<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE URITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File No. 0-20440
------------------------
MEDICAL RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 13-3584552
(State of Incorporation) (IRS Employer Identification No.)
125 STATE STREET, SUITE 200, 07601
HACKENSACK, NJ (Zip Code)
(Address of Principal Executive Office)
</TABLE>
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 30, 1999, 9,756,087 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 OTC Bulletin Board closing price of these shares on
that date) held by non-affiliates was $12,454,264.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MEDICAL RESOURCES, INC.
INDEX
<TABLE>
<CAPTION>
PAGES
---------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998........................... 3
Consolidated Statements of Operations for the three months ended June 30, 1999 and 1998...... 4
Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998........ 5
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998........ 6
Notes to Consolidated Financial Statements................................................... 7-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 14-23
PART II. OTHER INFORMATION............................................................................ 25
</TABLE>
2
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................................. $ 14,477 $ 20,997
Cash and short-term investments, restricted............................................ 800 1,182
Accounts receivable, net............................................................... 58,535 54,451
Other receivables...................................................................... 8,969 8,140
Prepaid expenses....................................................................... 3,437 3,819
Income taxes recoverable............................................................... 1,527 2,322
--------- -------------
Total current assets................................................................. 87,745 90,911
Property and equipment, net.............................................................. 45,332 50,791
Goodwill and other intangible assets, net................................................ 136,197 141,079
Other assets............................................................................. 3,005 3,133
--------- -------------
Total assets......................................................................... $ 272,279 $ 285,914
--------- -------------
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior notes due 2001 through 2005, classified as current.............................. $ 76,000 $ --
Notes and mortgages payable, classified as current..................................... 1,981 --
Capital lease obligations, classified as current....................................... 5,628 --
Current portion of notes and mortgages payable......................................... 8,641 11,019
Current portion of capital lease obligations........................................... 8,560 9,355
Accounts payable....................................................................... 8,747 10,946
Accrued expenses and other current liabilities......................................... 25,644 23,356
Accrued shareholder settlement costs................................................... 5,250 5,250
--------- -------------
Total current liabilities............................................................ 140,451 59,926
Notes and mortgages payable, less current portion........................................ 11,610 92,556
Obligations under capital leases, less current portion................................... 5,285 15,101
Other long term liabilities.............................................................. 1,025 1,061
--------- -------------
Total liabilities.................................................................... 158,371 168,644
Minority interest........................................................................ 5,643 5,047
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000 shares; 9,756 shares issued and
outstanding at June 30, 1999 and 9,336 shares issued and outstanding at December 31,
1998................................................................................. 98 93
Series C Convertible Preferred Stock, $1,000 per share stated value; 14 shares issued
and outstanding at June 30, 1999 and 15 shares issued and outstanding at December 31,
1998; (liquidation preference 3% per annum).......................................... 15,107 15,547
Additional paid-in capital............................................................. 146,167 146,165
Accumulated deficit.................................................................... (53,107) (49,582)
--------- -------------
Total stockholders' equity........................................................... 108,265 112,223
--------- -------------
Total liabilities and stockholders' equity............................................... $ 272,279 $ 285,914
--------- -------------
--------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
Net service revenues........................................................................ $ 40,720 $ 46,626
Cost of operations:
Cost of services.......................................................................... 26,134 28,129
Provision for doubtful accounts........................................................... 1,945 3,686
Equipment leases.......................................................................... 2,234 1,632
Depreciation and amortization............................................................. 5,709 6,158
--------- ---------
Total cost of operations................................................................ 36,022 39,605
--------- ---------
Gross profit.............................................................................. 4,698 7,021
Corporate general and administrative expenses............................................... 2,931 2,599
Stock-option based compensation............................................................. 46 114
Unusual charges............................................................................. 434 1,640
--------- ---------
Operating income.......................................................................... 1,287 2,668
Interest expense, net....................................................................... 2,824 3,426
--------- ---------
Income (loss) from continuing operations before minority interest and income taxes........ (1,537) (758)
Minority interest (benefit)................................................................. 300 462
--------- ---------
Income (loss) from continuing operations before income taxes.............................. (1,837) (1,220)
Provision for income taxes.................................................................. 220 222
--------- ---------
Income (loss) from continuing operations.................................................. (2,057) (1,442)
Income from discontinued operations, net of tax of $56...................................... -- 592
--------- ---------
Net income (loss)......................................................................... (2,057) (850)
Charges related to convertible preferred stock.............................................. (109) (139)
--------- ---------
Net income (loss) applicable to common stockholders....................................... $ (2,166) $ (989)
--------- ---------
--------- ---------
Basic and diluted income (loss) per common share:
Continuing operations..................................................................... $ (0.23) $ (0.22)
Discontinued operations................................................................... -- 0.08
--------- ---------
Net income (loss) per common share...................................................... $ (0.23) $ (0.14)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
Net service revenues........................................................................ $ 82,608 $ 93,648
Cost of operations:
Cost of services.......................................................................... 53,397 58,332
Provision for doubtful accounts........................................................... 4,147 7,307
Equipment leases.......................................................................... 4,270 3,005
Depreciation and amortization............................................................. 11,315 12,635
--------- ---------
Total cost of operations................................................................ 73,129 81,279
--------- ---------
Gross profit.............................................................................. 9,479 12,369
Corporate general and administrative expenses............................................... 5,595 5,815
Stock-option based compensation............................................................. 92 228
Unusual charges............................................................................. 714 5,400
--------- ---------
Operating income.......................................................................... 3,078 926
Interest expense, net....................................................................... 5,629 6,912
--------- ---------
Income (loss) from continuing operations before minority interest and income taxes........ (2,551) (5,986)
Minority interest (benefit)................................................................. 624 643
--------- ---------
Income (loss) from continuing operations before income taxes.............................. (3,175) (6,629)
Provision for income taxes.................................................................. 350 301
--------- ---------
Income (loss) from continuing operations.................................................. (3,525) (6,930)
Income from discontinued operations, net of tax of $117..................................... $ 0 1,341
--------- ---------
Net income (loss)......................................................................... (3,525) (5,589)
Charges related to convertible preferred stock.............................................. (220) (274)
--------- ---------
Net income (loss) applicable to common stockholders....................................... $ (3,745) $ (5,863)
--------- ---------
--------- ---------
Basic and diluted income (loss) per common share:
Continuing operations..................................................................... $ (0.40) $ (0.99)
Discontinued operations................................................................... -- 0.19
--------- ---------
Net income (loss) per common share...................................................... $ (0.40) $ (0.80)
--------- ---------
--------- ---------
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................... $ (3,525) $ (5,589)
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization..................................................... 11,315 12,969
Provision for uncollectible accounts receivable................................... 4,147 7,455
Issuance of warrants and notes to preferred stockholders.......................... -- 3,334
Other, net........................................................................ 676 936
Changes in operating assets and liabilities:
Accounts receivable............................................................... (9,221) (16,330)
Other receivables................................................................. (829) (5,067)
Prepaid expenses.................................................................. 365 1,023
Income taxes recoverable or payable............................................... 795 2,349
Other assets...................................................................... 108 336
Accounts payable and accrued expenses............................................. 414 (3,244)
Other liabilities................................................................. (36) 2,929
---------- ----------
Total adjustments............................................................... 7,734 6,690
---------- ----------
Net cash provided by operating activities..................................... 4,209 1,101
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net of disposals................................ (1,687) (1,086)
Sale of diagnostic imaging centers, net of cash sold................................ 781 --
Change in restricted cash........................................................... 382 (1,144)
Contingent consideration related to prior year acquisitions......................... -- (1,201)
Other, net.......................................................................... 11 --
---------- ----------
Net cash used in investing activities......................................... (513) (3,431)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes and mortgages payable................................... (6,223) (4,807)
Principal payments under capital lease obligations.................................. (4,983) (5,743)
Other borrowings.................................................................... 1,515 6,847
Repurchase of Common Stock subject to redemption.................................... -- (3,311)
Other, net.......................................................................... (525) 231
---------- ----------
Net cash used in financing activities......................................... (10,216) (6,783)
---------- ----------
Net decrease in cash and cash equivalents........................................... (6,520) (9,113)
Cash and cash equivalents at beginning of year...................................... 20,997 23,198
---------- ----------
Cash and cash equivalents at end of period.......................................... $ 14,477 $ 14,085
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Cash refunded by (paid for) income taxes.......................................... $ 173 $ (301)
Cash paid for interest............................................................ (5,757) (6,843)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Medical Resources, Inc., (herein referred to as "MRII" and collectively with
its subsidiaries, affiliated partnerships and joint ventures, referred to herein
as the "Company") specializes in the operation and management of diagnostic
imaging centers. The Company operates and manages primarily fixed-site,
free-standing outpatient diagnostic imaging centers (herein referred to as
"centers"), and provides diagnostic imaging network management services to
managed care providers. The Company also develops and markets radiology
information systems through its wholly-owned subsidiary, Dalcon Technologies,
Inc.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information, 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 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/A filed with the
Securities and Exchange Commission (the "SEC") for the year ended December 31,
1998.
On April 22, 1999, due to the Company's failure to meet the continued
listing requirements of the Nasdaq National Market and the Nasdaq SmallCap
Market, the Company's Common Stock was delisted by Nasdaq. The Company's Common
Stock is now traded on the OTC Bulletin Board, an electronic quotation service
for NASD Market Makers.
COST OF SERVICES
Cost of services as shown on the Consolidated Statement of Operations for
the three and six month periods ended June 30, 1999 and 1998 consist of the
following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ---------
Operations payroll and related........................................ $ 9,628 $ 9,928 $ 19,558 $ 21,510
Equipment maintenance expense......................................... 2,114 2,748 4,421 5,682
Contract radiology fees............................................... 2,202 2,046 4,466 4,347
Medical supplies...................................................... 2,569 2,920 5,258 5,919
Facilities rent and related........................................... 2,869 2,812 5,692 5,643
Other center level costs.............................................. 6,617 7,551 13,644 14,997
--------- --------- --------- ---------
Total Diagnostic Imaging.......................................... 25,999 28,005 53,039 58,098
Dalcon Technologies, Inc.............................................. 135 124 358 234
--------- --------- --------- ---------
Total Company..................................................... $ 26,134 $ 28,129 $ 53,397 $ 58,332
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
7
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
EARNINGS PER SHARE
The computations of basic earnings per share and diluted earnings per share
for the three and six months ended June 30, 1999 and 1998 were as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ---------
Basic and diluted earnings (loss) per share information:
Loss from continuing operations........................................ $ (2,057) $ (1,442) $ (3,525) $ (6,930)
Income from discontinued operations.................................... -- 592 -- 1,341
--------- --------- --------- ---------
Net loss............................................................... (2,057) (850) (3,525) (5,589)
Charges related to convertible preferred stock......................... (109) (139) (220) (274)
--------- --------- --------- ---------
$ (3,745)
Net loss applicable to common stockholders............................. $ (2,166) $ (989) 63)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares............................... 9,537 7,286 9,438 7,286
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted income (loss) per common share:
Continuing operations.............................................. $ (0.23) $ (0.22) $ (0.40) $ (0.99)
Discontinued operations............................................ -- 0.08 -- 0.18
--------- --------- --------- ---------
Net income (loss) per common share..................................... $ (0.23) $ (0.14) $ (0.40) $ (0.80)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
As of June 30, 1999, the Company failed to meet one of the financial
covenants (i.e., the interest coverage ratio requirement) under its $76,000,000
of Senior Notes indebtedness. In August 1999, the holders of the Senior Notes
granted the Company, through June 30, 1999, a waiver of that financial covenant
requirement. In connection with such waiver, the Company has agreed to prepay
$1,000,000 of outstanding principal of the Senior Notes (plus applicable
prepayment premium) and adjust the exercise price of warrants to purchase
375,000 shares of Common Stock previously issued to the holders of the Senior
Notes from $7.87 per share to $2.62 per share. Also in connection with this
waiver, the Company has agreed to prepay an additional $1,000,000 of outstanding
principal of the Senior Notes (plus applicable prepayment premium) if and when
the Company achieves certain minimum cash flow results. As a result of the
waiver described above, the Company is currently in compliance with all
financial covenants under the Senior Notes and the Company's other material debt
agreements.
Although the Company is currently in compliance with the financial covenants
under its Senior Notes and other material debt agreements, the requirements for
meeting certain of the financial covenants under the Senior Notes as of
September 30, 1999 increase significantly over those applicable as of June 30,
1999. Consequently, and based upon the recent financial performance of the
Company, it is unlikely that all of the financial covenants under the Senior
Notes will be met as of September 30, 1999. The Company is currently in
discussions with the holders of the Senior Notes for the purpose of resolving
this potential
8
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
(CONTINUED)
default event. Nevertheless, and although the Company has been successful in
obtaining waivers or covenant modifications from the Senior Note holders in the
past, there can be no assurance that the current discussions will be successful.
In the event that the parties are unable to reach agreement on modified
financial covenants, it is expected that the Senior Note holders will be
entitled, at their discretion any time after September 30, 1999, to exercise
certain remedies including acceleration of repayment. Furthermore, certain
medical equipment notes and leases of the Company (the "Cross Default Debt")
contain provisions which would then allow their holders, at their discretion, to
accelerate repayment of such notes, terminate such leases, and seek certain
other remedies.
In the event that the Company (i) fails to meet the financial covenants
under the Senior Notes as of September 30, 1999, and (ii) the Senior Note
holders, and/or the other obligors with respect to the Cross Default Debt, elect
to exercise their respective rights to accelerate their respective obligations,
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 material part, no assurance could be given that
the Company would be successful in identifying or consummating the financing
necessary to satisfy such obligations at that time. As a result of this
uncertainty related to the potential future defaults and corresponding remedies
described above, the Senior Notes and the Cross Default Debt are shown as
current liabilities on the Company's Consolidated Balance Sheets at June 30,
1999.
3. UNUSUAL CHARGES
During the three and six months ended June 30, 1999, the Company recorded
unusual charges of $434,000 and $714,000, respectively, attributable to defense
costs relating to the shareholder class action lawsuit and other related
litigation. The Company has incurred additional unusual charges during the third
quarter of 1999 related to the finalization of the settlement of the shareholder
class action lawsuit.
Unusual charges for the three months ended June 30, 1998 consisted of
$1,240,000 related to Convertible Preferred Stock penalties, and $400,000
associated with the shareholder class action lawsuit. Unusual charges for the
six months ended June 30, 1998 consisted of $3,467,000 related to Convertible
Preferred Stock penalties, $883,000 for costs of the investigation of related
party transactions, $713,000 associated with the shareholder class action
lawsuit and other charges of $337,000.
9
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Diagnostic Imaging:
Management fee receivables (net of contractual allowances) -
Due from unaffiliated physicians (Type I revenues)................................... $ 41,620 $ 33,810
Due from affiliated physicians (Type III revenues)................................... 5,364 5,436
Patient and third party payor accounts receivable (Type II revenues)..................... 26,562 28,884
--------- ------------
73,546 68,130
Dalcon Technologies, Inc................................................................. 630 346
--------- ------------
Accounts receivable before allowance for doubtful accounts............................... 74,176 68,476
Less: Allowance for doubtful accounts.................................................... (15,641) (14,025)
--------- ------------
Total accounts receivable, net........................................................... $ 58,535 $ 54,451
--------- ------------
--------- ------------
</TABLE>
Accounts receivable is net of contractual allowances, which represent
standard fee reductions negotiated with certain third party payors. Contractual
allowances, recorded as a reduction in deriving net service revenues, were
approximately $36,509,000 and $30,415,000 for the three months ended June 30,
1999 and 1998, respectively, and approximately $71,496,000 and $59,265,000 for
the six months ended June 30, 1999 and 1998, respectively.
5. COMMITMENTS AND CONTINGENCIES
Between November 1997 and January 1998, several lawsuits were commenced
against the Company, certain of the Company's Directors and certain officers
concerning certain related party transactions that have since been investigated
by a Special Committee of the Board of Directors ("Special Committee"). The
complaints in each action assert that the Company and the named defendants
violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934,
alleging that the Company omitted and/or misrepresented material information in
its public filings, including that the Company failed to disclose that it had
entered into acquisitions that were not in the best interest of the Company,
that it had paid unreasonable and unearned acquisition and financial advisory
fees to related parties, and that it concealed or failed to disclose adverse
material information about the Company. Each action seeks unspecified
compensatory damages, with interest, and the costs and expenses incurred in
bringing the action. On February 9, 1998, the above-mentioned class actions were
consolidated for all purposes in federal district court in New Jersey. On June
30, 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 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 then Chairman of the Board ("712 Advisory"), 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 712 Advisory for
10
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 712 Advisory agreed to allow the Company to terminate
its relationship with 712 Advisory.
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) 712 Advisory
performed acquisition advisory services fully consistent with the expectations
and understanding of the committee of outside directors that had approved 712
Advisory's acquisition fees; and (iv) the acquisition advisory fees paid to 712
Advisory 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.
On December 18, 1998, attorneys for the plaintiffs in the pending class
actions reached an agreement in principle with the Company and certain of the
other defendants to settle all of the pending class actions.
On August 9, 1999, the federal district court in the District of New Jersey
approved the Stipulation of Settlement settling all of the consolidated class
action lawsuits pending against the Company in consideration primarily of (i) a
payment of $2.75 million to be provided from the Company's insurer (the
"Insurance Proceeds") and (ii) the issuance of $5.25 million of convertible
subordinated promissory notes (the "Convertible Subordinated Notes"). The $5.25
million of Convertible Subordinated Notes will bear interest at the rate of 8%
per annum, will be due on the earlier of August 1, 2005 or when the Company's
presently outstanding Senior Notes are paid in full, and may be prepaid in cash
by the Company at any time after issuance subject to the payment of a prepayment
premium which begins at 8% and decreases over time. Additionally, the
Convertible Subordinated Notes are convertible into shares of the Company's
Common Stock beginning February 15, 2000 at a price of $2.62 per share.
As previously disclosed by the Company, the U.S. Attorney for the District
of New Jersey commenced an investigation in connection with the disclosures
regarding the related-party transactions referenced above. In addition and as
previously disclosed, the Company has received an inquiry from the SEC, but no
formal proceedings have been commenced by the SEC. The Company has cooperated
fully with these authorities and provided all information requested by them.
On November 7, 1997, William D. Farrell resigned from his position as
President and Chief Operating Officer of the Company and as Director, and Gary
I. Fields resigned from his position as Senior Vice President and General
Counsel. On the same date, Messrs. Farrell and Fields filed a Complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and the members of the Company's Board of Directors, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and breach
of contract. On December 17, 1997, the plaintiffs amended their complaint to add
a claim for violation of public policy. The plaintiffs allege that they were
constructively terminated as a result of their objection to certain
related-party transactions, the purported failure of the defendants to
adequately disclose the circumstances surrounding such transactions, and the
Company's public issuance of allegedly false and misleading accounts concerning
or relating to such related-party transactions. The plaintiffs seek unspecified
compensatory and punitive damages, interest and costs and reinstatement of the
plaintiffs to their positions with the Company. On April 8, 1998, the Company
filed its Answer to the Amended Complaint, and asserted a counterclaim against
Messrs. Farrell and Fields for breach of fiduciary duties. The Company intends
to defend vigorously against the allegations.
11
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On June 2, 1998, Mr. Ronald Ash filed a complaint against the Company, its
wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources,
Inc. (the latter hereinafter referred to as "Wesley", and both companies
collectively, "StarMed"), and certain officers and directors of the Company in
the United States District Court for the Northern District of California. On
June 24, 1997, the Company, acquired the assets of Wesley, a medical staffing
company in San Francisco, California, from Mr. Ash and another party for 45,741
shares of the Company's Common Stock valued at $2,000,000 and contingent
consideration based on the company achieving certain financial objectives during
the three year period subsequent to the transaction. The Ash complaint, among
other things, alleges that the defendants omitted and/or misrepresented material
information in the Company's public filings and that they concealed or failed to
disclose adverse material information about the Company in connection with the
sale of Wesley to the Company by the plaintiff. The plaintiff seeks damages in
the amount of $4.25 million or, alternatively, rescission of the sale of Wesley.
On October 7, 1998, upon motion by the Company, the Ash action was
transferred from the United States District Court for the Northern District of
California and consolidated with the pending securities class actions in the
United States District Court for the District of New Jersey. The Company
believes that it has meritorious defenses to the claims asserted by plaintiff,
and intends to defend itself vigorously.
The legal proceedings described above are in their preliminary stages.
Although the Company believes it has meritorious defenses to all claims against
it, the Company is unable to predict with any certainty the ultimate outcome of
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 the
outcome of such other litigation will not have a material adverse effect on the
Company's financial position, cash flows or results of operations. Accordingly,
the Company has made no accrual for any costs associated with such litigation.
In connection with certain of the Company's acquisitions, the Company has
also agreed with certain sellers that all or a portion of the consideration for
such acquisitions will be paid on a contingent basis based upon the
profitability, revenues or other financial criteria of the acquired business
during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differs for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration and in other cases the parties have agreed
that any payment of such contingent consideration may be paid in cash or shares
of Common Stock, or a combination of both. Contingent consideration associated
with acquisitions is recorded as additional purchase price when resolved.
During 1997, 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 International, LDC ("RGC"). Each share of the Series C Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser of
(i) $62.10 or (ii) the average of the daily closing bid prices for the Common
Stock for the five (5) consecutive trading days ending five (5) trading days
prior to the date of conversion. Pursuant to the Preferred Stock 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 not later than
October 1997 or such other mutually agreed upon date and provided for monthly
penalties ("RGC Registration Penalties") in the event that the Company failed to
register the Conversion Shares prior to such date.
12
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As a result of the Company's failure to register the RGC Conversion Shares
until October 3, 1998, the Company: (i) issued warrants to RGC to acquire (a)
272,333 shares of Common Stock at an exercise price equal to $34.86 per share
(the "December 1997 Warrants") and (b) 116,666 share of Common Stock at an
exercise price of $38.85 per share (the "January 1998 Warrants") (such warrants
having an estimated value of $3,245,000), and (ii) issued promissory notes
bearing interest at 13% per annum (the "RGC Penalty Notes") in the aggregate
principal amount of $2,451,000 due and payable, as amended, in eleven monthly
payments beginning on December 1, 1998 and ending on October 1, 1999. Pursuant
to an agreement with RGC, entered into as of May 1, 1998, the exercise price of
certain December 1998 RGC Warrants to acquire 77,667 shares of Common Stock was
reduced to $2.73 per share, and the exercise price of all of the January 1998
RGC Warrants was reduced to $2.73 per share. 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.
In addition, as a result of the Company's failure to register the RGC
Conversion Shares prior to September 15, 1998, RGC held, until recently (see
below), the right to demand a one-time penalty amount equal to 10% of the stated
value of the outstanding Series C Preferred Stock (which penalty amount is
presently $1,427,500) payable, at the option of RGC, in cash or additional
shares of Common Stock (the "Registration Default Penalty"). As of the date
hereof, RGC had not demanded the Registration Default Penalty. In July 1999, the
Company entered into an agreement (the "Repurchase Agreement) with RGC pursuant
to which the Company can repurchase, through September 30, 1999, part or all of
the Series C Preferred Stock without payment of any premium and without payment
of the Registration Default Penalty, provided such repurchases are funded
through a definitive third-party financing agreement entered into by August 30,
1999. The Company's right to obtain financing for the repurchase of the Series C
Preferred Stock, whether before or after September 30, 1999, remains subject to
the consent of the holders of its Senior Notes. Furthermore, if and to the
extent the Series C Preferred Stock is not repurchased by the Company by
September 30, 1999 under the terms of the Repurchase Agreement, the contractual
provisions previously in effect between the parties shall again become
applicable (either as of August 31, 1999 or as of October 1, 1999, depending on
whether a definitive third-party financing agreement is entered into by August
30, 1999). There can be no assurance that the Company will be able to obtain the
required approval of the holders of the Senior Notes, or enter into a definitive
third-party financing agreement by August 30, 1999, sufficient to enable it to
repurchase by September 30, 1999 the Series C Preferred Stock. Purchasers of
Common Stock could experience substantial dilution upon conversion of the Series
C Preferred Stock, the RGC Penalty Notes and the exercise of December 1997 RGC
Warrants and January 1998 RGC Warrants.
During May 1999, RGC converted an additional 623 shares of Series C
Preferred Stock into 420,169 shares of Common Stock.
6. DISCONTINUED OPERATIONS
On August 18, 1998, the Company sold 100% of its stockholdings in StarMed
(the "StarMed Sale") for net cash proceeds at closing of $15,028,000, plus the
elimination of $13,786,000 of StarMed's outstanding third party debt. Due to the
StarMed Sale, the results of operations of StarMed for 1998 are herein reflected
in the Company's Consolidated Statements of Operations as discontinued
operations.
13
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. DISCONTINUED OPERATIONS (CONTINUED)
The following table shows the summary statement of operations for StarMed
for the three and six months ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1998
-------------- --------------
<S> <C> <C>
Net service revenues............................................................. $ 20,490 $ 40,307
Office level operating costs and provisions for uncollectible accounts
receivable..................................................................... 16,400 32,197
Corporate general and administrative............................................. 3,056 5,912
Depreciation and amortization.................................................... 163 334
------- -------
Operating income............................................................. 871 1,864
Interest expense, net............................................................ 223 406
------- -------
Income before income taxes....................................................... 648 1,458
Provision for income taxes....................................................... 56 117
------- -------
Income after income taxes........................................................ $ 592 $ 1,341
------- -------
------- -------
</TABLE>
14
<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(s)"), 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, (typically including billing and collection of
receivables), and technical imaging services to the Interpreting Physician(s).
Net service revenues are reported, when earned, at their estimated net
realizable amounts from third party payors, patients 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 and various State and
Federal regulations, imaging centers operated or managed by the Company
recognize revenue under one of the three following types of agreements with
Interpreting Physician(s):
Type I--Pursuant to facility service agreements with Interpreting
Physician(s) or Physician Group, 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(s) or Physician Group 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 Physician(s) either (i) a fixed
percentage of fees collected for services performed 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(s) 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--Pursuant to a facility service agreement, 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 Physician(s). 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
Physician(s) 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.
Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. No such audits have been initiated and the Company is not aware of any
pending audits.
15
<PAGE>
The Company also recognizes revenue from the licensing and/or sale of
software and hardware comprising radiology information systems which the Company
has developed. Such revenues are recognized on an accrual basis as earned.
For the three months ended June 30, 1999, the fees received or retained by
the Company under the three types of agreements with Interpreting Physician(s)
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 87% for the Type
III agreements. These agreements generally have terms ranging from one to ten
years.
QUARTER ENDED JUNE 30, 1999 COMPARED TO THE QUARTER ENDED JUNE 30, 1998
For the quarter ended June 30, 1999, total Company net service revenues were
$40,720,000 versus $46,626,000 for the quarter ended June 30, 1998, a decrease
of $5,906,000 or 13%. The decrease in net service revenues was due principally
to the combined effects of, (i) a continuing gradual decline in reimbursement
rates, (ii) a decrease in personal injury claims business, and (iii) a modality
mix change away from relatively higher priced MRI procedure volumes. In
addition, during 1998 and early 1999, the Company closed or sold eight imaging
centers.
Net service revenues from personal injury claims, mainly involving
automobile accidents, comprised approximately 10% of diagnostic imaging net
revenues in the second quarter of 1999, down from approximately 14% in the
second quarter of 1998. Management believes this decrease resulted principally
from the effects of the Company's intentional reduction in reliance on personal
injury revenues due to the high bad debt rate and very long collection cycle
associated with such business. In addition, recent legislation in New Jersey and
Florida aimed at curtailing auto insurance spending also contributed to the
decline in personal injury revenues for the period. If this trend continues, it
could have a material adverse effect on the financial results of the Company.
Management believes that past and future declines in revenues from personal
injury claims business will be offset, over time, with other payor class
revenues, especially as the Company completes its equipment replacement and
upgrade program. Under this equipment replacement program, the Company expects
to replace or upgrade approximately 22 MRI systems in its centers by the end of
1999. While not necessarily indicative of future performance at the same or
other centers, annualized procedure volumes have increased an average of
approximately 38% at six of the Company's centers where new MRI systems were
installed during 1998 and early 1999. While the Company intends to finance new
diagnostic equipment via operating leases, there can be no assurance that such
financing will remain available over the course of the planned equipment upgrade
program. Consequently, if such financing or alternate financing were to become
unavailable, the Company's future procedure volumes and net revenues could be
materially adversely affected over time.
The industry segment in which the Company participates has been experiencing
gradual reimbursement rate declines and this is expected to continue for some
period of time due to factors such as the expansion of managed care in the
United States and reimbursement cuts by U.S. government agencies. The Company
will attempt to mitigate the impact of any further decline in reimbursement
rates by decreasing its costs and increasing patient referral volumes.
Nevertheless, if the rate of decline in reimbursement rates were to materially
increase, or if the Company is unsuccessful in reducing its costs or increasing
its volumes, the Company's results could be materially and adversely affected
over time.
Costs of services for the three months ended June 30, 1999 were $26,134,000
compared to $28,129,000 for the three months ended June 30, 1998, a decrease of
$1,995,000 or 7%. This decrease was due to the
16
<PAGE>
closure or sale of eight centers during 1998 and early 1999, and center-level
cost reduction initiatives implemented since the beginning of 1998.
The provision for uncollectible accounts receivable for the quarter ended
June 30, 1999 was $1,945,000, or 5% of related net service revenues, compared to
the second quarter 1998 provision of $3,686,000, or 8% of related net service
revenues. The decrease in the provision for uncollectible accounts receivable,
as a percentage of net service revenues, was principally due to the decline in
personal injury claims business which carries higher than average bad debt
rates, and to improvements made by the Company in billing and collection systems
and procedures during late 1998 and early 1999.
Depreciation and amortization expense for the quarter was $5,709,000,
compared to $6,158,000 for the second quarter of 1998, or a decrease of
$449,000. The decrease was due primarily to lower diagnostic equipment
depreciation, which was partially the result of the Company entering into
operating leases throughout 1998 and 1999 in connection with diagnostic
equipment replacements.
Gross profit margins, which represent net service revenue less center costs
as a percent of net service revenue, decreased for the quarter ended June 30,
1999 to 12% from 15% for the quarter ended June 30, 1998. This was due primarily
to the impact of the decline in revenue described above.
Corporate general and administrative expense for the three months ended June
30, 1999 was $2,931,000, an increase of $332,000 from the $2,599,000 recorded
for the three months ended June 30, 1998. This was due primarily to higher
payroll costs.
During the three months ended June 30, 1999, the Company recorded unusual
charges of $434,000 attributable to defense costs relating to the shareholder
class action lawsuit and other related litigation. The Company has incurred
additional unusual charges during the third quarter of 1999 related to the
finalization of the settlement of the shareholder class action lawsuit.
Unusual charges for the three months ended June 30, 1998 consisted of
$1,240,000 related to Convertible Preferred Stock penalties and $400,000
associated with the shareholder class action lawsuit.
Net interest expense for the three months ended June 30, 1999 was $2,824,000
as compared to $3,426,000 for the three months ended June 30, 1998, a decrease
of $602,000. This decrease was primarily attributable to the retirement of notes
payable and capitalized lease obligations.
The Company's loss for the quarter ended June 30, 1999 was increased by
$300,000 attributable to minority interests, as compared to an increase in the
Company's loss of $462,000 for the quarter ended June 30, 1998.
The provision for income taxes for the three months ended June 30, 1999 was
$220,000 as compared to $222,000 for the comparable period last year. The
provision for income taxes for the three months ended June 30, 1999 and 1998
consists entirely of estimated state income taxes. For both quarters, a benefit
for income taxes related to the Company's losses has not been recorded due to
the uncertainty regarding the realization 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, 1999 was $2,057,000 compared to $1,442,000 for the quarter ended June 30,
1998.
The net loss applicable to common stockholders (used in computing loss per
common share) in the quarters ended June 30, 1999 and 1998 includes charges of
$109,000 and $139,000, respectively, as a result of the accretion of the
Company's convertible preferred stock.
17
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
For the six months ended June 30, 1999, total Company net service revenues
were $82,608,000 versus $93,648,000 for the six months ended June 30, 1998, a
decrease of $11,040,000 or 12%. The decrease in net service revenues was due
principally to the combined effects of, (i) a continuing gradual decline in
reimbursement rates, (ii) a decrease in personal injury claims business, and
(iii) a modality mix change away from relatively higher priced MRI procedure
volumes. In addition, during 1998 and early 1999, the Company closed or sold
eight imaging centers.
Costs of services for the six months ended June 30, 1999 were $53,397,000
compared to $58,332,000 for the six months ended June 30, 1998, a decrease of
$4,935,000 or 8%. This decrease was due to the closure or sale of eight centers
during 1998 and early 1999, and center-level cost reduction initiatives
implemented since the beginning of 1998.
The provision for uncollectible accounts receivable for the six months ended
June 30, 1999 was $4,147,000, or 5% of related net service revenues, compared to
the same period of 1998 provision of $7,307,000, or 8% of related net service
revenues. The decrease in the provision for uncollectible accounts receivable,
as a percentage of net service revenues, was principally due to the decline in
personal injury claims business which carries higher than average bad debt
rates, and to improvements made by the Company in billing and collection systems
and procedures during late 1998 and early 1999.
Depreciation and amortization expense for the six month period was
$11,315,000, compared to $12,635,000 for the same period of 1998, or a decrease
of $1,320,000. The decrease was due primarily to lower diagnostic equipment
depreciation, which was partially the result of the Company entering into
operating leases throughout 1998 and early 1999 in connection with diagnostic
equipment replacements.
Gross profit margins, which represent net service revenue less center costs
as a percent of net service revenue, decreased for the six months ended June 30,
1999 to 11% from 13% for the six months ended June 30, 1998. This was due
primarily to the impact of the decline in revenue described above.
Corporate general and administrative expense for the six months ended June
30, 1999 was $5,595,000, a decrease of $220,000 from the $5,815,000 recorded for
the six months ended June 30, 1998.
During the six months ended June 30, 1999, the Company recorded unusual
charges of $714,000 attributable to defense costs relating to the shareholder
class action lawsuit and other related litigation.
Unusual charges for the six months ended June 30, 1998 consisted of
$3,467,000 related to Convertible Preferred Stock penalties, $883,000 for costs
of the investigation of related party transactions, $713,000 associated with the
shareholder class action lawsuit and other charges of $337,000.
Net interest expense for the six months ended June 30, 1999 was $5,629,000
as compared to $6,912,000 for the six months ended June 30, 1998, a decrease of
$1,283,000. This decrease was primarily attributable to the retirement of notes
payable and capitalized lease obligations.
The Company's loss for the six months ended June 30, 1999 was increased by
$624,000 attributable to minority interests, as compared to an increase in the
Company's loss of $643,000 for the quarter ended June 30, 1998.
The provision for income taxes for the six months ended June 30, 1999 was
$350,000 as compared to $301,000 for the comparable period last year. The
provision for income taxes for the six months ended June 30, 1999 and 1998
consists entirely of estimated state income taxes.
18
<PAGE>
The Company's net loss from continuing operations for the six months ended
June 30, 1999 was $3,525,000 compared to $6,930,000 for the six months ended
June 30, 1998.
The net loss applicable to common stockholders (used in computing loss per
common share) in the quarters ended June 30, 1999 and 1998 includes charges of
$220,000 and $274,000, respectively, as a result of the accretion of the
Company's convertible preferred stock.
STARMED SALE
On August 18, 1998, the Company sold 100% of its stockholdings in StarMed
(the "StarMed Sale") for net cash proceeds at closing of $15,028,000, plus the
elimination of $13,786,000 of StarMed's outstanding third party debt. Due to the
StarMed Sale, the results of operations of StarMed for 1998 are herein reflected
in the Company's Consolidated Statements of Operations as discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, the Company's primary source of
cash flow was comprised of $4,209,000 from operations, a reduction in the
Company's cash balances of $6,520,000, and other borrowings of $1,515,000. The
primary use of cash was repayment of principal amount of capital lease
obligations and notes and mortgages payable totaling $11,206,000.
During the six months ended June 30, 1998, the Company's primary source of
cash flow was comprised of $1,101,000 from operations, a reduction 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 uses of cash was 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.
The Company has never declared a dividend on its Common Stock and, under the
Company's Senior Notes agreement, the payment of such dividends is not
permitted.
WORKING CAPITAL
The Company had a working capital deficit of $31,363,000 at June 30, 1999
compared to a working capital surplus of $30,985,000 at December 31, 1998. The
deficit in working capital at June 30, 1999 was caused by the reclassification
of certain debt from long-term to current on the Company's Consolidated Balance
Sheets due to a potential event of default under the Company's Senior Notes
financial covenants (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Resources and Liquidity").
OTHER OBLIGATIONS OF THE COMPANY
In connection with certain of the Company's acquisitions, the Company has
also agreed with certain sellers that all or a portion of the consideration for
such acquisitions will be paid on a contingent basis based upon the
profitability, revenues or other financial criteria of the acquired business
during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differs for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration and in other cases the parties have agreed
that any payment of such contingent consideration
19
<PAGE>
may be paid in cash or shares of Common Stock, or a combination of both.
Contingent consideration associated with acquisitions is recorded as additional
purchase price when resolved.
During 1997, 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 International, LDC ("RGC"). Each share of the Series C Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser of
(i) $62.10 or (ii) the average of the daily closing bid prices for the Common
Stock for the five (5) consecutive trading days ending five (5) trading days
prior to the date of conversion. Pursuant to the Preferred Stock 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 not later than
October 1997 or such other mutually agreed upon date and provided for monthly
penalties ("RGC Registration Penalties") in the event that the Company failed to
register the Conversion Shares prior to such date.
As a result of the Company's failure to register the RGC Conversion Shares
until October 3, 1998, the Company: (i) issued warrants to RGC to acquire (a)
272,333 shares of Common Stock at an exercise price equal to $34.86 per share
(the "December 1997 Warrants") and (b) 116,666 share of Common Stock at an
exercise price of $38.85 per share (the "January 1998 Warrants") (such warrants
having an estimated value of $3,245,000), and (ii) issued promissory notes
bearing interest at 13% per annum (the "RGC Penalty Notes") in the aggregate
principal amount of $2,451,000 due and payable, as amended, in eleven monthly
payments beginning on December 1, 1998 and ending on October 1, 1999. Pursuant
to an agreement with RGC, entered into as of May 1, 1998, the exercise price of
certain December 1998 RGC Warrants to acquire 77,667 shares of Common Stock was
reduced to $2.73 per share, and the exercise price of all of the January 1998
RGC Warrants was reduced to $2.73 per share. 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.
In addition, as a result of the Company's failure to register the RGC
Conversion Shares prior to September 15, 1998, RGC held, until recently (see
below), the right to demand a one-time penalty amount equal to 10% of the stated
value of the outstanding Series C Preferred Stock (which penalty amount is
presently $1,427,500) payable, at the option of RGC, in cash or additional
shares of Common Stock (the "Registration Default Penalty"). As of the date
hereof, RGC had not demanded the Registration Default Penalty. In July 1999, the
Company entered into an agreement (the "Repurchase Agreement) with RGC pursuant
to which the Company can repurchase, through September 30, 1999, part or all of
the Series C Preferred Stock without payment of any premium and without payment
of the Registration Default Penalty, provided such repurchases are funded
through a definitive third-party financing agreement entered into by August 30,
1999. The Company's right to obtain financing for the repurchase of the Series C
Preferred Stock, whether before or after September 30, 1999, remains subject to
the consent of the holders of its Senior Notes. Furthermore, if and to the
extent the Series C Preferred Stock is not repurchased by the Company by
September 30, 1999 under the terms of the Repurchase Agreement, the contractual
provisions previously in effect between the parties shall again become
applicable (either as of August 31, 1999 or as of October 1, 1999, depending on
whether a definitive third-party financing agreement is entered into by August
30, 1999). There can be no assurance that the Company will be able to obtain the
required approval of the holders of the Senior Notes, or enter into a definitive
third-party financing agreement by August 30, 1999, sufficient to enable it to
repurchase by September 30, 1999 the Series C Preferred Stock. Purchasers of
Common Stock could experience substantial dilution upon conversion of the Series
C Preferred Stock, the RGC Penalty Notes and the exercise of December 1997 RGC
Warrants and January 1998 RGC Warrants.
In addition to matters discussed above, the Company is subject to litigation
that may require additional future cash outlays.
20
<PAGE>
FINANCIAL RESOURCES AND LIQUIDITY
As of June 30, 1999, the Company failed to meet one of the financial
covenants (i.e., the interest coverage ratio requirement) under its $76,000,000
of Senior Notes indebtedness. In August 1999, the holders of the Senior Notes
granted the Company, through June 30, 1999, a waiver of that financial covenant
requirement. In connection with such waiver, the Company has agreed to prepay
$1,000,000 of outstanding principal of the Senior Notes (plus applicable
prepayment premium) and adjust the exercise price of warrants to purchase
375,000 shares of Common Stock previously issued to the holders of the Senior
Notes from $7.87 per share to $2.62 per share. Also in connection with this
waiver, the Company has agreed to prepay an additional $1,000,000 of outstanding
principal of the Senior Notes (plus applicable prepayment premium) if and when
the Company achieves certain minimum cash flow results. As a result of the
waiver described above, the Company is currently in compliance with all
financial covenants under the Senior Notes and the Company's other material debt
agreements.
Although the Company is currently in compliance with the financial covenants
under its Senior Notes and other material debt agreements, the requirements for
meeting certain of the financial covenants under the Senior Notes as of
September 30, 1999 increase significantly over those applicable as of June 30,
1999. Consequently, and based upon the recent financial performance of the
Company, it is unlikely that all of the financial covenants under the Senior
Notes will be met as of September 30, 1999. The Company is currently in
discussions with the holders of the Senior Notes for the purpose of resolving
this potential default event. Nevertheless, and although the Company has been
successful in obtaining waivers or covenant modifications from the Senior Note
holders in the past, there can be no assurance that the current discussions will
be successful. In the event that the parties are unable to reach agreement on
modified financial covenants, the Senior Note holders will be entitled, at their
discretion any time after September 30, 1999, to exercise certain remedies
including acceleration of repayment. Furthermore, certain medical equipment
notes and leases of the Company (the "Cross Default Debt") contain provisions
which would then allow their holders, at their discretion, to accelerate
repayment of such notes, terminate such leases, and seek certain other remedies.
In the event that the Company (i) fails to meet the financial covenants
under the Senior Notes as of September 30, 1999, and (ii) the Senior Note
holders, and/or the other obligors with respect to the Cross Default Debt, elect
to exercise their respective rights to accelerate their respective obligations,
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 material part, no assurance could be given that
the Company would be successful in identifying or consummating the financing
necessary to satisfy such obligations at that time. As a result of this
uncertainty related to the potential future defaults and corresponding remedies
described above, the Senior Notes and the Cross Default Debt are shown as
current liabilities on the Company's Consolidated Balance Sheets at June 30,
1999.
Prior to 1998, the Company incurred substantial debt in connection with
acquisitions of imaging centers. As of June 30, 1999, the Company's debt,
including capitalized lease obligations, totaled $117,705,000. Cash available to
MRII for general corporate use declined from $13,479,000 at December 31, 1998 to
$11,691,000 as of June 30, 1999 (both balances exclude cash held by non-wholly
owned affiliates as of the indicated dates, since such cash amounts are not
readily available to MRII for general corporate purposes). However, some portion
of such excluded cash is expected to be available to satisfy that portion of the
Company's remaining 1999 short term debt which is attributable to non-wholly
owned affiliates.
Other than operating lease obligations to finance new diagnostic equipment,
the Company does not expect to incur significant additional debt in the near
future. Additionally, due to ongoing cost reduction initiatives and due to
improvements made and being made to the Company's billing and collections
systems and procedures, the Company expects 1999 cash flows from operations to
improve from the level achieved in 1998 and the first half of 1999. Based on
these factors, and assuming that the Company reaches
21
<PAGE>
satisfactory resolution with the Senior Note holders regarding a potential
financial covenant default, management believes that existing available cash
balances, plus expected 1999 cash flows from operations, will be adequate to
fund the Company's 1999 cash requirements.
COMMON STOCK
On April 22, 1999, due to the Company's failure to meet the continued
listing requirements of the Nasdaq National Market and the Nasdaq SmallCap
Market, the Company's Common Stock was delisted by Nasdaq. The Company's Common
Stock is now traded on the OTC Bulletin Board, an electronic quotation service
for NASD Market Makers. There can be no assurance that the Company's Common
Stock will continue to trade on the OTC Bulletin Board. It is the Company's
intention to again seek to be listed on Nasdaq or a national securities exchange
if and when the Company satisfies the requirements for listing.
SEASONALITY AND INFLATION
The Company believes that its business is only moderately affected by
seasonality. The third quarter is typically the slowest quarter of the year
because the months of July and August are the principal vacation months of the
year. The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to date to the Company's operations. Notwithstanding the
foregoing, general inflation trends and continuing reimbursement rate pressures
in the future may cause the Company not to be able to raise prices for its
diagnostic imaging procedures by an amount sufficient to offset the negative
effects of increasing costs. 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.
These trends, if continued over time, could have a material adverse effect on
the financial results of the Company.
IMPACT OF YEAR 2000 ON COMPANY'S COMPUTER SOFTWARE
The Company is preparing for the impact of the arrival of the Year 2000 on
its business, as well as on the businesses of its customers, suppliers and
business partners. The "Year 2000 Problem" is a term used to describe the
problems created by systems that are unable to accurately interpret dates after
December 31, 1999. These problems are derived predominately from the fact that
certain computer hardware and many software programs historically recorded a
date's "year" in a two-digit format (i.e., "98" for 1998) and therefore may
recognize the year "00" as 1900 instead of the Year 2000. The Year 2000 Problem
creates potential risks for the Company, including the inability to recognize or
properly treat dates occurring on or after January 1, 2000, which may result in
computer system failures or miscalculations of critical financial or operational
information as well as failures of equipment controlling date-sensitive
microprocessors or influencing patient care.
In addition to its internal systems, the Company relies heavily on third
parties in operating its business. Such third parties include (1) vendors who
supply software, hardware and other equipment to the Company, (2) intermediaries
that process claims and payments on behalf of various payors, (3) insurance
companies, HMO's and other private payors, (4) utilities which provide
electricity, water, natural gas and telephone services and (5) vendors of
medical supplies and pharmaceuticals used in patient care.
The Company began formulating a plan in 1998 to address the Year 2000
Problem and to ensure that all relevant systems had been subject to a full Year
2000 review and, if necessary, remediation, replacement or upgrade. Under the
plan, the Company has focused on (i) internal financial, operational and medical
software and equipment and (ii) the Year 2000 compliance of all third party
suppliers and intermediaries doing business with the Company. In connection with
its Year 2000 compliance activities, the Company has contacted all outside
vendors and intermediaries with which the Company has material relationships and
engaged in discussions which will continue throughout 1999 in furtherance of the
Company's stated goal of minimizing any adverse impact related to the Year 2000
Problem.
22
<PAGE>
The Company has completed its assessment of all material financial and
billing computer systems. In connection with this review, the Company upgraded
its financial accounting systems to Year 2000 compliant systems in January 1999.
This system is currently being tested to verify Year 2000 compliance, and such
testing should be completed by September 30, 1999. The Company's ICIS billing
and collection system has been upgraded in June 1999, and is expected to be
fully installed and tested by October 1999. The costs and expenses incurred or
expected to be incurred relating to Year 2000 compliance for these systems is
currently not expected to be material. Software sold by the Company's
wholly-owned subsidiary, Dalcon Technologies, Inc. is expected to be fully Year
2000 compliant and fully installed and tested at all 300 sites supported by
Dalcon by September 1999. Computer equipment at Dalcon Technologies, Inc. has
been inventoried and testing is underway for Year 2000 compliance. This testing
is expected to be completed by September 1999.
The Company has completed its review of all diagnostic imaging equipment in
operation at the Company's centers. Each piece of diagnostic equipment in
operation has computer systems and applications, and in many cases, embedded
computer processors. The Company is in communication with all of the
manufacturers of such equipment and believes that a majority of the equipment is
either currently Year 2000 compliant or can be upgraded (either through software
modifications or hardware replacement) to become Year 2000 compliant. The
Company expects all necessary upgrades or other remediation to be completed no
later than October 1999. In the event that certain diagnostic imaging equipment
is not Year 2000 compliant and no upgrade or remediation is available, the
Company expects to provide for the replacement of such equipment prior to
December 1999.
With regard to third parties, 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. Compliance letters have been sent
to all such payors and suppliers, and follow up will continue throughout 1999. A
significant portion of the Company's revenues are derived from the Medicare
program, which is administered by the Health Care Financing Administration
(HCFA). HCFA employs more than 60 carriers and intermediaries to process
Medicare fee-for-service claims throughout the nation. There are several hundred
different computer systems involved in the everyday work of HCFA, its carriers
and intermediaries.
HCFA has announced the establishment of target dates to complete testing of
its mission critical systems and to certify to the Secretary of Health and Human
Services that its mission critical systems will be Year 2000 compliant. There
can be no assurance that HCFA will meet the established timetable or that it
will have its mission critical systems, which most directly affect the Company,
Year 2000 compliant in time to prevent disruptions to the Medicare payments
received by the Company. Moreover, HCFA has announced the delayed implementation
of certain new regulations as well as the possible postponement of scheduled
rate increases while its resources are redirected towards Year 2000 compliance.
While certain members of Congress have taken strong exception to HCFA's
announcement to delay rate increases, it is possible that rate increases, which
were scheduled to take effect on October 1, 1999, could be delayed until after
December 31, 1999.
The Company estimates that costs and expenses associated with completing the
outlined Year 2000 compliance plan will range from $500,000 to $900,000. The
Company presently believes that it will substantially complete its internal Year
2000 compliance program prior to January 1, 2000, and that there should be no
material adverse impact at such time related to Year 2000 Problems associated
with the Company's systems or software. Based on communications with its vendors
and suppliers, the Company also believes that each third party or intermediary
with whom the Company has a material relationship is currently Year 2000
compliant or scheduled to be Year 2000 compliant by January 1, 2000.
Despite the Company's best efforts, there can be no assurance that (i) the
Company's assessments regarding the Year 2000 Problem are correct; (ii) the
Company will be able to successfully complete its Year 2000 review and implement
such upgrades and/or remediation as is necessary or (iii) third parties or
suppliers with whom the Company does business will avoid Year 2000 Problems
which might adversely affect
23
<PAGE>
the Company business or operations. While the Company is developing contingency
plans to address such failures or unexpected problems (such plans to include
identification of alternative suppliers or intermediaries), there can be no
assurance that such contingency plans will be adequate to resolve these
problems. The Company's contingency plan is expected to be completed by
approximately September 30, 1999.
The Year 2000 Problem involves substantial risk to the Company. The Company
believes today that the likely worst case scenario regarding the Year 2000
Problem will involve (1) malfunctions in clinical computer software and hardware
at certain of the imaging centers operated and/or managed by the Company, (2)
malfunctions in biomedical equipment at certain of the imaging centers operated
and/or managed by the Company, (3) temporary disruptions in delivery of medical
supplies and utility services at certain of the imaging centers operated and/or
managed by the Company and (4) temporary disruptions in payments, especially
payments from Medicare and other government programs. The Company expects these
events will result in increased expense as the affected facilities refer tests
and other procedures to other parties, access alternative suppliers and increase
staffing to assure adequate patient care. These events may also cause lost
revenue for procedures which certain of the imaging centers operated and/or
managed by the Company are unable to perform.
The foregoing assessment is based on information currently available to the
Company. The Company will revise its assessment as it implements its Year 2000
compliance plan. The Company can provide no assurances that applications and
equipment believed to be Year 2000 compliant will not experience difficulties or
the Company will not experience difficulties obtaining resources needed to make
modifications to or replace the Company's affected systems and equipment.
Failure by the Company or third parties, on which it relies to resolve Year 2000
issues, could have a material adverse effect on the Company's results of
operations and its ability to provide health care services as described more
fully herein.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Statements contained in this Report 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 acquired
businesses; the ability of the Company to generate net positive cash flows from
operations; the payment timing and ultimate collectibility of accounts
receivable from different payor groups (including Personal Injury type); the
potential dilution that would result from the conversion of the Company's Series
C Convertible Preferred Stock into common shares at current share prices; the
impact of a changing mix of managed care and personal injury claim business on
contractual allowance provisions, net revenues and bad debt provisions; the
ability of the Company to obtain financing (and all required consents and
approvals), pursuant to a definitive third-party financing agreement entered
into by August 30, 1999, sufficient to enable it to repurchase by September 30,
1999 the Series C Convertible Preferred Stock and thereby avoid the 15%
repurchase premium amount (if it otherwise would have become applicable) and the
10% penalty amount; the ultimate economic impact of 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; the availability of lease financing, in general and on
reasonable terms, for the replacement or upgrade of the Company's diagnostic
equipment as required to remain competitive; 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.
24
<PAGE>
II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
10.1 Waiver and Amendment regarding the Company's Senior Note Agreement,
between the Company and the institutional investors party thereto,
dated August 6, 1999.
b. REPORTS ON FORM 8-K
None
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 13, 1999
25
<PAGE>
Exhibit 10.1
THIRD WAIVER AND AMENDMENT AGREEMENT
THIS THIRD WAIVER AND AMENDMENT AGREEMENT (this "AGREEMENT") is
entered into as of August 6, 1999 among Medical Resources, Inc. (the "COMPANY")
and the institutional investors party hereto (the "Purchasers"). The Purchasers
are collectively the holders of not less than a majority of the $52,000,000 in
aggregate principal amount originally outstanding of the Company's 7.77% Senior
Notes due February 20, 2005 (the "7.77% NOTES") issued pursuant to a Note
Purchase Agreement dated as of February 20, 1997 (the "FEBRUARY NOTE AGREEMENT")
and not less than a majority of the $20,000,000 in aggregate principal amount
originally outstanding of the Company's 8.10% Senior Notes due February 20, 2005
(the "8.10% NOTES") and the $6,000,000 in aggregate principal amount originally
outstanding of the Company's 8.01% Senior Notes due February 20, 2005 (the
"8.01% NOTES" and together with the 7.77% Notes and the 8.10% Notes, the
"NOTES") issued pursuant to a Note Purchase Agreement dated as of June 26, 1997
(the "JUNE NOTE AGREEMENT" and together with the February Note Agreement, each
as amended by the First Waiver Agreement and the Second Waiver Agreement
(defined below) the "NOTE AGREEMENTS"). Capitalized terms not otherwise defined
in this Agreement have the meanings given therefor in the Note Agreements.
WHEREAS, the Note Agreements have previously been amended by a Waiver
and Amendment Agreement dated September 23, 1998 (the "FIRST WAIVER AGREEMENT")
and a Second Waiver and Amendment Agreement dated March 15, 1999 (the "SECOND
WAIVER AGREEMENT"); and
WHEREAS, the Company has advised the Purchasers that it is not
currently in compliance with its covenant set forth in paragraph 6A(2) of the
Note Agreements as of June 30, 1999 and has requested that the Purchasers waive
any Default or Event of Default arising therefrom; and
WHEREAS, the Purchasers are willing to do so on the terms and
conditions of this Agreement.
NOW, THEREFORE, the parties agree:
1. AMENDMENT TO NOTE AGREEMENTS.
(a) The definitions of Restricted Payments in the Note Agreements is
clarified to add the inadvertently omitted closing parenthesis in the fifth line
thereof as follows:
"RESTRICTED PAYMENTS" means the declaration, payment or
making, directly or indirectly, of any dividend, payment or other
distribution on or in respect of any Equity Interest of the Company
or any Restricted Subsidiary (other than the payment of a dividend,
payment or other distribution to the Company or Wholly-Owned
Restricted Subsidiary) or the setting apart of any funds or property
therefor, ...."
<PAGE>
(b) Clause (x) of paragraph 5A of each Note Agreement is amended and
restated in its entirety:
"(x) promptly, but not later than 20 days following the end
of each calendar month, a cash flow and accounts receivable aging
report for such month on a weekly basis accompanied by a
reconciliation of the actual versus projected cash flows and
promptly, but not later than August 13, 1999 and on the seventh day
following the end of each second week thereafter, projected weekly
cash flows for the next following three month period."
2. WAIVER. The Purchasers hereby waive any Default or Event of
Default arising under paragraph 6A(2) of each Note Agreement as a result of the
Company's ratio of (a) Consolidated EBITA to (b) Consolidated Interest Expense
for the four fiscal quarters ended June 30, 1999, taken as a single accounting
period, being less than 1.92 to 1.0.
3. REPRESENTATIONS AND WARRANTIES.
(a) Subject to the disclosure schedules attached to the June Note
Agreement and the updated disclosure schedules attached to the Second Waiver
Agreement, each of the representations and warranties set forth in paragraph 8
of each Note Agreement is true and correct in all material respects on and as if
made as of the date hereof and after giving effect to the transactions
contemplated by this Agreement.
(b) The Company has furnished the Purchasers with the unaudited
balance sheets of the Consolidated Group dated as of June 30, 1999 and March 31,
1999 and the related statements of operations, cash flows and stockholders'
equity for the six and three months, respectively ended on such dates. The
unaudited financial statements fairly present in all material respects the
financial condition of the Consolidated Group and the results of its operations
and cash flows for the respective periods specified thereby. The audited
financial statements have been prepared in accordance with GAAP, consistently
applied throughout the periods involved except as set forth in the notes
thereto. Since June 30, 1999, there have been no developments or changes
affecting the business, assets, liabilities, condition (financial or otherwise)
of the Company or any Restricted Subsidiary which has had or is reasonably
expected to have, either individually or in the aggregate, a Material Adverse
Effect.
(c) As of the date hereof, the Company has no direct or indirect
equity or beneficial ownership in any Unrestricted Subsidiary.
(d) As of the date hereof, no demand for or any other action to
obtain payment of (whether in cash or in stock) the September 1998 Penalty has
been made or taken and the obligations of the Company thereunder are not
represented by a note or other instrument.
<PAGE>
4. CONDITIONS. The effectiveness of the waiver granted in Section 2
will be revoked, automatically and without further action on the part of the
Purchasers and this Agreement shall be of no force and effect, if on or before
August 16, 1999 the following conditions have not been satisfied:
(a) ACTUAL JUNE 30, 1999 RATIO. The ratio of the Company's (a)
Consolidated EBITA to (b) Consolidated Interest Expense for the four fiscal
quarters ended June 30, 1999 taken as a single accounting period shall not have
been less than 1.70 to 1.0.
(b) SETTLEMENT APPROVAL. The Class Action Settlement Agreement in the
form attached as Exhibit I to the Second Waiver Agreement shall have been
approved by the United States District Court for the District of New Jersey and
the Settlement Notes issued in connection therewith shall contain the
subordination provisions set forth in Exhibit I attached and shall otherwise be
in form and substance satisfactory to the Required Holders.
(c) WARRANT EXERCISE PRICE. The Company shall have delivered to each
Purchaser an amendment to the Warrants resetting the exercise price therefor to
a price equal to the lesser of (a) $2.75 per share or (b) the conversion price
set forth in the Settlement Note.
(d) PRINCIPAL PREPAYMENT. The Company, by wire transfer of
immediately available funds in accordance with the instructions set forth on
Exhibit A to the Note Agreements, shall have prepaid the Notes, with Make Whole
Amount, in the aggregate principal amount of $1,000,000 together with all
interest accrued on the principal amount being prepaid through the date of
prepayment. Additionally, at such time as the Company's three month weekly cash
flow forecast reflects ending available cash for each weekly period of at least
$7,000,000 (whether as a result of improved revenues, collections, reduced
expenses or proceeds of the sale of assets or otherwise), the Company, by wire
transfer of immediately available funds in accordance with the instructions set
forth on Exhibit A to the Note Agreements, shall have prepaid the Notes, with
Make Whole Amount, in the aggregate principal amount of $1,000,000 together with
all interest accrued on the principal amount being prepaid through the date of
prepayment. Each prepayment of principal pursuant to this Section 4(d) is to be
allocated among the Purchasers in proportion to the aggregate principal amount
of the Notes held by each and shall otherwise be applied in accordance with
paragraph 4D of each Note Agreement.
(e) OPINION OF COUNSEL. The Company shall have delivered an opinion
of Willkie, Farr & Gallagher as to (i) the legal existence and corporate power
and authority of the Company, (ii) the due authorization, execution, delivery
and enforceability of this Agreement and the amendments to the Warrants required
by subparagraph (c) above, (iii) the absence of conflicts with or creation of
liens under applicable law in connection herewith or therewith and (iv) the
absence of any required governmental consents in connection herewith or
therewith, in form and substance satisfactory to the Purchasers.
<PAGE>
(f) PAYMENT OF EXPENSES. All Expenses, including those of Special
Counsel, as set forth in invoices delivered to the Company prior to the date
hereof shall have been paid in full by the Company.
5. NO OTHER WAIVERS. Except as expressly set forth herein or as
previously amended, the Note Agreements shall continue in full force and effect
without alteration or amendment and except as expressly set forth herein no
other waiver of any Default or Event of Default is hereby granted.
6. GOVERNING LAW. THIS AGREEMENT IS TO BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF
THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY LAWS OR RULES RELATING TO
CONFLICTS OF LAWS THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK).
7. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, and it shall
not be necessary in making proof of this Agreement to produce or account for
more than one such counterpart.
[Signatures Follow]
<PAGE>
This Agreement is executed under seal as of the date first above written.
MEDICAL RESOURCES, INC.
By: /s/ Christopher J.Joyce
Title: Senior Vice President
<PAGE>
Purchasers under the February
Note Agreement:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: /s/ Stephen J. Blewitt
Name:
Title: Vice President
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By: /s/ Stephen J. Blewitt
Name:
Title: Vice President
INVESTORS PARTNER LIFE INSURANCE COMPANY
By: /s/ Stephen J. Blewitt
Name:
Title: Vice President
MELLON BANK, N.A., solely
in its capacity as Trustee
for The Long Term
Investment Trust, (as
directed by John Hancock
Mutual Life Insurance
Company), and not in its
individual capacity
By:
--------------------------------
Name:
Title:
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
By:
--------------------------------
Name:
Title:
LIFE INVESTORS INSURANCE COMPANY
OF AMERICA
By:
--------------------------------
Name:
Title:
GREAT AMERICAN LIFE INSURANCE COMPANY
By: /s/ Mark Muething
Name:
Title: Senior Vice President
GENERAL ELECTRIC CAPITAL
ASSURANCE COMPANY
(f/k/a Great Northern Insured Annuity
Corporation)
By: /s/ Morian C. Mooers
Name:
Title: Investment Officer
AMERICAN BANKERS INSURANCE COMPANY
OF FLORIDA
By:
--------------------------------
Name:
Title:
<PAGE>
COVA FINANCIAL SERVICES LIFE INSURANCE
COMPANY
By: CONNING ASSET MANAGEMENT COMPANY
By: /s/ Frank Car
Name:
Title:
HARE & CO. (with respect to Senior
Note No. 12 as nominee of Lincoln
National Life Insurance Company)
By: /s/ Patrick M. Dodd
Name:
Title: Authorized officer
<PAGE>
Purchasers under the June Note Agreement:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By:
--------------------------------
Name:
Title:
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By:
--------------------------------
Name:
Title:
GENERAL ELECTRIC CAPITAL
ASSURANCE COMPANY
(f/k/a Great Northern Insured Annuity
Corporation)
By: /s/ Morian C. Mooers
Name:
Title: Investment Officer
OCCIDENTAL LIFE INSURANCE
COMPANY OF NORTH CAROLINA
By: CONNING ASSET MANAGEMENT COMPANY
By: /s/ L. Caro
Name:
Title:
<PAGE>
PENINSULAR LIFE INSURANCE CO.
By: CONNING ASSET MANAGEMENT
COMPANY
By:
--------------------------------
Name:
Title:
EXECUTIVE RISK INDEMNITY INC.
By: CONNING ASSET MANAGEMENT
COMPANY
By:
--------------------------------
Name:
Title:
<PAGE>
EXHIBIT I
SETTLEMENT NOTE SUBORDINATION PROVISIONS
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,477
<SECURITIES> 0
<RECEIVABLES> 74,176
<ALLOWANCES> 15,641
<INVENTORY> 0
<CURRENT-ASSETS> 87,745
<PP&E> 95,013
<DEPRECIATION> 49,681
<TOTAL-ASSETS> 272,279
<CURRENT-LIABILITIES> 140,451
<BONDS> 0
0
15,107
<COMMON> 98
<OTHER-SE> 93,060
<TOTAL-LIABILITY-AND-EQUITY> 272,279
<SALES> 0
<TOTAL-REVENUES> 82,608
<CGS> 0
<TOTAL-COSTS> 73,129
<OTHER-EXPENSES> 7,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,629
<INCOME-PRETAX> (3,175)
<INCOME-TAX> 350
<INCOME-CONTINUING> (3,525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,525)
<EPS-BASIC> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
