<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission File No. 0-20440
MEDICAL RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3584552
(State of Incorporation) (IRS Employer Identification No.)
125 STATE STREET, SUITE 200, HACKENSACK, NJ 07601
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: (201) 488-6230
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |_| No |X|
At November 3, 2000, 10,064,228 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 last reported trade price of
these shares on that date) held by non-affiliates was $423,407.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
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Medical Resources, Inc.
(Debtor-in-Possession)
Index
<TABLE>
<CAPTION>
PAGES
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999........................................... 3
Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999........................... 4
Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 1999........................... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999........................... 6
Notes to Consolidated Financial Statements.................. 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14-22
PART II. OTHER INFORMATION........................................... 23
</TABLE>
2
<PAGE>
Medical Resources, Inc.
(Debtor-in-Possession)
Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................................... $ 9,068 $ 9,360
Cash and short-term investments, restricted .................................. 972 600
Accounts receivable, net ..................................................... 41,639 50,177
Other receivables ............................................................ 10,548 8,579
Prepaid expenses ............................................................. 3,060 3,638
--------- ---------
Total current assets ....................................................... 65,287 72,354
Property and equipment, net .................................................... 25,557 33,718
Goodwill and other intangible assets, net ...................................... 95,677 112,474
Other assets ................................................................... 1,597 1,510
--------- ---------
Total assets ............................................................... $ 188,118 $ 220,056
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior notes due 2001 through 2005, classified as current .................... $ -- $ 75,000
Notes and mortgages payable, classified as current ........................... 2,713 10,999
Capital lease obligations, classified as current ............................. 2,485 4,901
Current portion of notes and mortgages payable ............................... 3,713 9,718
Current portion of capital lease obligations ................................. 4,980 7,808
Accounts payable ............................................................. 5,483 11,327
Accrued expenses and other current liabilities ............................... 29,906 28,324
--------- ---------
Total current liabilities .................................................. 49,280 148,077
Notes and mortgages payable, less current portion .............................. 1,463 4,213
Obligations under capital leases, less current portion ......................... 999 3,535
Other long term liabilities .................................................... 761 768
Liabilities subject to compromise .............................................. 93,334 --
Minority interest .............................................................. 3,698 4,573
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000 shares; 10,064 issued and
Outstanding at September 30, 2000 and 9,756 issued and outstanding at
December 31, 1999 ......................................................... 101 98
Series C Convertible Preferred Stock, $1,000 per share stated value; 14 shares
Issued and outstanding; liquidation preference 3% per annum ............... 15,521 15,321
Additional paid-in capital ................................................... 144,766 144,909
Accumulated deficit .......................................................... (121,805) (101,438)
--------- ---------
Total stockholders' equity ................................................. 38,583 58,890
--------- ---------
Total liabilities and stockholders' equity ................................. $ 188,118 $ 220,056
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Medical Resources, Inc.
(Debtor-in-Possession)
Consolidated Statements of Operations
For the Three Months Ended September 30, 2000 and 1999
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Net service revenues .......................... $ 33,513 $ 37,551
Cost of services .............................. 23,353 27,085
-------- --------
Gross profit ............................... 10,160 10,466
Provision for doubtful accounts ............... 1,145 4,949
Corporate general and administrative expenses . 2,945 3,178
Equipment leases .............................. 3,285 2,860
Depreciation and amortization ................. 4,345 5,547
Loss on impairment of goodwill and other assets -- 29,825
Loss attributable to sale or closure of centers 4,417 1,150
Other unusual charges ......................... 1,523 1,012
-------- --------
Operating loss .............................. (7,500) (38,055)
Interest expense, net ......................... 2,389 2,834
Minority interest ............................. 381 82
-------- --------
Loss before income taxes .................... (10,270) (40,971)
Provision for income taxes .................... 100 90
-------- --------
Net loss .................................... (10,370) (41,061)
Charges related to convertible preferred stock (102) (106)
-------- --------
Net loss applicable to common stockholders .. $(10,472) $(41,167)
======== ========
Basic and diluted net loss per common share ... $ (1.04) $ (4.22)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Medical Resources, Inc.
(Debtor-in-Possession)
Consolidated Statements of Operations
For the Nine Months Ended September 30, 2000 and 1999
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
Net service revenues .......................... $ 108,669 $ 120,159
Cost of services .............................. 74,314 80,182
--------- ---------
Gross profit ............................... 34,355 39,977
Provision for doubtful accounts ............... 4,249 9,096
Corporate general and administrative expenses . 8,803 9,165
Equipment leases .............................. 10,077 7,130
Depreciation and amortization ................. 13,686 16,862
Loss on impairment of goodwill and other assets -- 29,825
Loss attributable to sale or closure of centers 5,565 1,150
Other unusual charges ......................... 3,290 1,726
--------- ---------
Operating loss .............................. (11,315) (34,977)
Interest expense, net ......................... 7,621 8,463
Minority interest ............................. 1,131 706
--------- ---------
Loss before income taxes .................... (20,067) (44,146)
Provision for income taxes .................... 300 440
--------- ---------
Net loss .................................... (20,367) (44,586)
Charges related to convertible preferred stock (308) (326)
--------- ---------
Net loss applicable to common stockholders .. $ (20,675) $ (44,912)
========= =========
Basic and diluted net loss per common share ... $ (2.07) $ (4.71)
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Medical Resources, Inc.
(Debtor-in-Possession)
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(20,367) $(44,586)
-------- --------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ............................ 13,686 16,862
Provision for uncollectible accounts receivable .......... 4,249 9,096
Loss on impairment of goodwill and other long lived assets -- 29,825
Loss on disposition of diagnostic imaging centers ........ 4,611 --
Other, net ............................................... (815) 803
Changes in operating assets and liabilities:
Accounts receivable ...................................... 4,289 (11,505)
Other receivables ........................................ (1,969) (1,017)
Prepaid expenses ......................................... (113) 485
Income taxes recoverable or payable ...................... (108) 745
Other assets ............................................. -- 526
Accounts payable and accrued expenses .................... 2,755 2,621
Other liabilities ........................................ (7) 306
-------- --------
Total adjustments ...................................... 26,578 48,747
-------- --------
Net cash provided by operating activities .......... 6,211 4,161
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net of disposals ....... (682) (2,444)
Disposition of diagnostic imaging centers, net of cash sold 8,315 781
Other, net ................................................. (372) 382
-------- --------
Net cash provided by (used in) in investing activities . 7,261 (1,281)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes and mortgages payable .......... (6,215) (9,934)
Principal payments under capital lease obligations ......... (7,549) (7,084)
Other borrowings ........................................... -- 1,515
Other, net ................................................. -- (1,105)
-------- --------
Net cash used in financing activities .................. (13,764) (16,608)
-------- --------
Net decrease in cash and cash equivalents .................. (292) (13,728)
Cash and cash equivalents at beginning of year ............. 9,360 20,997
-------- --------
Cash and cash equivalents at end of period ................. $ 9,068 $ 7,269
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for -
Cash refunded by (paid for) income taxes, net ........ $ (224) $ 93
Cash paid for interest ................................ (2,046) (8,469)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
MEDICAL RESOURCES, INC.
(DEBTOR-IN-POSSESSION)
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.
On April 7, 2000, Medical Resources, Inc., the parent company, filed a
pre-negotiated Joint Plan of Reorganization (the "Plan") and commenced
proceedings under Chapter 11 of the Federal bankruptcy laws in the United States
Bankruptcy Court for the Southern District of New York. Reference is made to
Note 2 of the Notes to Consolidated Financial Statements for further
information.
The unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission (the "SEC") for the year ended December 31, 1999.
COST OF SERVICES
Cost of services as shown on the Consolidated Statement of Operations for the
three and nine month periods ended September 30, 2000 and 1999 consist of the
following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operations payroll and related.......... $8,947 $10,191 $27,795 $29,649
Equipment maintenance expense........... 1,800 2,266 5,547 6,687
Contract radiology fees................. 1,721 2,109 5,712 6,575
Medical supplies........................ 2,258 2,579 7,304 7,837
Facilities rent and related............. 2,633 3,315 8,331 9,453
Other center level costs................ 5,802 6,387 19,034 19,385
------- ------- ------- -------
Total Diagnostic Imaging.............. 23,161 26,847 73,723 79,586
Dalcon Technologies, Inc................ 192 238 591 596
------- ------- ------ ------
Total Company......................... $23,353 $27,085 $74,314 $80,182
======= ======= ======= =======
</TABLE>
7
<PAGE>
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
EARNINGS PER SHARE
The computations of basic and diluted loss per share for the three and nine
months ended September 30, 2000 and 1999 were as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic and diluted loss per share information:
Net loss ....................................... $(10,370) $(41,061) $(20,367) $(44,586)
Charges related to convertible preferred stock . (102) (106) (308) (326)
-------- -------- -------- --------
Net loss applicable to common stockholders ..... $(10,472) $(41,167) $(20,675) $(44,912)
======== ======== ======== ========
Weighted average number of common shares ....... 10,064 9,756 9,995 9,545
======== ======== ======== ========
Basic and diluted income (loss) per common share $ (1.04) $ (4.22) $ (2.07) $ (4.71)
======== ======== ======== ========
</TABLE>
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
Since September 30, 1999, the Company has failed to meet certain of the
financial covenants under its $75,000,000 of Senior Notes indebtedness. In
addition, the Company has deferred payment of the required monthly interest
payments on the Senior Note indebtedness since January 2000 and the required
monthly interest and principle payments on certain other unsecured debt since
February 2000. The deferral of these payments represent defaults under such loan
agreements. As a result of these defaults, the lenders were entitled, at their
discretion, to exercise certain remedies, including acceleration of repayment.
Furthermore, certain medical equipment and other notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek other
remedies if the Company is in default under the terms of other agreements such
as the Senior Notes.
In the event that the holders of the Senior Notes or the other creditors or
lessors elected to exercise their right to accelerate the obligations under the
Senior Notes or the other loans and leases, such acceleration would have had a
material adverse effect on the Company, its operations and its financial
condition. In addition, if such obligations were accelerated, in whole or in
part, there could be no assurance that the Company would be successful in
identifying or consummating financing necessary to satisfy the obligations which
would have become immediately due and payable. Furthermore, the Company has
generated net losses in each of its last three calendar years aggregating
$102,456,000. Absent the successful consummation of the Company's plan for
reorganization these matters raise substantial doubt about the Company's ability
to continue as a going concern.
Following negotiations with the holders of its Senior Notes to address the
uncertainties associated with the financial difficulties described above, on
March 29, 2000, the Company entered into an agreement-in-principle with the
holders of the Senior Notes providing for conversion of the full amount of their
$75,000,000 of debt into approximately 84% of the common equity of the Company.
In addition, under the agreement-in-principle with the holders of the Senior
Notes, an additional $5,121,000 of unsecured notes would also be converted into
approximately 6% of the common equity of the Company.
On April 7, 2000, the Company filed a Plan of Reorganization reflecting the
terms of the agreement-
8
<PAGE>
in-principal, and commenced proceedings under Chapter 11 of the Federal
Bankruptcy Code. The Plan of Reorganization is subject to Bankruptcy Court
approval and applies only to the parent company and none of its operating
subsidiaries. In addition, physician relationships, trade credit and employee
obligations of the Company will not be impaired. There can be no assurance,
however, that the Company will be successful in consummating the reorganization
as described above.
Under Chapter 11 of the Federal Bankruptcy Code, certain claims against the
Debtor in existence prior to the filing of the petitions for relief under the
Federal bankruptcy laws are stayed while the Debtor continues business
operations as Debtor-in-Possession. These claims are reflected in the September
30, 2000 balance sheet as "liabilities subject to compromise." Additional claims
subject to compromise may arise subsequent to the filing date resulting from
rejection of executive contracts, including leases, and from the determination
by the court (or agreed to by parties in interest), or as a result of allowed
claims for contingencies and other disputed amounts.
Liabilities subject to compromise as of September 30, 2000 consist of the
following (in thousands):
<TABLE>
<S> <C>
Senior Notes due 2001 through 2005 $75,000
Unsecured promissory notes 5,121
Subordinated convertible notes 5,250
Purchase price protection notes 455
-------
Total debt subject to compromise 85,826
Capital lease payable 231
Accrued interest related to debt subject to compromise 6,333
Trade and other miscellaneous claims 944
-------
$93,334
=======
</TABLE>
During the three months ended September 30, 2000, the Company recorded
$1,986,000 of interest expense related to interest bearing debt included in the
liabilities subject to compromise.
The Debtor has received approval from the Bankruptcy Court to pay or
otherwise honor certain of its pre-petition obligations, including employee
wages and certain vendor obligations.
In addition to reaching the agreement with the holders of the Senior Notes
described above, the Company has taken various actions to improve the Company's
liquidity, including the following: (i) during 1999 and nine months of 2000, the
Company sold or closed twenty-four underperforming centers that had generated
aggregate pretax operating losses of $6,614,000 during 1999 and (ii) the Company
deferred certain payments to its creditors, as described above, in anticipation
of reaching an agreement with such creditors.
The financial statements do not include any further adjustments reflecting
the possible future effects on the recoverability and classification of assets
or the amount and classification of liabilities that may result from the outcome
of this uncertainty or the consummation of the reorganization.
3. LOSS ATTRIBUTABLE TO SALE AND CLOSURE OF CENTERS AND OTHER UNUSUAL CHARGES
During the three months ended September 30, 2000 and 1999, the Company
recorded losses attributable to the sale and closure of diagnostic imaging
centers of $4,417,000 and $1,150,000, respectively. The 2000 loss consists of
(i) $4,063,000 for the net loss on the sale of diagnostic imaging centers and
(ii) $354,000 for current period charges attributable to centers previously
closed. Net cash proceeds from the sale of diagnostic imaging centers during the
three months ended September 30, 2000 was $2,205,000. The 1999 loss relates to a
reserve for the loss on the sale or closure of diagnostic imaging centers
consisting of
9
<PAGE>
$730,000 for estimated equipment removal, facility restoration and related costs
and $420,000 for legal and professional fees and employee termination cost.
During the nine months ended September 30, 2000 and 1999, the Company
recorded losses attributable to the sale and closure of diagnostic imaging
centers of $5,565,000 and $1,150,000, respectively. The 2000 loss consists of
(i) $4,611,000 for the net loss on the sale of diagnostic imaging centers and
(ii) $954,000 for current period charges attributable to centers previously
closed. Net cash proceeds from the sale of diagnostic imaging centers during the
nine months ended September 30, 2000 was $8,315,000. The 1999 loss relates to a
reserve for the loss on the sale or closure of diagnostic imaging centers
consisting of $730,000 for estimated equipment removal, facility restoration and
related costs and $420,000 for legal and professional fees and employee
termination cost.
During the three months ended September 30, 2000 and 1999, the Company
recorded other unusual charges of $1,523,000 and $1,012,000, respectively. The
2000 charge consists of professional fees associated with the Company's
proceedings under Chapter 11 of the Federal Bankruptcy Code. The 1999 charge
consists of (i) $531,000 of costs associated with the shareholder class action
lawsuit and other related litigation (the shareholder class action lawsuit was
settled during the third quarter of 1999), (ii) $215,000 of costs associated
with investigation of possible strategic alternatives by the Company, and (iii)
$266,000 of severance and other costs.
During the nine months ended September 30, 2000 and 1999, the Company
recorded other unusual charges of $3,290,000 and $1,726,000, respectively. The
2000 charge consists of professional fees associated with the Company's
proceedings under Chapter 11 of the Federal Bankruptcy Code. The 1999 charge
consists of (i) $1,245,000 of cost associated with the shareholder class action
lawsuit and other related litigation (the shareholder class action lawsuit was
settled during the third quarter of 1999), (ii) $215,000 of costs associated
with investigation of possible strategic alternatives by the Company, and (iii)
$266,000 of severance and other costs.
During the third quarter of 1999, the Company recorded a $29,825,000 non-cash
loss on the impairment of goodwill and other long-lived assets. This loss
consists of the write-off of goodwill of $21,763,000, other intangibles of
$508,000 and fixed assets of $7,554,000. The impairment relates primarily to
eleven of the Company's diagnostic imaging centers that were under-performing.
The Company has recorded impairment losses for these centers because the sum of
their expected future cash flows, determined based on an assumed continuation of
current operating methods and structures, is less than the carrying value of the
related long-lived assets. The Company's assessment of future cash flows for
these centers reflects the recent negative trends in the diagnostic imaging
business, including continued erosion of reimbursement rates and further
expansion of capacity through the opening of new competing centers in certain of
the Company's markets. Due to these trends, the Company has determined that its
plans for operating improvements in these centers will likely not be adequate to
cause these centers to be sufficiently successful in the future to recover the
value of recorded goodwill and other long-lived assets.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following (in thousands):
10
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Diagnostic Imaging:
Management fee receivables (net of contractual allowances) -
Due from unaffiliated physicians (Type I revenues) $ 22,791 $ 22,604
Due from affiliated physicians (Type III revenues) 13,321 15,998
Patient and third party payor accounts receivable (Type II revenues) 24,098 26,988
-------- --------
Accounts receivable before allowance for doubtful accounts 60,210 65,590
Less: Allowance for doubtful accounts (18,571) (15,413)
-------- --------
Total accounts receivable, net $ 41,639 $ 50,177
======== ========
</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 $28,608,000 and $32,841,000 for the three months ended September
30, 2000 and 1999, respectively and approximately $93,231,000 and $104,337,000
for the nine months ended September 30, 2000, and 1999, respectively.
5. COMMITMENTS AND CONTINGENCIES
Between November 14, 1997 and January 9, 1998, seven class action lawsuits
were filed in the United States District Court for the District of New Jersey
against the Company and certain of the Company's directors and/or officers. The
complaints in each action asserted that the Company and the named defendants
violated Section 10(b), and that certain named defendants violated Section 20(a)
of the Securities Exchange Act of 1934 (the "Exchange Act"), alleging that the
Company omitted and/or misrepresented material information in its public
filings, including that the Company failed to disclose that it had entered into
acquisitions that were not in the best interest of the Company, that it had paid
unreasonable and unearned acquisition and financial advisory fees to related
parties, and that it concealed or failed to disclose adverse material
information about the Company.
On August 9, 1999 the District Court approved an agreement settling all of
the pending class actions in consideration primarily of (i) a payment of $2.75
million to be provided by the Company's insurer 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 bear
interest at the rate of 8% per annum, and mature by their terms on the earlier
of August 1, 2005 or when the Company's presently outstanding Senior Notes are
paid in full. Additionally, the Convertible Subordinated Notes were convertible
into shares of the Company's Common Stock beginning February 15, 2000 at a price
per share equal to $2.62 per share. Under the terms of the Company's Plan of
Reorganization, all of the Convertible Subordinated Notes would be converted
into common equity of the Company.
Notwithstanding the settlement of the class actions, there are several
lawsuits remaining against the Company brought on behalf of sellers of imaging
centers who seek damages based on the decline in value of shares of Common Stock
issued in connection with the acquisition of certain imaging centers. Regarding
these lawsuits, which are currently subject to the automatic stay protections of
Chapter 11 of the Federal Bankruptcy Code, the Company believes that it has
meritorious defenses which it intends to assert vigorously.
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
11
<PAGE>
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.
On November 6, 2000, the Company and Mr. Farrell and Mr. Fields entered
into a settlement agreement which fully settles and resolves all of their
respective claims against the Company. Under the terms of the settlement
agreement (i) Mr. Farrell will receive a cash payment of $200,000 and receive an
allowed claim in the Company's Chapter 11 proceeding of $1,153,000; and (ii) Mr.
Fields will receive a cash payment of $50,000 and receive an allowed claim in
the Company's Chapter 11 proceeding of $172,000.
On June 2, 1998, Mr. Ronald Ash filed a complaint against the Company,
StarMed, Wesley Medical Resources, Inc., a subsidiary of the Company ("Wesley"),
and certain officers and directors of the Company in the United States District
Court for the Northern District of California. 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
(which is currently subject to the automatic stay of the Federal Bankruptcy
Code), and intends to defend itself vigorously. On February 19, 1999, the
Company filed a motion to dismiss the Ash Complaint.
During November 2000, Mr. Ash agreed to consent to summary judgment being
entered against him which limits his claims against the Company to no more than
$1 million. The Company continues to dispute that any amounts are owed Ash and
will seek either to arbitrate the dispute or have it resolved by the Bankruptcy
Court.
The Ash Complaint has been stayed in connection with the Company's Chapter
11 proceedings. Under the terms of the Company's Plan of Reorganization, claims
held by the plaintiffs in the actions described above, as well as other actions
pending against the Company, would be converted into common equity of the
Company.
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.
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In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as consideration, the Company agreed
to register such shares for resale pursuant to the Federal securities laws. In
some cases, the Company agreed with the sellers in such acquisitions to pay to
the seller (in additional shares and/or cash) an amount equal to the shortfall,
if any (the "Price Protection Shortfall"), in the value of the issued shares and
the market value of such shares on the effective date of the Company's
registration statement. Based upon the closing sales price of the Company's
Common Stock on October 2, 1998 ($2.67 per share), the date on which the
Company's registration statement was declared effective, the Company issued
590,147 shares of Common Stock and became obligated to pay during 1999 an
additional $1,658,000 with respect to all such Price Protection Shortfall
obligations. As of September 30, 2000, $405,000 of such Price Protection
Shortfall obligations remained due and payable in 2000.
6. CONVERTIBLE PREFERRED STOCK
As of September 30, 2000, 14,175 shares of the Company's Series C Convertible
Preferred Stock, $1,000 stated value per share (the "Series C Preferred Stock")
are outstanding and held by 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.
As a result of the Company's failure to register the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock prior to September 15,
1998 (the date required under the Preferred Stock Agreement) and the delisting
of the Company's Common Stock from NASDAQ in April 1999, RGC was entitled to
demand: (i) the Company repurchase all of the outstanding Series C Preferred
Stock and (ii) a one-time additional penalty of $1,490,000, payable, at the
option of RGC, in cash or additional shares of Common Stock.
On March 30, 2000, RGC served notice on the Company seeking redemption of all
of the outstanding shares of Series C Preferred Stock for an aggregate cash
payment of $17,447,000. It is expected that all of RGC's claims shall be
addressed under the terms of the Company's Plan of Reorganization.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
RECENT DEVELOPMENTS
On March 29, 2000, the Company entered into an agreement-in-principle with
the holders of the Senior Notes providing for conversion of the full amount of
their $75,000,000 of debt into approximately 84% of the common equity of the
Company. In addition, under the agreement-in-principle with the holders of the
Senior Notes, an additional $5,121,000 of unsecured notes would also be
converted into approximately 6% of the common equity of the Company. On April 7,
2000, the Company filed a Plan of Reorganization reflecting the terms of the
agreement-in-principal, and commenced proceedings under Chapter 11 of the
Federal Bankruptcy Code. The Plan of Reorganization is subject to Bankruptcy
Court approval and applies only to the parent company and none of its operating
subsidiaries. In addition, physician relationships, trade credit and employee
obligations of the Company will not be impaired. The Company continues to
proceed with the completion of its Plan of Reorganization, and expects to emerge
from Chapter 11 by the end of the year 2000 or during January 2001. There can be
no assurance, however, that the Company will be successful in consummating the
reorganization as described above.
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.
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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 Interpreting Physician(s) fees and, in
certain instances, facility lease expense), 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.
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 nine months ended September 30, 2000, 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 89%
for the Type I agreements, 77% to 91% for the Type II agreements and 77% to 89%
for the Type III agreements. These agreements generally have terms ranging from
one to ten years.
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1999
For the quarter ended September 30, 2000, net service revenues were
$33,513,000 compared to $37,551,000 for the quarter ended September 30, 1999, a
decrease of $4,038,000 or 11%. The decrease in net service revenues was due
principally to the impact of the sale and closure of twenty-one underperforming
imaging centers during the fourth quarter of 1999 and the first nine months of
2000 and the ongoing decline in reimbursement rates of managed care payors. The
decrease was partially offset by an increase in same-store gross revenues
(before contractual allowances) of 1%.
In general, healthcare providers have been experiencing gradual reimbursement
rate declines over the past three years and this is expected to continue through
2000 due to factors such as the expansion of managed care in the United States
and budgetary pressures placed on U.S. government agencies. The Company will
attempt to mitigate the impact of any further decline in reimbursement rates by
decreasing its costs and endeavoring to increase procedure 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 over time, the Company's results could be materially and adversely
affected.
With respect to procedure volumes, management believes the domestic
diagnostic imaging industry has experienced recent growth in MR and CT
procedures of approximately 6-7% per year. Such growth is expected to continue
in the near future. However, management believes that this growth in procedures
is being largely offset in a number of the Company's markets by an increase in
capacity. This increase in capacity is the result of the opening of competing
new centers as well as the upgrade of existing equipment which reduces the time
it takes for procedures to be performed. If the number of imaging centers
continues to increase, the Company's future procedure volumes and net revenues
could be materially adversely affected over time.
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Management believes that in order to remain competitive in the marketplace,
it must maintain high quality, state-of-the-art medical equipment. Accordingly,
under the Company's equipment replacement program, the Company replaced or
upgraded fourteen MRI systems and eleven CT systems in its centers during 1999.
In addition, the Company expects to replace or upgrade a total of an additional
sixteen MRI systems and eight CT systems during 2000. Over time, the Company
expects to achieve increased volumes due to this equipment replacement program.
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.
Costs of services for the quarter ended September 30, 2000 were $23,353,000
compared to $27,085,000 for the quarter ended September 30, 1999, a decrease of
$3,732,000 or 14%. This decrease was due primarily to the impact of the sale and
closure of twenty-one imaging centers during the fourth quarter of 1999 and the
first nine months of 2000.
Gross profit margins, which represent net service revenue less cost of
services as a percent of net service revenue, increased for the quarter ended
September 30, 2000 to 30% from 28% for the quarter ended September 30, 1999.
This increase was due primarily to the impact of the sale and closure of
twenty-one imaging centers during the fourth quarter of 1999 and the first nine
months of 2000.
The provision for uncollectible accounts receivable for the quarter ended
September 30, 2000 was $1,145,000, or 3% of related net service revenues,
compared to the third quarter 1999 provision of $4,949,000, or 13% of related
net service revenues. Including bad debt charges reflected as a reduction in net
service revenues (Type III revenues), the provision for uncollectible accounts
receivable for the quarter ended September 30, 2000 was 5% of adjusted net
service revenues. The Company is continuing to focus on improving its billing
and collection function through increased training and added emphasis on
rebilling and disputing denials by the Company's payors.
Corporate general and administrative expense for the quarter ended September
30, 2000 was $2,945,000, as compared to $3,178,000 for the quarter ended
September 30, 1999, a decrease of 7%. This decrease was primarily due to lower
professional fees and corporate level headcount reductions.
Equipment lease expense for the quarter ended September 30, 2000 was
$3,285,000, as compared to $2,860,000 for the quarter ended September 30, 1999,
an increase of $425,000 due to the equipment replacement program described
above.
Depreciation and amortization expense for the quarter was $4,345,000,
compared to $5,547,000 for the third quarter of 1999, or a decrease of
$1,202,000. The decrease was primarily due to the sale and closure of twenty-one
imaging centers during the fourth quarter of 1999 and the first nine months of
2000, and to lower diagnostic equipment depreciation as a result of the Company
entering into new operating leases during 1999 and the first nine months of
2000.
During the quarter ended September 30, 2000 and 1999, the Company recorded
losses attributable to the sale and closure of diagnostic imaging centers of
$4,417,000 and $1,150,000, respectively. The 2000 loss consists of (i)
$4,063,000 for the net loss on the sale of diagnostic imaging centers and (ii)
$354,000 for current period charges attributable to centers previously closed.
Net cash proceeds from the sale of diagnostic imaging centers during the three
months ended September 30, 2000 was $2,205,000. The 1999 loss relates to a
reserve for the loss on the sale or closure of diagnostic imaging centers
consisting of $730,000 for estimated equipment removal, facility restoration and
related costs and $420,000 for legal and professional fees and employee
termination cost.
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During the quarter ended September 30, 2000 and 1999, the Company recorded
other unusual charges of $1,523,000 and $1,012,000, respectively. The 2000
charge consists of professional fees associated with the Company's proceedings
under Chapter 11 of the Federal Bankruptcy Code. The 1999 charge consists of (i)
$531,000 of costs associated with the shareholder class action lawsuit and other
related litigation (the shareholder class action lawsuit was settled during the
third quarter of 1999), (ii) $215,000 of costs associated with investigation of
possible strategic alternatives by the Company, and (iii) $266,000 of severance
and other costs.
During the quarter ended September 30, 1999, the Company recorded a
$29,825,000 non-cash loss on the impairment of goodwill and other long-lived
assets. This loss consists of the write-off of goodwill of $21,763,000, other
intangibles of $508,000 and fixed assets of $7,554,000. The impairment relates
primarily to eleven of the Company's diagnostic imaging centers that were
under-performing. The Company has recorded impairment losses for these centers
because the sum of their expected future cash flows, determined based on an
assumed continuation of current operating methods and structures, is less than
the carrying value of the related long-lived assets. The Company's assessment of
future cash flows for these centers reflects the recent negative trends in the
diagnostic imaging business, including continued erosion of reimbursement rates
and further expansion of capacity through the opening of new competing centers
in certain of the Company's markets. Due to these trends, the Company has
determined that its plans for operating improvements in these centers will
likely not be adequate to cause these centers to be sufficiently successful in
the future to recover the value of recorded goodwill and other long-lived
assets.
The Company will incur additional professional fees during the remainder of
2000 related to its proceedings under Chapter 11 of the Federal Bankruptcy Code,
and could incur additional unusual charges related to the possible sale and
closure of additional imaging centers.
Net interest expense for the quarter ended September 30, 2000 was $2,389,000
as compared to $2,834,000 for the quarter ended September 30, 1999, a decrease
of $445,000. This decrease was primarily attributable to reductions in notes
payable and capitalized lease obligations. Included in interest expense for the
quarter ended September 30, 2000 is $1,986,000 related to accruals of interest
on debt subject to compromise. Under the Company's Plan of Reorganization, debt
subject to compromise and its accrued but unpaid interest would be converted
into common equity.
The Company's loss for the quarter ended September 30, 2000 was increased by
$381,000 attributable to minority interests, as compared to an increase in the
Company's loss of $82,000 for the quarter ended September 30, 1999.
The provision for income taxes for the quarter ended September 30, 2000 was
$100,000 as compared to $90,000 for the comparable period last year. The
provision for income taxes for the quarter ended September 30, 2000 and 1999
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 for the quarter ended September 30, 2000 was
$10,370,000 compared to $41,061,000 for the quarter ended September 30, 1999.
The net loss applicable to common stockholders (used in computing loss per
common share) in the quarters ended September 30, 2000 and 1999 includes charges
of $102,000 and $106,000, respectively, as a result of the accretion of the
Company's Series C Preferred Stock.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
For the nine months ended September 30, 2000, total Company net service
revenues were $108,669,000 compared to $120,159,000 for the nine months ended
September 30, 1999, a decrease of $11,490,000 or 10%. The decrease in net
service revenues was due principally to the impact of the sale and closure of
twenty-four underperforming imaging centers during 1999 and first half of 2000
and the ongoing decline in reimbursement rates of managed care payors. This
decrease was partially offset by an increase in same-store gross revenues
(before contractual allowances) of 2%.
Costs of services for the nine months ended September 30, 2000 were
$74,314,000 compared to $80,182,000 for the nine months ended September 30,
1999, a decrease of $5,868,000 or 7%. This decrease was due primarily to the
impact of the sale and closure of twenty-four imaging centers during 1999 and
the first nine months of 2000.
Gross profit margins, which represent net service revenue less cost of
services as a percent of net service revenue, declined slightly for the nine
months ended September 30, 2000 to 32% from 33% for the nine months ended
September 30, 1999. This decrease was due primarily to the impact of the decline
in reimbursement rates described above.
The provision for uncollectible accounts receivable for the nine months ended
September 30, 2000 was $4,249,000, or 4% of related net service revenues,
compared to the nine months 1999 provision of $9,096,000, or 8% of related net
service revenues. Including bad debt charges reflected as a reduction in net
service revenues (Type III revenues), the provision for uncollectible accounts
receivable for the nine months ended September 30, 2000 was 5% of adjusted net
service revenues.
Corporate general and administrative expense for the nine months ended
September 30, 2000 was $8,803,000, as compared to $9,165,000 for the nine months
ended September 30, 1999, a decrease of 4%. This decrease was primarily due to
lower professional fees and corporate level headcount reductions.
Equipment lease expense for the nine months ended September 30, 2000 was
$10,077,000 as compared to $7,130,000 for the nine months ended September 30,
1999, an increase of $2,947,000, due to the equipment replacement program
described above.
Depreciation and amortization expense for the nine months was $13,686,000,
compared to $16,862,000 for the nine months of 1999, or a decrease of
$3,176,000. The decrease was primarily due to the sale and closure of twenty-one
imaging centers during the fourth quarter of 1999 and the first nine months of
2000, and to lower diagnostic equipment depreciation as a result of the Company
entering into new operating leases during 1999 and the first nine months of
2000.
During the nine months ended September 30, 2000 and 1999, the Company
recorded losses attributable to the sale and closure of diagnostic imaging
centers of $5,565,000 and $1,150,000, respectively. The 2000 loss consists of
(i) $4,611,000 for the net loss on the sale of diagnostic imaging centers and
(ii) $954,000 for current period charges attributable to centers previously
closed. Net cash proceeds from the sale of diagnostic imaging centers during the
nine months ended September 30, 2000 was $8,315,000. The 1999 loss relates to a
reserve for the loss on the sale or closure of diagnostic imaging centers
consisting of $730,000 for estimated equipment removal, facility restoration and
related costs and $420,000 for legal and professional fees and employee
termination cost.
During the nine months ended September 30, 2000 and 1999, the Company
recorded other unusual charges of $3,290,000 and $1,726,000, respectively. The
2000 charge consists of professional fees associated with the Company's
proceedings under Chapter 11 of the Federal Bankruptcy Code. The 1999
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charge consists of (i) $1,245,000 of cost associated with the shareholder class
action lawsuit and other related litigation (the shareholder class action
lawsuit was settled during the third quarter of 1999), (ii) $215,000 of costs
associated with investigation of possible strategic alternatives by the Company,
and (iii) $266,000 of severance and other costs.
During the nine months ended September 30, 1999, the Company recorded a
$29,825,000 non-cash loss on the impairment of goodwill and other long-lived
assets. As described above, this loss consists of the write-off of goodwill of
$21,763,000, other intangibles of $508,000 and fixed assets of $7,554,000
Net interest expense for the nine months ended September 30, 2000 was
$7,621,000 as compared to $8,463,000 for the nine months ended September 30,
1999, a decrease of $842,000. This decrease was primarily attributable to
reductions in notes payable and capitalized lease obligations. Included in
interest expense for the nine months ended September 30, 2000 is $4,065,000
related to accruals of interest subsequent to April 7, 2000 on debt subject to
compromise. Under the Company's Plan of Reorganization, debt subject to
compromise and its accrued but unpaid interest would be converted into common
equity.
The Company's loss for the nine months ended September 30, 2000 was increased
by $1,131,000 attributable to minority interests, as compared to an increase in
the Company's loss of $706,000 for the nine months ended September 30, 1999.
The provision for income taxes for the nine months ended September 30, 2000
was $300,000 as compared to $440,000 for the comparable period last year. The
provision for income taxes for the nine months ended September 30, 2000 and 1999
consists entirely of estimated state income taxes. For both periods, 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 for the nine months ended September 30, 2000 was
$20,367,000 compared to $44,586,000 for the nine months ended September 30,
1999.
The net loss applicable to common stockholders (used in computing loss per
common share) in the nine months ended September 30, 2000 and 1999 includes
charges of $308,000 and $326,000, respectively, as a result of the accretion of
the Company's Series C Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
During the nine months ended September 30, 2000, the Company's primary
sources of cash flow was comprised of $8,315,000 from the sale of diagnostic
imaging centers, and $6,211,000 from operations. The primary use of cash was
repayment of principal amount of capital lease obligations and notes and
mortgages payable totaling $13,764,000.
During the nine month ended September 30, 1999, the Company's primary source
of cash flow was comprised of $4,161,000 from operations, a reduction in the
Company's cash balances of $13,728,000, 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 of $17,018,000.
FINANCIAL RESOURCES AND LIQUIDITY
On March 29, 2000, the Company entered into an agreement-in-principle with
the holders of the Senior Notes providing for conversion of the full amount of
their $75,000,000 of debt into approximately 84% of the common equity of the
Company. In addition, under the agreement-in-principle with the
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holders of the Senior Notes, an additional $5,121,000 of unsecured notes would
also be converted into approximately 6% of the common equity of the Company. On
April 7, 2000, the Company filed a Plan of Reorganization reflecting the terms
of the agreement-in-principal, and commenced proceedings under Chapter 11 of the
Federal Bankruptcy Code. The Plan of Reorganization is subject to Bankruptcy
Court approval and applies only to the parent company and none of its operating
subsidiaries. In addition, physician relationships, trade credit and employee
obligations of the Company will not be impaired. The Company continues to
proceed with the completion of its Plan of Reorganization, and expects to emerge
from Chapter 11 by the end of the year 2000 or during January 2001. There can be
no assurance, however, that the Company will be successful in consummating the
reorganization as described above.
Under Chapter 11 of the Federal Bankruptcy Code, certain claims against the
Debtor in existence prior to the filing of the petitions for relief under the
Federal bankruptcy laws are stayed while the Debtor continues business
operations as Debtor-in-Possession. These claims are reflected in the September
30, 2000 balance sheet as "liabilities subject to compromise." Additional claims
subject to compromise may arise subsequent to the filing date resulting from
rejection of executive contracts, including leases, and from the determination
by the court (or agreed to by parties in interest), or as a result of allowed
claims for contingencies and other disputed amounts.
In addition to reaching the agreement with the holders of the Senior Notes
described above, the Company has taken various actions to improve the Company's
liquidity, including the following: (i) during 1999 and nine months of 2000, the
Company sold or closed twenty-four underperforming centers generating net
proceeds to the Company of $9,096,000 and resulting in the elimination of
operations which had generated aggregate pretax operating losses of $6,614,000
during 1999, and (ii) the Company deferred certain payments to its creditors, as
described above, in anticipation of reaching an agreement with such creditors.
The financial statements do not include any further adjustments reflecting
the possible future effects on the recoverability and classification of assets
or the amount and classification of liabilities that may result from the outcome
of this uncertainty or the consummation of the reorganization.
Prior to 1998, the Company incurred substantial debt in connection with
acquisitions of imaging centers. As of September 30, 2000, the Company's debt,
including capitalized lease obligations, totaled $102,410,000. Cash available to
the Company for general corporate use increased from $3,827,000 at December 31,
1999 to $7,532,000 as of September 30, 2000. These balances exclude cash held by
non-wholly owned affiliates as of the indicated dates, since such cash amounts
are not readily available to the Company for general corporate purposes.
However, some portion of such excluded cash is expected to be available to
satisfy that portion of the Company's year 2000 scheduled debt repayments which
are 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 the proceeds from the sale of certain centers and
due to improvements made and being made to the Company's billing and collections
systems and procedures, the Company expects, on a same store basis, average
monthly cash flows during 2000 and 2001 to improve from the level achieved
during 1999. Provided that the Company is able to continue to show improvement
in its cash collections, and assuming that the Company reaches satisfactory
resolution with the Senior Note holders and its other lenders regarding its Plan
of Reorganization, management believes that existing available cash balances
plus expected cash flow from operations will be adequate to fund the Company's
expected cash requirements for the next twelve months.
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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 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.
As of September 30, 2000, 14,175 shares of the Company's Series C Convertible
Preferred Stock, $1,000 stated value per share (the "Series C Preferred Stock")
are outstanding and held by 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.
As a result of the Company's failure to register the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock prior to September 15,
1998 (the date required under the Preferred Stock Agreement) and the delisting
of the Company's Common Stock from NASDAQ in April 1999, RGC was entitled to
demand: (i) the Company repurchase all of the outstanding Series C Preferred
Stock and (ii) a one-time additional penalty of $1,490,000, payable, at the
option of RGC, in cash or additional shares of Common Stock.
On March 30, 2000, RGC served notice on the Company seeking redemption of all
of the outstanding shares of Series C Preferred Stock for an aggregate cash
payment of $17,447,000. It is expected that all of RGC's claims shall be
addressed under the terms of the Company's Plan of Reorganization.
In addition to matters discussed above, the Company is subject to litigation
that may require additional future cash outlays.
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.
The Company has never declared a dividend on its Common Stock and under the
Company's Senior Note agreement, the payment of such dividends is not permitted.
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
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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 attempting to increase 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.
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
consummate a Plan of Reorganization pursuant to its agreement with the holders
of the $75,000,000 of Senior Notes; the ability of the Company to generate net
positive cash flows from operations; the ability of the Company to obtain
financing (and any required consents and approvals) to fund its operations as
needed; the payment timing and ultimate collectibility of accounts receivable
from different payer groups (including personal injury type); 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 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 is contained in the Company's filings with the Securities
and Exchange Commission (SEC) over the last 12 months, copies of which are
available from the SEC or from the Company upon request.
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II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
None
b. REPORTS ON FORM 8-K
On November 2, 2000, the Company filed a Current Report of Form 8-K
reporting that on October 26, 2000, it had dismissed its independent auditors,
Ernst & Young, LLP and appointed Arthur Andersen, LLP as the Company's new
independent accountants effective October 27, 2000.
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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/ Geoffrey A. Whynot
------------------------------------------
Geoffrey A. Whynot
CO-CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ Steven M. Vella
------------------------------------------
Steven M. Vella
VICE PRESIDENT-FINANCE
(PRINCIPAL ACCOUNTING OFFICER)
Date: November 14, 2000
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