acquisition advisory services fully consistent with the expectations
and understanding of the committee of outside directors that had approved the
Affiliate's acquisition fees; and (iv) the acquisition advisory fees paid to the
Affiliate in connection with the Company's acquisitions in 1997 were within the
range of customary acquisition advisory fees paid to investment bankers on
transactions of similar size.
As previously announced by the Company, the U.S. Attorney for the District
of New Jersey commenced an investigation in connection with the disclosures
regarding the related party transactions referred to above. In addition, the
Company has also received an inquiry from the SEC, but there have been no formal
proceedings commenced by the SEC. The Company has cooperated fully with these
authorities and provided all information requested by them.
On November 7, 1997, the Company accepted the resignations of William D.
Farrell, as President and Chief Operating Officer of the Company and as
Director, and Gary I. Fields, as Senior Vice President and General Counsel. On
the same date, Messrs. Farrell and Fields filed a complaint in the Superior
Court of New Jersey, Law Division, Essex County, against the Company and the
members of the Company's Board of Directors, claiming retaliatory discharge
under the New Jersey Conscientious Employee Protection Act and breach of
contract. On December 17, 1997, the plaintiffs amended their complaint to add a
claim for violation of public policy. The plaintiffs allege that they were
constructively terminated as a result of their objection to certain related-
party transactions, the purported failure of the defendants to adequately
disclose the circumstances surrounding such transactions, and the Company's
public issuance of alleged false and misleading accounts concerning or relating
to such related-party transactions. The plaintiffs seek unspecified compensatory
and punitive damages, interest and costs and reinstatement of the plaintiffs to
their positions with the Company. On April 8, 1998, the Company filed its Answer
to the Amended Complaint, and asserted a counterclaim against Messrs. Farrell
and Fields for breach of fiduciary duties. The Company intends to defend
vigorously against the allegations.
On November 8, 1997, the Company removed John P. O'Malley III, the
Company's Chief Financial Officer, for failure to fulfill certain of his
functions as Chief Financial Officer. Mr. O'Malley has filed a complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and members of the Board of Directors, as defendants, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and
defamation. Mr. O'Malley alleges that the Company terminated his employment in
retaliation for voicing the concerns of shareholders and senior management
regarding related-party transactions and because the Company did not want to
make full and adequate disclosure of the facts and circumstances surrounding
such transactions. In
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<PAGE>
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.
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 Securities and
Exchange Commission within an agreed-upon period of time, including the right to
require the Company to repurchase the shares issued to such seller. In the event
the Company is unable to register such shares by the required dates, the Company
would become obligated to repurchase the shares issued in connection with such
acquisition. As of June 30, 1998 and December 31, 1997, the Company had
reflected $5,509,000 and $9,734,000, respectively, of Common Stock subject to
redemption on its Consolidated Balance Sheet related to shares that the Company
may be required to repurchase. During the first six months, ended June 30, 1998,
the Company paid $3,311,000 to sellers who exercised their rights to have shares
of Common Stock repurchased. The Company expects to pay an additional
$5,509,000 during the remainder of 1998 ($3,696,000 of which was due and payable
on June 3, 1998 (the "June 1998 Repurchase Obligation") but has not been paid by
the Company) in connection with the settlement of certain repurchase obligations
of the Company subject, under certain circumstances, to the consent of the
Senior Note holders. With respect to the June 1998 Repurchase Obligation which
remains due and payable, the Company is in discussions with the sellers to whom
such obligations are owed and the Senior Note lenders regarding the timing and
satisfaction of the June 1998 Repurchase Obligation.
In addition, in connection with certain of such acquisitions, the Company has
agreed with the sellers in such acquisitions to pay to the sellers (in
additional shares and/or cash) an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or, in
other cases, as of the execution of the relevant acquisition agreement (referred
to as "Price Protection"). Based upon the closing sales price of the Company's
Common Stock on July 31, 1998 ($7.81 per share), such shortfall would be
approximately $3,801,000, excluding Price Protection obligations related to the
shares which have repurchase obligations, referred to above.
In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differ for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration and in other cases the parties have agreed
that any payment of such contingent consideration may be paid in cash or shares
of Common Stock, or a combination of both.
Although the Company has the option, in certain cases, to pay certain of such
amounts in shares of Common Stock, payment of significant cash funds to sellers
in the event such remedies or earnout provisions are triggered could have a
material adverse effect on the Company's cash flow and financial condition. In
addition, the Company may be required to finance all or a portion of any such
cash payments from third-party sources. No assurance can be given that such
capital will be available on terms acceptable to the Company. In addition, the
issuance by the Company of shares of Common Stock in payment of any such owed
amounts could be dilutive to the Company's stockholders.
14
<PAGE>
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement dated July
21, 1997, as amended, between the Company and RGC International, LDC ("RGC")
(hereinafter referred to as the "RGC Agreements"), the Company issued 18,000
shares of Series C Convertible Preferred Stock, $1,000 stated value per share
(the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the Company
was required to use its best efforts to include the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock (the "RGC Conversion
Shares") in an effective Registration Statement on Form S-3 not later than
October 1997. As amended, the RGC Agreements provide for monthly penalties
("RGC Registration Penalties") in the event that the Company failed to register
the Conversion Shares prior to October 1997 with such penalties continuing until
July 23, 1998.
On June 18, 1998 2,500 shares of Series C Preferred Stock were converted into
373,000 shares of Common Stock. Accordingly, as of June 30, 1998, 15,500 shares
of the Company's Series C Preferred Stock were issued and outstanding. Each
share of the Series C Preferred Stock is convertible into such number of shares
of Common Stock as is determined by dividing the stated value ($1,000) of each
share of Series C Preferred Stock plus 3% per annum from the closing date to the
conversion date by the lesser of (i) $20.70 or (ii) the average of the daily
closing bid prices for the Common Stock for the (5) five consecutive trading
days ending five (5) trading days prior to the date of conversion.
As a result of the Company's continued failure to register the RGC Conversion
Shares, the Company: (i) issued warrants to RGC to acquire 389,000 shares of
Common Stock at an exercise prices ranging from $34.86 to $38.85 per share,
subject to reset in November 1998 (such warrants having an estimated value, for
accounting purposes, of $3,245,000); and (ii) issued interest bearing promissory
notes (the "RGC Penalty Notes") in the aggregate principal amount of $2,450,000
due the earlier of (x) January 4, 1999 and (y) the later of (A) five business
days following the sale of StarMed and (B) October 15, 1998 in the event the
sale of StarMed occurs before October 15, 1998. The principal amount of and
interest accrued on the RGC Penalty Notes may be converted, at the option of the
Company or RGC in certain circumstances, into additional shares of Series C
Preferred Stock or Common Stock. Pursuant to an amendment to the RGC Agreements
entered into June 1998, the Company will no longer incur any monthly penalties
for failure to register the RGC Conversion Shares following July 23, 1998.
However, if the RGC Conversion Shares are not registered as of September 15,
1998, RGC may demand a one-time penalty of $1,550,000 (the "September 1998
Penalty"), payable, at the option of RGC, in cash or additional shares of Common
Stock. There can be no assurance that the Company will be able to register the
RGC Conversion Shares by such date or that the Company will be able to pay the
RGC Penalty Notes when due or the September 1998 Penalty, if such payment
becomes due. Purchasers of Common Stock could therefore experience substantial
dilution upon conversion of the Series C Preferred Stock and the RGC Penalty
Notes and the exercise of such warrants. The shares of Series C Preferred Stock
are not registered and may be sold only if registered under the Act or sold in
accordance with an applicable exemption from registration, such as Rule 144.
6. DISCONTINUED OPERATIONS
On July 8, 1998, the Company entered into a definitive agreement to sell
StarMed, in the form of a stock sale, to RehabCare Group, Inc. for $33,000,000
(the "StarMed Sale"). Due to the StarMed Sale, the results of operations of
StarMed are herein reflected in the Company's Consolidated Statements of
Operations as discontinued operations.
Net cash proceeds from the StarMed Sale will be used to repay approximately
$14,000,000 of StarMed's outstanding third-party debt (in accordance with the
terms of sale) and will increase the Company's consolidated cash balance by
approximately $15,000,000. $2,000,000 of the $33,000,000 sale price will be
placed in escrow at closing to be available, for a specified period of time, to
fund indemnification obligations that may be incurred by the Company; subject to
actual claims, part or all of this amount will be payable to the Company over
time. For accounting purposes, a pretax gain from the StarMed Sale of
approximately $5,000,000 is expected to be reported in the third quarter of
1998.
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<PAGE>
The following table shows summary balance sheets for StarMed as of June 30,
1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,022 $ 455
Accounts receivable, net 14,934 12,657
Other current assets 613 279
------- -------
Total current assets 21,569 13,391
Property and equipment, net 458 428
Goodwill, net 9,993 10,442
Other assets 118 218
------- -------
Total assets $32,138 $24,479
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current notes and mortgages payable $ 492 $ 850
Borrowings under line of credit 10,591 3,744
Debt due parent 4,000 4,000
Accounts payable and accrued expenses 2,110 2,229
------- -------
Total current liabilities 17,193 10,823
Notes and mortgages payable, less current portion 2,702 2,827
Debt due parent 6,352 6,279
Equity 5,891 4,550
------- -------
Total liabilities and stockholder's equity $32,138 $24,479
======= =======
</TABLE>
The following table shows summary statements of operations for StarMed for
the three and six month periods ended June 30 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------- ------- ----- -----
<S> <C> <C> <C> <C>
Net service revenues $20,490 $12,801 $40,307 $25,947
Office level operating costs and provisions
for uncollectible accounts receivable 16,400 10,408 32,197 21,148
Corporate general and administrative 3,056 1,822 5,912 3,488
Depreciation and amortization 163 132 334 263
------- ------- ------- -------
Operating income 871 439 1,864 1,048
Interest expense, net 223 73 406 116
------- ------- ------- -------
Income before income taxes 648 366 1,458 932
Provision for income taxes 56 211 117 537
------- ------- ------- -------
Net income $ 592 $ 155 $ 1,341 $ 395
======= ======= ======= =======
</TABLE>
In June 1998, an individual filed a complaint against the Company, StarMed,
Wesley Medical Resources, Inc., a subsidiary of the Company ("Wesley"), and
certain officers and directors of the Company in the United States District
Court for the Northern District of California. The complaint, among other
things, alleges that the defendants omitted and/or misrepresented material
information in the Company's public filings and that they concealed or failed to
disclose material adverse information about the Company in connection with the
sale of Wesley to the Company by the plaintiff. The plaintiff seeks damages in
the amount of $4.25 million or, alternatively, recission of the sale of Wesley.
The Company believes that it has meritorious defenses to the claims asserted by
plaintiff, and intends to defend itself vigorously. In July 1998, the Company
and the named defendants filed a motion to dismiss the plaintiff's complaint on
numerous grounds. The legal proceeding described above is in its preliminary
stages. Although the Company believes it has meritorious defenses to all claims
against it, the Company is unable to predict with any certainty the ultimate
outcome of such proceeding.
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<PAGE>
7. SUBSEQUENT EVENT
During July 1998, the Company completed its review of under-performing centers
and has determined to sell or close approximately eight imaging centers during
the third and fourth quarters of 1998. The Company expects to incur a charge of
between $3,000,000 and $4,000,000 during the third quarter of 1998 related to
these imaging centers. Such charge will primarily relate to the write-off of
fixed assets and other assets.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
REVENUE RECOGNITION
At each of the Company's diagnostic imaging centers, all medical services
are performed exclusively by physician groups (the "Physician Group" or the
"Interpreting Physician"), generally consisting of radiologists with whom the
Company has entered into independent contractor agreements. Pursuant to these
agreements, the Company has agreed to provide equipment, premises, comprehensive
management and administration, including responsibility for billing and
collection of receivables, and technical imaging services to the Interpreting
Physician.
Net service revenues 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 three months and six
months ended June 30, 1998 were $25,869,000 and $50,283,000, respectively, or
55% and 54% of revenues, respectively.
Type II - The Company bills patients and third party payors directly for
services provided and pays the Interpreting Physicians either (i) a fixed
percentage of fees collected at the center, or (ii) a contractually fixed amount
based upon the specific diagnostic imaging procedures performed. Revenues are
recorded net of contractual allowances and the Company accrues the Interpreting
Physician fee as an expense on the Consolidated Statements of Operations. The
Company bears the risk of loss due to uncollectible amounts from patients and
third party payors, and the Company has established reserves for the estimated
uncollectible amount. Type II net service revenues for the three months and six
months ended June 30, 1998 were $17,450,000 and $36,618,000, respectively, or
37% and 39% of revenues, respectively.
Type III - The Company receives from an affiliated physician association a
fee for the use of the premises, a fee per procedure for acting as billing and
collection agent and a fee for administrative and technical services performed
at the centers. The affiliated physicians 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 three months and six months ended June 30, 1998 were
$3,307,000 and $6,747,000, respectively, or 8% and 7% of revenues,
respectively.
Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.
The fees received or retained by the Company under the three types of
agreements with Interpreting Physicians described above, expressed as a
percentage of gross billings net of contractual allowances for the 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.
18
<PAGE>
QUARTER ENDED JUNE 30, 1998 COMPARED TO THE QUARTER ENDED JUNE 30, 1997
For the quarter ended June 30, 1998, total Company net service revenues were
$46,626,000 versus $37,877,000 for the quarter ended June 30, 1997, an increase
of $8,749,000 or 23%.
The increase in net service revenues is due primarily to the timing of various
1997 acquisitions which contributed $12,479,000 of the increase. Revenues at
imaging centers that were operated by the Company for all of 1997 decreased
$4,100,000 or 16%, to $20,992,000 for the quarter ended June 30, 1998 from
$25,092,000 for the same period in 1997, primarily as a result of higher
contractual allowances, as a percentage of gross billings, in the 1998 second
quarter, and a modality mix change toward lower priced procedures. Aggregate
procedure volumes for these imaging centers were relatively constant in the
second quarter of 1998 as compared to the second quarter of 1997.
Contractual allowances are largely dependent upon reimbursement rates from
third party payors, including Medicare, Medicaid and managed care providers.
Management believes that it is likely that the Company's overall reimbursement
rates will gradually decline for some period of time, due to factors such as the
expansion of managed care organizations and continued national healthcare reform
efforts. The Company intends to attempt to mitigate the impact of any decline
in reimbursement rates by decreasing costs and increasing referral volumes. If
the rate of decline in reimbursement rates were to increase materially, or if
the Company is unsuccessful in reducing its costs or increasing its volumes, the
Company's results could be materially and adversely affected.
Diagnostic Imaging revenue derived from personal injury claims, mainly
involving automobile accidents, represented approximately 18% of the Diagnostic
Imaging business net service revenues for the quarter ended June 30, 1998.
Automobile insurance carriers generally pay the non-deductible non-co-pay
portion of the charge, with the remaining balance payable by the individual. The
timing of collection from the individual is partially dependent upon the outcome
and timing of any settlement or judgment of the injury claim. Accordingly, such
receivables typically require a longer period of time to collect compared to the
Company's other receivables, and in the experience of the Company incur a higher
bad debt expense. If the Company were to become less successful in its efforts
in collecting these receivables, the Company's results could be materially and
adversely affected.
Operating costs for the three months ended June 30, 1998 were $29,761,000
compared to $21,913,000 for the three months ended June 30, 1997, an increase of
$7,848,000 or 36% due to an increase in operating costs of $8,466,000 related to
centers acquired during 1997. Operating costs at imaging centers operated by
the Company for all of 1997 decreased $618,000, or 5%, to $12,653,000 for the
three months ended June 30, 1998 from $13,271,000 for the three months ended
June 30, 1997.
Center operating margins, which represent net service revenue less operating
costs as a percent of net revenue, decreased for the quarter ended June 30, 1998
to 36% from 42% for the quarter ended June 30, 1997 due primarily to higher
contractual allowances and generally higher payroll and administrative costs.
The provision for uncollectible accounts receivable for the quarter ended June
30, 1998 was $3,686,000 an increase of $1,754,000 from second quarter 1997
provision of $1,932,000. The Company's provision for uncollectible accounts
receivable for the second quarter of 1998 represented 8% of related net service
revenues, compared to the second quarter of 1997 provision, which represented 5%
of related net service revenues. The increase in the provision for uncollectible
accounts receivable, as a percentage of net service revenues, was due to an
increase in the estimated rate of bad debts, primarily related to personal
injury claim receivables. If and to the extent that personal injury claim
receivables decline as a percentage of total net service revenues over time, and
provided the Company improves its cash collections of outstanding accounts
receivables on an ongoing basis, this provision should fall below 8% of net
service revenues in the future. Although outstanding accounts receivables
increased during the second quarter of 1998, cash collections since mid-June
have improved.
Corporate general and administrative expense for the three months ended June
30, 1998 was $2,599,000, an increase of $1,056,000 from the $1,543,000 recorded
for the three months ended June 30, 1997. This increase was primarily due to
higher payroll and related costs as a result of the expanded business
development activities and the resulting growth experienced during 1997. The
second quarter of 1998 benefited from lower general and administrative expense
as a result of the Company's workforce reduction and follow-on attrition program
implemented at the end of the first quarter of 1998. Results for the second
quarter of 1998 and 1997 include non-cash charges of $114,000 and $2,305,000,
respectively, for compensation expense resulting from stock options granted in
1996 and early 1997 that were approved by the Company's stockholders in May
1997. Such
19
<PAGE>
compensation expense represents the difference between the exercise price of the
options and the market price of the Company Common Stock on the date of plan
approval, attributable to vested shares.
Depreciation and amortization expense for the second quarter of 1998 was
$6,158,000, compared to $4,288,000 for the second quarter of 1997, or an
increase of $1,870,000. The increase was due primarily to higher equipment
depreciation resulting from 1997 acquisitions and increased goodwill
amortization.
During the second quarter of 1998, the Company recorded $1,640,000 of unusual
charges consisting of (i) $1,240,000 for penalties associated with delays in the
registration of the Company's Common Stock issuable upon conversion of
convertible preferred stock, and (ii) $400,000 for the estimated net costs
associated with the resolution of the shareholder and employee lawsuits.
The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current negotiations
regarding penalties associated with the failure to register the Company's Common
Stock and waivers or amendments of the financial covenants under its Senior
Notes, and the outcome of certain litigation.
Net interest expense for the three months ended June 30, 1998 was $3,426,000
as compared to $1,847,000 for the three months ended June 30, 1997, an increase
of $1,579,000. This increase was primarily attributable to debt assumed in
connection with the Company's 1997 acquisitions and additional borrowings under
the Company's Senior Notes.
The Company's income for the quarter ended June 30, 1998 was decreased by
$462,000 attributable to minority interests, as compared to an increase in the
Company's income of $428,000 for the quarter ended June 30, 1997.
The provision for income taxes for the three months ended June 30, 1998
decreased $1,627,000 to $222,000 as compared to $1,849,000 for the comparable
period last year. The provision for income taxes for the three months ended
June 30, 1998 consists entirely of estimated state income taxes. During the
second 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 from continuing operations for the quarter ended June
30, 1998 was $1,442,000 compared to net income from continuing operations for
the quarter ended June 30, 1997 of $2,628,000.
The net loss applicable to common stockholders (used in computing loss per
common share) in the second quarter of 1998 includes charges of $139,000 as a
result of the accretion of the Company's preferred stock.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1998, total Company's net service revenues
were $93,648,000 versus $64,718,000 for the six months ended June 30, 1997, an
increase of $28,930,000 or 45%.
The increase is due to the timing of various 1997 acquisitions which were
responsible for $35,093,000 of the increase. Offsetting this increase were
centers that were operated by the Company for all of 1997 which decreased
$7,340,000, or 15%, to $42,223,000 for the six months ended June 30, 1998 from
$49,563,000 for the same period in 1997, primarily as a result of higher
contractual allowances, as a percentage of gross billings, in the 1998 second
quarter, and a modality mix change toward lower priced procedures. Aggregate
procedure volumes for these imaging centers were relatively constant in the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997.
Operating costs for the six months ended June 30, 1998 were $61,337,000
compared to $36,284,000 for the six months ended June 30, 1997, an increase of
$25,053,000 or 69%. Primarily, this is due to an increase in operating costs of
$22,718,000 related to centers acquired during 1997. Operating costs at imaging
centers operated by the Company for all of 1997 increased $2,335,000, or 9%, to
$28,524,000 for the six months ended June 30, 1998 from $26,189,000 for the six
months ended June 30, 1997, primarily as a result of increased payroll costs.
20
<PAGE>
Center operating margins, which represent net service revenue less imaging
center and staffing operating costs as a percent of net revenue, decreased for
the six months ended June 30, 1998 to 35% from 44% for the six months ended June
30, 1997, due primarily to higher contractual allowances and generally higher
payroll and administrative costs.
The provision for uncollectible accounts receivable for the six months ended
June 30, 1998 was $7,307,000, an increase of $3,554,000 from six months ended
1997 provision of $3,753,000. The Company's provision for uncollectible accounts
receivable for the six months ended 1998 was 8% of related net service revenues,
compared to the first six months of 1997, which represented 6% of related net
service revenues. The increase in the provision for uncollectible accounts
receivable, as a percentage of net service revenues, was due to an increase in
the estimated rate of bad debts, primarily related to personal injury claim
receivables. If and to the extent that personal injury claim receivables
decline as a percentage of total net service revenues over time, and provided
the Company improves its cash collections of outstanding accounts receivables on
an ongoing basis, this provision should fall below 8% of net service revenues in
the future. Although outstanding accounts receivables increased during the
second quarter of 1998, cash collections since mid-June have improved.
Corporate general and administrative expense for the six months ended June 30,
1998 was $5,815,000, an increase of $3,126,000 from the $2,689,000 recorded for
the six months ended June 30, 1997. This increase was primarily due to higher
payroll and related costs as a result of the expanded business development
activities and the resulting growth experienced during 1997. Results for the
six months ended June 30, 1998 and 1997 include non-cash charges of $228,000 and
$2,305,000, respectively, for compensation expense resulting from stock options
granted in 1996 and early 1997 that were approved by the Company's stockholders
in May 1997. Such compensation expense represents the difference between the
exercise price of the options and the market price of the Company Common Stock
on the date of plan approval, attributable to vested shares.
Depreciation and amortization expense for the first six months of 1998 was
$12,635,000 compared to $7,079,000 for the first six months of 1997, or an
increase of $5,556,000 attributable almost entirely to the Company's Diagnostic
Imaging business. The increase was due primarily to higher equipment
depreciation resulting from 1997 acquisitions and increased goodwill
amortization.
During the six months ended June 30, 1998, the Company recorded $5,400,000 of
unusual charges consisting of (i) $3,467,000 ($1,194,000 of which was a non-cash
charge related to the issuance of 117,000 Common Stock warrants) for penalties
associated with delays in the registration of the Company's Common Stock issued
in connection with acquisitions or issuable upon conversion of convertible
preferred stock, (ii) $713,000 for the estimated net costs associated with the
resolution of the shareholder and employee lawsuits, (iii) $883,000 for costs
associated with the investigation of related party transactions and (iv)
$337,000 for management termination benefits and related costs.
The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current negotiations
regarding penalties associated with the failure to register the Company's Common
Stock and waivers or amendments of the financial covenants under its Senior
Notes, and the outcome of certain litigation.
Net interest expense for the six months ended June 30, 1998 was $6,912,000 as
compared to $2,733,000 for the six months ended June 30, 1997, an increase of
$4,179,000. This increase was primarily attributable to higher outstanding
debt, including the issuance of $78,000,000 of Senior Notes during 1997, notes
payable of $36,505,000 and capital lease obligations totaling $26,612,000
assumed in connection with the Company's 1997 acquisitions.
The Company's income for the six months ended June 30, 1998 was decreased by
$643,000 attributable to minority interests, as compared to an increase in the
Company's income of $193,000 for the six months ended June 30, 1997.
The provision for income taxes for the six months ended June 30, 1998
decreased $3,777,000 to $301,000 as compared to $4,078,000 for the comparable
period last year. The provision for income taxes for the six months ended June
30, 1998 consists entirely of estimated state income taxes. During the first
six months of 1998, a benefit for income taxes has not been recorded due to the
uncertainty regarding the recognition of the full amount of the Company's
deferred tax assets.
21
<PAGE>
The Company's net loss from continuing operations for the six months ended
June 30, 1998 was $6,930,000 compared to net income from continuing operations
for the six months ended June 30, 1997 of $5,990,000.
The net loss applicable to common stockholders (used in computing loss per
common share) in the first half of 1998 includes charges of $274,000 as a result
of the accretion of the Company's preferred stock.
During July 1998, the Company completed its review of under-performing
centers and has determined to sell or close approximately eight imaging centers
during the third and fourth quarters of 1998. The Company expects to incur a
charge of between $3,000,000 and $4,000,000 during the third quarter of 1998
related to these imaging centers. Such charge will primarily relate to the
write-off of fixed assets and other assets.
RESULTS OF DISCONTINUED OPERATIONS
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
Net service revenues for StarMed increased to $20,490,000 in the second
quarter of 1998 from $12,801,000 in the second quarter of 1997, an increase of
$7,689,000 or 60%. Internal growth in the staffing business, consisting
primarily of the opening of new Per Diem division offices, accounted for
$6,386,000 of the increase in revenues. Revenues at Per Diem division offices
acquired during 1997 accounted for $1,303,000 of the increase.
Operating costs for StarMed for the three months ended June 30, 1998 were
$16,400,000 compared to $10,408,000 for the three months ended June 30, 1997, an
increase of $5,992,000 or 58%. Internal growth in the staffing business
accounted for $4,986,000 of the increase in operating costs. Increased costs at
Per Diem division offices acquired during 1997 accounted for $1,006,000 of the
additional operating costs.
Net earnings related to StarMed increased to $592,000 in the second quarter
of 1998 from $155,000 in the second quarter of 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net service revenues for StarMed increased to $40,307,000 for the six months
ended June 30, 1998 from $25,947,000 for the six months ended June 30, 1997, an
increase of $14,360,000 or 55%. Internal growth in the staffing business,
consisting primarily of the opening of new Per Diem division offices, accounted
for $11,483,000 of the increase in revenues. Revenues at Per Diem division
offices acquired during 1997 accounted for $2,877,000 of the increase.
Operating costs for StarMed for the six months ended June 30, 1998 were
$32,197,000 compared to $21,148,000 for the six months ended June 30, 1997, an
increase of $11,049,000 or 52%. Internal growth in the staffing business
accounted for $8,940,000 of the increase in operating costs. Increased costs at
Per Diem division offices acquired during 1997 accounted for $2,109,000 of the
additional operating costs.
Net earnings related to StarMed increased to $1,341,000 for the six months
ended June 30, 1998 from $395,000 for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company's primary source of
cash flow was from reductions in the Company's cash balances of $9,113,000 and
borrowings under the Company's line of credit of $6,847,000. The primary use of
cash was the repayment of principal amount of capital lease obligations and
notes and mortgages payable of $10,550,000, and repurchase of Common Stock
subject to redemption as a result of the exercise of puts provided by the
Company in connection with 1997 acquisitions of $3,311,000. Operating activities
provided cash of $1,101,000 during the six months ended June 30, 1998. Cash flow
from operating activities was adversely effected by an increase of $8,874,000 in
accounts receivable, net of allowance for bad debts. From mid-June through early
August of this year, cash collections have improved and, during this period,
outstanding accounts receivable has decreased.
22
<PAGE>
During the six months ended June 30, 1997, the Company's primary source of
cash flow was from financing activities, as a result of net proceeds from the
Senior Notes of $77,113,000. The primary use of cash was to fund acquisitions
which totaled approximately $38,732,000 and to fund the repayment of certain
notes and capital lease obligations of $28,955,000. Operating activities
provided cash of $2,935,000 during the first half of 1997.
The Company has never declared a dividend on its Common Stock and under the
Company's Senior Note agreement, the payments of such dividends is not
permitted.
As a result of its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under its $78,000,000 of Senior Notes. Management and the Senior Note
lenders are engaged in discussions to resolve this matter. In the event the
parties are unable to reach agreement, the lenders are entitled, at their
discretion, to exercise certain remedies including acceleration of repayment.
There can be no assurance that the Senior Note lenders will provide the Company
with an amendment or waiver of the defaults. In addition, certain medical
equipment notes, and operating and capital leases of the Company 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 June 30, 1998 and December 31, 1997 and the
Company has a deficit in working capital which is more fully described below.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. In addition to continuing to negotiate with the Senior Note
lenders in an attempt to obtain waivers or amendments of the aforementioned
defaults, the Company has taken various actions in response to this situation,
including the following: (i) it effected a workforce reduction in March 1998
aimed at reducing the Company's overall expense levels, and (ii) on July 8,
1998, the Company entered into a definitive agreement to sell StarMed, in the
form of a stock sale, to RehabCare Group, Inc. (NASDAQ:RHBC) for $33,000,000.
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 $55,892,000 at June 30, 1998
compared to a working capital deficit of $58,174,000 at December 31, 1997. The
deficit in both periods is primarily due to $78,000,000 of Senior Notes due 2001
through 2005 and other debt and capital leases shown as current liabilities as a
result of financial covenant defaults under such agreements.
On July 8, 1998, the Company entered into a definitive agreement to sell
StarMed, in the form of a stock sale, to RehabCare Group, Inc. for $33,000,000
(the "StarMed Sale"). Due to the StarMed Sale, the results of operations of
StarMed are herein reflected in the Company's Consolidated Statements of
Operations as discontinued operations. Net cash proceeds from the StarMed Sale
will be used to repay approximately $14,000,000 of StarMed's outstanding third-
party debt (in accordance with the terms of sale) and will increase the
Company's consolidated cash balance by approximately $15,000,000. $2,000,000 of
the $33,000,000 sale price will be placed in escrow at closing to be available,
for a specified period of time, to fund indemnification obligations that may be
incurred by the Company; subject to actual claims, part or all of this amount
will be payable to the Company over time. For accounting purposes, a pretax
gain from the StarMed Sale of approximately $5,000,000 is expected to be
reported in the third quarter of 1998.
In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as partial consideration, the Company
granted rights to have such shares registered for resale pursuant to the federal
securities laws. In certain of such acquisitions, the Company has granted
specific remedies to the sellers in the event that the registration statement
covering the relevant shares is not declared effective by the Securities and
Exchange Commission within an agreed-upon period of time, including the right to
require the Company to repurchase the shares issued to such seller. In the event
the Company is unable to register such shares by the required dates, the Company
would become obligated to repurchase the shares issued in connection with such
acquisition. As of June 30, 1998 and December 31, 1997, the Company had
reflected $5,509,000 and $9,734,000,
23
<PAGE>
respectively, of Common Stock subject to redemption on its Consolidated Balance
Sheet related to shares that the Company may be required to repurchase. During
the first six months, ended June 30, 1998, the Company paid $3,311,000 to
sellers who exercised their rights to have shares of Common Stock repurchased.
The Company expects to pay an additional $5,509,000 during the remainder of 1998
($3,696,000 of which was due and payable on June 3, 1998 (the "June 1998
Repurchase Obligation") but has not been paid by the Company) in connection with
the settlement of certain repurchase obligations of the Company subject, under
certain circumstances, to the consent of the Senior Note holders. With respect
to the June 1998 Repurchase Obligation which remains due and payable, the
Company is in discussions with the sellers to whom such obligations are owed and
the Senior Note lenders regarding the timing and satisfaction of the June 1998
Repurchase Obligation.
In addition, in connection with certain of such acquisitions, the Company has
agreed with the sellers in such acquisitions to pay to the sellers (in
additional shares and/or cash) an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or, in
other cases, as of the execution of the relevant acquisition agreement (referred
to as "Price Protection"). Based upon the closing sales price of the Company's
Common Stock on July 31, 1998 ($7.81 per share), such shortfall would be
approximately $3,801,000, excluding Price Protection obligations related to the
shares which have repurchase obligations, referred to above.
In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differ for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration and in other cases the parties have agreed
that any payment of such contingent consideration may be paid in cash or shares
of Common Stock, or a combination of both.
Although the Company has the option, in certain cases, to pay certain of such
amounts in shares of Common Stock, payment of significant cash funds to sellers
in the event such remedies or earnout provisions are triggered could have a
material adverse effect on the Company's cash flow and financial condition. In
addition, the Company may be required to finance all or a portion of any such
cash payments from third-party sources. No assurance can be given that such
capital will be available on terms acceptable to the Company. In addition, the
issuance by the Company of shares of Common Stock in payment of any such owed
amounts could be dilutive to the Company's stockholders.
Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement dated July
21, 1997, as amended, between the Company and RGC International, LDC ("RGC")
(hereinafter referred to as the "RGC Agreements"), the Company issued 18,000
shares of Series C Convertible Preferred Stock, $1,000 stated value per share
(the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the Company
was required to use its best efforts to include the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock (the "RGC Conversion
Shares") in an effective Registration Statement on Form S-3 not later than
October 1997. As amended, the RGC Agreements provide for monthly penalties
("RGC Registration Penalties") in the event that the Company failed to register
the Conversion Shares prior to October 1997 with such penalties continuing until
July 23, 1998.
On June 18, 1998 2,500 shares of Series C Preferred Stock were converted into
373,000 shares of Common Stock. Accordingly, as of June 30, 1998, 15,500 shares
of the Company's Series C Preferred Stock were issued and outstanding. Each
share of the Series C Preferred Stock is convertible into such number of shares
of Common Stock as is determined by dividing the stated value ($1,000) of each
share of Series C Preferred Stock plus 3% per annum from the closing date to the
conversion date by the lesser of (i) $20.70 or (ii) the average of the daily
closing bid prices for the Common Stock for the (5) five consecutive trading
days ending five (5) trading days prior to the date of conversion.
As a result of the Company's continued failure to register the RGC Conversion
Shares, the Company: (i) issued warrants to RGC to acquire 389,000 shares of
Common Stock at an exercise prices ranging from $34.86 to $38.85 per share,
subject to reset in November 1998 (such warrants having an estimated value, for
accounting purposes, of $3,245,000); and (ii) issued interest bearing promissory
notes (the "RGC Penalty Notes") in the aggregate principal
24
<PAGE>
amount of $2,450,000 due the earlier of (x) January 4, 1999 and (y) the later of
(A) five business days following the sale of StarMed and (B) October 15, 1998 in
the event the sale of StarMed occurs before October 15, 1998. The principal
amount of and interest accrued on the RGC Penalty Notes may be converted, at the
option of the Company or RGC in certain circumstances, into additional shares of
Series C Preferred Stock or Common Stock. Pursuant to an amendment to the RGC
Agreements entered into June 1998, the Company will no longer incur any monthly
penalties for failure to register the RGC Conversion Shares following July 23,
1998. However, if the RGC Conversion Shares are not registered as of September
15, 1998, RGC may demand a one-time penalty of $1,550,000 (the "September 1998
Penalty"), payable, at the option of RGC, in cash or additional shares of Common
Stock. There can be no assurance that the Company will be able to register the
RGC Conversion Shares by such date or that the Company will be able to pay the
RGC Penalty Notes when due or the September 1998 Penalty, if such payment
becomes due. Purchasers of Common Stock could therefore experience substantial
dilution upon conversion of the Series C Preferred Stock and the RGC Penalty
Notes and the exercise of such warrants. The shares of Series C Preferred Stock
are not registered and may be sold only if registered under the Act or sold in
accordance with an applicable exemption from registration, such as Rule 144.
In addition to matters discussed above, the Company is subject to litigation
that may require additional future cash outlays.
During July 1998, the Company's shareholders approved a reverse stock split of
the Company's outstanding shares of Common Stock. As a result of the reverse
stock split, each three outstanding shares of Common Stock were automatically
converted into one share of new Common Stock. The Company effected the reverse
stock split in order to meet the minimum bid price requirement for continued
listing on the Nasdaq Stock Market. The share data included in this Form 10-Q
has been adjusted to reflect the impact of the reverse stock split. There can
be no assurance that in the future the Common Stock will meet the continued
listing requirements for The Nasdaq Stock Market.
The Company's sources of liquidity consist of its cash balances and its
ability to enter into operating leases to fund expansions and equipment
replacement at its centers. At June 30, 1998 and December 31, 1997, the
Company's cash and cash equivalents were $14,085,000 and $23,198,000,
respectively. Assuming that the Company (i) reaches satisfactory resolution
with the Senior Note lenders regarding the financial covenant defaults, and (ii)
completes the sale of StarMed, 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 business is generally unaffected by seasonality.
The impact of inflation and changing prices on the Company has been primarily
limited to salary, medical and film supplies and rent increases and has not been
material to date to the Company's operations. Management is aware of general
inflationary expectations and growing health care cost containment pressures,
and believes that the Company may not be able to raise the prices for its
diagnostic imaging procedures by an amount sufficient to offset such negative
effects. While the Company has responded to these concerns in the past by
increasing the volume of its business there can be no assurance that the Company
will be able to increase its volume of business in the future. In addition,
current discussions within the Federal Government regarding national health care
reform are emphasizing containment of health care costs as well as expansion of
the number of eligible parties. The implementation of this reform could have a
material effect on the financial results of the Company.
Impact of Year 2000 On Company's Computer Software
The computer programming code utilized in the Company's financial, billing and
imaging equipment systems were generally written using two digits rather than
four to define the applicable year. As a result, those computer programs have
time-sensitive software that recognizes a date using 00's as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
resulting in disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
normal business activities.
The Company has completed an assessment of its material financial and billing
computer systems. The Company is in the process of upgrading these systems to
be Year 2000 compliant and expects to complete this
25
<PAGE>
process by late 1998 or early 1999. The cost to be incurred related to Year 2000
compliance for these systems is currently not expected to be material.
The Company has initiated a program to determine whether the computer
applications of its significant payors and suppliers will be upgraded in a
timely manner. The Company has also initiated a program to determine whether
embedded applications that control certain medical and other equipment will be
affected. The Company has not yet completed these reviews. The nature of the
Company's business is such that any failure to these types of applications may
have a material adverse effect on its business.
Because of the many uncertainties associated with Year 2000 compliance
issues, and because the Company's assessment is necessarily based on information
from third party-vendors, payors and suppliers, there can be no assurance that
the Company's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct.
Software sold by the Company's wholly-owned subsidiary, Dalcon Technologies,
Inc., is expected to be fully year 2000 compliant in connection with the annual
upgrade planned for late 1998.
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.
26
<PAGE>
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
None.
b. Reports on Form 8-K
-------------------
On April 8, 1998, the Company filed a Current Report on Form 8-K,
reporting under Item 5 that the Company's Board of Directors voted to adopt
the recommendations contained in the report of a Special Committee of two
outside directors elected to the Board in December 1997 and appointed to
investigate certain events and review the Company's policies regarding
related party transactions.
On April 16, 1998, the Company filed a Current Report on Form 8-K,
reporting under Item 5 that the Company was unable to file its Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 by the
April 15, 1998 extended due date for such filing.
On May 20, 1998, the Company filed a Current Report on Form 8-K,
reporting under Item 5 that (i) Peter J. Powers had resigned as a director
of the Company effective May 13, 1998 and (ii) the Company would report a
loss for the year ended December 31, 1997 and that it expected to report a
loss for the quarter ended March 31, 1998.
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.
/s/ Duane C. Montopoli
-----------------------
Duane C. Montopoli
Chief Executive Officer
(Principal Executive Officer)
/s/ Geoffrey A. Whynot
---------------------------
Geoffrey A. Whynot
Chief Financial Officer and Senior
Vice President Finance
(Principal Accounting Officer)
Date: August 14, 1998
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