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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 1-12461
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MEDICAL RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
DELAWARE 13-3584552
(State of Incorporation) (I.R.S. Employer Identification Number)
125 STATE STREET, SUITE 200, HACKENSACK, NJ 07601
(Address of Principal Executive Office) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 488-6230
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
TITLE OF EACH CLASS
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
At March 17, 2000, 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 $4,891,400.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On March 29, 2000, the Company entered into an agreement-in-principle with
the holders of its Senior Notes to convert the Company's $75,000,000 of Senior
Notes into shares of Common Stock of the Company. Since September 30, 1999, the
Company has been in technical default of the Senior Note financial covenants and
beginning January 2000, suspended monthly interest payments on the Senior Notes.
As a result of these defaults, the holders of the Senior Notes have the right,
among other things, to accelerate the maturity of the Senior Note obligations
and demand immediate payment from the Company. In order to address the risk and
uncertainty relating to these on-going defaults, the Company and the holders of
the Senior Notes have entered into an agreement-in-principle pursuant to which
all of the Senior Notes, and approximately $5,121,000 of unsecured debt held by
DVI, Inc. (the Company's primary medical equipment lender), are to be converted
into approximately 90% of the Company's outstanding Common Stock. Under this
agreement-in-principle, which is subject to certain conditions, including
internal approval by certain holders of the Senior Notes, it is contemplated
that the Company's remaining equity will be distributed among junior creditors
(including plaintiffs in current lawsuits pending against the Company), other
claim holders and the Company's equity holders (including holders of the
Company's Series C Convertible Preferred Stock).
The conversion of Senior Notes and other distributions are to be affected
through a pre-negotiated Plan of Reorganization under Chapter 11 of the Federal
Bankruptcy Code. It is expected that the Plan of Reorganization (which will
apply only to the parent company, Medical Resources, Inc., and not to any of its
operating subsidiaries or affiliates), will be filed in early April and, subject
to court approval, consummated in sixty to ninety days. Under the
agreement-in-principle with the holders of the Senior Notes, it is contemplated
that the Company will meet all of its trade credit and operating obligations in
the ordinary course and with no disruption of physician, vendor or employee
relationships. See "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GENERAL
Medical Resources, Inc. ("Medical Resources" and collectively with its
subsidiaries, affiliated partnerships and joint ventures, the "Company")
specializes in the operation and management of fixed-site outpatient diagnostic
imaging centers in the United States. The Company currently operates and/or
manages 83 outpatient diagnostic imaging centers located in the Northeast (49),
Southeast (22), the Midwest (7) and California (5), and provides network
management services to managed care organizations. The Company has grown rapidly
and has increased the number of diagnostic imaging centers it operates and/or
manages from 39 at December 31, 1996 to the present total of 83. This expansion
primarily took place through the end of 1997. The Company, through its
wholly-owned subsidiary, Dalcon Technologies, Inc. ("Dalcon"), also develops and
markets software products and systems for the diagnostic imaging industry.
DIAGNOSTIC IMAGING DIVISION. The Company's diagnostic imaging centers
provide diagnostic imaging services in a comfortable, service-oriented
outpatient environment to patients referred by physicians. At each of the
diagnostic imaging centers, the Company provides management, administrative,
marketing and technical services, as well as equipment, technologists and
facilities, to physicians or physician groups who interpret scans performed on
patients. Medical services at the Company's imaging centers are provided by
board certified or board eligible interpreting physicians, generally
radiologists, with whom the Company enters into independent contractor
agreements. Of the Company's 83 centers, 77 provide magnetic resonance imaging
(MR). Many of the Company's centers also provide some or all of the following
services: computerized tomography (CT), ultrasound, nuclear medicine, general
radiography, fluoroscopy and mammography.
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The number of outpatient diagnostic imaging centers in the United States is
estimated to have grown from approximately 700 in 1984 to approximately 2,900 as
of December 31, 1999. Ownership and management of fixed-site outpatient
diagnostic imaging centers are highly fragmented, with no dominant national
provider. The Company believes that the environment faced by diagnostic imaging
center operators is characterized by an increased influence of managed care
organizations, rising business complexity, growing control over patient flows by
payors, and continued overall reimbursement pressures, all of which have been
and will continue to require center owners to seek operational efficiencies. In
addition, the Company believes that public and private reforms in the healthcare
industry emphasizing cost containment and accountability will continue to shift
the delivery of imaging services from highly fragmented, individual or small
center operators to companies operating or managing larger multi-modality
networks of centers.
The Company intends, over time, to capitalize on the fragmented nature of
the diagnostic imaging center industry through the acquisition of additional
centers. The Company seeks to expand the scope and efficiency of its operations
at its existing and acquired facilities by: (i) leveraging the geographic
concentration of the centers it operates and/or manages; (ii) expanding the
imaging services offered by its centers by upgrading existing technology and
adding new modalities; (iii) establishing joint venture or other similar
arrangements with strategic partners (such as local hospital systems);
(iv) applying sophisticated operating, financial and information systems and
procedures; (v) utilizing targeted local marketing programs; and
(vi) developing its network management services to address more fully the needs
of managed care organizations.
Dalcon develops and markets software system applications to diagnostic
imaging center operators. Through its proprietary radiology information system,
ICIS, Dalcon provides the Company's imaging centers, as well as imaging centers
owned and/or operated by third-parties, with information system development,
service and support specifically designed for the administration and operation
of imaging centers, including patient scheduling, registration, transcription,
film tracking, billing, and insurance claim processing. In February 1998, Dalcon
entered into a an agreement with HealthSouth Corporation, pursuant to which
Dalcon is installing its ICIS information system in the majority of
HealthSouth's imaging centers not already using it. This agreement is expected
to continue through December 31, 2001.
Medical Resources was incorporated in Delaware in August 1990 and has its
principal executive office at 125 State Street, Suite 200, Hackensack, New
Jersey 07601. Its telephone number is (201) 488-6230.
DIAGNOSTIC IMAGING SERVICES INDUSTRY
OVERVIEW
Imaging centers have played a vital role in the healthcare delivery system
by offering diagnostic services such as Magnetic Resonance Imaging ("MR"),
Computerized Tomography ("CT"), Ultrasound, Nuclear Medicine, Mammography and
X-ray in an outpatient setting. Diagnostic imaging procedures are used to
diagnose diseases and physical injuries through the use of various, generally
non-invasive imaging modalities. The use of non-invasive diagnostic imaging has
grown rapidly in recent years because it allows physicians to diagnose quickly
and accurately a wide variety of diseases and injuries without exploratory
surgery or other invasive procedures, which are usually more expensive, risky
and potentially debilitating for patients. In addition, diagnostic imaging is
increasingly being used as a screening tool for preventative care. While
conventional X-ray continues to be the primary imaging modality based on the
number of procedures performed, the use of MR and CT procedures has increased
due to their more sophisticated diagnostic capabilities. The Company believes
that utilization will continue to increase because of the growth in demand for
diagnostic imaging services as well as the introduction of new diagnostic
imaging procedures involving new and existing modalities.
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EQUIPMENT AND MODALITIES
Diagnostic imaging systems are generally based on the ability of energy
waves to penetrate human tissue and generate images of the body, which can be
displayed either on film or on a video monitor. Imaging systems have evolved
from conventional x-rays to the advanced technologies of MR, CT, Ultrasound,
Nuclear Medicine and Mammography. The principal diagnostic imaging modalities
provided at centers operated or managed by the Company include the following:
MAGNETIC RESONANCE IMAGING. MR is a sophisticated diagnostic imaging system
that utilizes a strong magnetic field in conjunction with low energy
electromagnetic waves, which are processed by a computer to produce
high-resolution images of body tissue. A principal element of MR imaging is that
the atoms in various kinds of body tissue behave differently in response to a
magnetic field, enabling the differentiation of internal organs and normal and
diseased tissue. Unlike CT and X-rays, MR does not utilize ionizing radiation,
which can cause tissue damage in high doses. As with other diagnostic imaging
technologies, MR is generally non-invasive.
COMPUTERIZED TOMOGRAPHY. In CT imaging, a computer directs the movement of
an X-ray tube to produce multi cross-sectional images of a particular organ or
area of the body. CT imaging is used to detect tumors and other conditions
affecting bones and internal organs. CT provides higher resolution images than
conventional X-rays.
ULTRASOUND. Ultrasound has widespread applications, particularly for
procedures in obstetrics, gynecology and cardiology. Ultrasound imaging relies
on the computer-assisted processing of sound waves to develop images of internal
organs and the vascular system. A computer processes sound waves as they are
reflected by body tissue, providing an image that may be viewed immediately on a
computer screen or recorded continuously or in single images for further
interpretation.
NUCLEAR MEDICINE. Nuclear medicine is used primarily to study anatomic and
metabolic functions. During a nuclear medicine procedure, short-lived
radioactive isotopes are administered to the patient by ingestion or injection.
The isotopes release small amounts of radioactivity that can be recorded by a
gamma camera and processed by a computer to produce an image of various
anatomical structures.
GENERAL RADIOGRAPHY AND FLUOROSCOPY (X-RAY). The most frequently used type
of imaging equipment in radiology utilizes "X-rays" or ionizing radiation to
penetrate the body and record images on film. Fluoroscopy uses a video viewing
system for real time monitoring of the organs being visualized.
MAMMOGRAPHY. Mammography is a specialized form of radiology equipment using
low dosage X-rays to visualize breast tissue. It is the primary screening tool
for breast cancer.
IMAGING CENTER LOCATION AND ASSET OWNERSHIP STRUCTURE
The following table sets forth certain information concerning the imaging
centers currently owned, operated or managed by the Company. Typically, a
wholly-owned subsidiary of the Company owns the assets associated with a center
and either leases such assets to a medical practice on an exclusive or
non-exclusive basis or, where permitted by law, operates the center on its own
behalf. In other cases, the assets of the imaging center are owned by limited
partnerships or other business entities in which a subsidiary of the Company is
the sole general partner or manager. The ownership percentages set forth below
under the column "Ownership" reflect the Company's equity or partnership
ownership interests in such subsidiaries or partnerships. Where the imaging
center assets are leased to physicians or physician groups, the name of the
respective medical practice is shown below under the column "Imaging Center
Name". For the centers not wholly-owned by the Company, the Company is generally
paid a management fee based on services provided under management agreements
with the imaging center's ownership entity.
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IMAGING CENTER OPERATED
LOCATION NAME(1) SINCE (2) OWNERSHIP(3) MODALITIES(4)
- -------- -------------------- -------------- ------------ ------------------------
<S> <C> <C> <C> <C>
NORTHEAST (49
CENTERS)
Bel Air, MD Colonnade Imaging
Center November 1991 62.9% MR, CT, US, NM, R, F, M
Chelmsford, MA MRI of Chelmsford March 1997 65.0% MR
Dedham, MA MRI of Dedham March 1997 35.0% MR
Seabrook, MD Seabrook
Radiological Center April 1995 87.1% MR, CT
Silver Springs, MD Accessible MRI of
Montgomery Cty May 1997 100% MR
Towson, MD Accessible MRI of
Baltimore County May 1997 100% MR, CT
Clifton, NJ Clifton Medical
Imaging Center June 1987 100% MR, CT, US, NM, R, F, M
Cranford, NJ Cranford Diagnostic
Imaging March 1997 100% MR, CT, US, M
Englewood, NJ Englewood Imaging
Center December 1979 100% MR, CT, US, R, F, M
Hackensack, NJ Hackensack
Diagnostic Imaging June 1995 100% MR, CT, US, R, F, M
Jersey City, NJ M.R. Institute at
Midtown July 1992 100% MR
Kearny, NJ West Hudson MRI
Associates March 1997 25.0% MR
Marlton, NJ MRImaging of South
Jersey July 1984 91.0% MR
Montvale, NJ Montvale Medical
Imaging March 1997 100% MR, CT, US, R, F, M
Morristown, NJ MRImaging of
Morristown December 1984 94.2% MR
North Bergen, NJ The MRI Center at
Palisades March 1997 9.0% MR
Randolph, NJ Morris-Sussex MRI March 1997 20.0% MR
Totowa, NJ Advantage Imaging at
Totowa Road March 1997 15.0% MR
Union, NJ Open MRI of Union August 1984 79.7% MR
Vineland, NJ South Jersey MRI May 1997 100% MR
West Orange, NJ (5) Northfield Imaging January 1991 100% MR, CT, US, NM, R, F, M
Albany, NY Albany Open MRI May 1997 100% MR
Bronx, NY Westchester Square
Imaging January 1996 100% MR, CT
Bronx, NY MRI of the Bronx September 1997 100% MR, CT
Brooklyn, NY Brooklyn Medical
Imaging Center June 1997 100% MR, CT, US, R, F, M
East Setauket, NY Open MRI at Smith
Haven November 1996 100% MR
Flushing, NY Meadows Mid-Queens
Imaging Center June 1997 100% MR, CT, US, R, M
Flushing, NY MRI of Queens September 1997 100% MR
Garden City, NY Open MRI at Garden
City November 1996 100% MR
New York, NY MRI-CT Scanning of
Manhattan January 1996 100% MR, CT, US, R, M
Staten Island, NY Staten Island
Medical Imaging
Center June 1997 100% MR, CT
Syracuse, NY Syracuse Open MRI May 1997 100% MR
</TABLE>
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IMAGING CENTER OPERATED
LOCATION NAME(1) SINCE (2) OWNERSHIP(3) MODALITIES(4)
- -------- -------------------- -------------- ------------ ------------------------
<S> <C> <C> <C> <C>
Yonkers, NY Inter-County Imaging September 1997 65% MR, CT, US, R, F, M
Allentown, PA MRImaging of Lehigh
Valley May 1986 95.9% MR
Broomall, PA Mainline Open MRI May 1997 100% MR
Havertown, PA (6) Haverford Imaging
Center May1997 100% MR, CT, US, NM, R, F, M
Langhorn, PA Oxford Valley
Diagnostic Center May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA Academy Imaging
Center January 1986 97.7% MR, CT, US, NM, R, F, M
Philadelphia, PA Callowhill Open MRI May 1997 100% MR
Philadelphia, PA Lansdowne Medical
Center May 1997 100% R
Philadelphia, PA Northeast Imaging May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA South Philadelphia
Radiology Center May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA Juaniata Park May 1997 100% R
Philadelphia, PA Germantown MRI
Center September 1997 100% MR
Philadelphia, PA Diamond Radiology September 1997 100% R
Philadelphia, PA Liberty Radiology August 1998 100% R
Philadelphia, PA Mayfair Radiology October 1998 100% R
Springfield, PA Springfield
Diagnostic Imaging
Center May 1997 100% MR, CT, US, NM, R, F, M
Trevose, PA Bensalem Open MRI May 1997 100% MR
SOUTHEAST (22
CENTERS)
St. Petersburg, FL Magnetic Resonance
Associates July 1984 100% MR, CT, US, R, F
Naples, FL Gulf Coast MRI June 1993 100% MR
Fort Myers, FL Riverwalk San Carlos May 1995 70% MR
Cape Coral, FL Riverwalk Cape Coral
MRI September 1996 70% MR
Naples, FL Naples MRI September 1996 100% MR
Titusville, FL MRI of North Brevard September 1996 100% MR
Sarasota, FL Sarasota Outpatient
MRI & Diagnostic
Center September 1996 100% MR, CT
Clearwater, FL Access Imaging May 1996 100% MR, CT
Jacksonville, FL MRI Center of
Jacksonville February 1997 100% MR
West Palm Beach, FL The Magnet of Palm
Beach March 1997 100% MR, CT, US, NM, R, F, M
Miami, FL Coral Way MRI August 1997 100% MR
Sarasota, FL Gulf Side Open MRI August 1997 100% MR
Jupiter, FL MRI of Jupiter August 1997 100% MR, R
Bradenton, FL West Bradenton
Imaging June 1999 100% MR, CT, US
Bradenton, FL Magnetic Imaging
Center of Manatee August 1997 100% MR
Hollywood, FL Open MRI of South
Florida August 1997 100% MR
Tampa, FL Northside Imaging &
Breast Care Center August 1997 100% MR
</TABLE>
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<CAPTION>
IMAGING CENTER OPERATED
LOCATION NAME(1) SINCE (2) OWNERSHIP(3) MODALITIES(4)
- -------- -------------------- -------------- ------------ ------------------------
<S> <C> <C> <C> <C>
Venice, FL Venice Imaging & MRI
Center August 1997 100% MR, CT, US, R, F, M
Port Charlotte, The MRI Center of
Charlotte County September 1997 100% MR
Fort Myers, FL Riverwalk Cleveland July 1998 70% MR
Fort Myers, FL Riverwalk General
Diagnostics July 1998 50% CT, US, NM, R, F
Fort Myers, FL Riverwalk Lee
Memorial July 1998 70% MR
MIDWEST (7 CENTERS)
Chicago, IL MRImaging of Chicago April 1987 87.2% MR
Chicago, IL Open MRI of Chicago June 1992 79.6% MR, CT, US, NM, R, F, M
Oak Lawn, IL Oak Lawn MR &
Imaging Center January 1994 100% MR, CT, US, R, F, M
Libertyville, IL Libertyville Imaging
Center January 1995 100% MR
Centerville, OH Dayton Open MRI May 1997 100% MR
Youngstown, OH Boardman X-Ray October 1997 100% MR, CT, US, R, F, M
Warren, OH Advanced Radiology/
Access MRI October 1997 100% MR, CT, US, R, F, M
CALIFORNIA (5
CENTERS)
Long Beach, CA Pacific MRI January 1997 100% MR
San Clemente, CA OceanView Radiology
Center January 1997 100% MR, CT, US, R, F, M
Rancho Cucamonga, CA Grove Diagnostic
Imaging March 1997 100% MR, CT, US, NM, R, F, M
San Jose, CA Diagnostic Imaging
Network August 1997 51% MR, CT, US, NM, R, F, M
San Jose, CA O'Connor MRI August 1997 60% MR, CT
</TABLE>
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(1) In cases where the center is operated or managed by the Company on behalf of
a medical practice, the "Imaging Center Name" refers to (i) the name of such
medical practice or (ii) the assumed name pursuant to which the medical
practice operates the center. In cases where the Company is permitted by law
to operate the center on its own behalf, "Imaging Center Name" refers to the
assumed name of the Company's subsidiary.
(2) Operated or managed by the Company or NMR of America, Inc. since such date.
(3) Represents the Company's ownership interest in the subsidiary or affiliated
partnership related to such center.
(4) Modalities are magnetic resonance imaging (MR), computerized tomography
(CT), ultrasound (US), nuclear medicine (NM), radiology (R), fluoroscopy
(F) and mammography (M).
(5) Includes the operation of the Livingston Breast Care mammography unit, which
is located at the Northfield Imaging Center.
(6) Represents the consolidation of Haverford MRI and Manoa Radiology, which
have been operated by the Company since May 1997.
Each center consists of a waiting/reception area and one room per modality,
dressing rooms, billing/ administration rooms and radiologist interpreting
rooms. The size of the Company's centers generally ranges from 1,500 to 11,400
square feet. The Company has also added new imaging equipment modalities to
certain centers and plans to continue this strategy in those situations where
the Company believes that such additions are economically justified.
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GROWTH STRATEGY AT EXISTING CENTERS
LEVERAGING GEOGRAPHIC CONCENTRATION. The Company has developed clusters of
imaging centers in certain geographic areas that enable the Company to improve
the utilization of the imaging centers by attracting business from larger
referral sources, such as managed care organizations, due to the Company's
ability to meet the quality, volume and geographical coverage requirements of
these payors. The Company intends, over time, to increase center concentration
in existing markets to attract additional referrals of this type and to expand
into new geographic areas, through acquisitions, in order to secure additional
managed care and other contracts.
The Company continually reviews the financial performance and operations of
its imaging centers. From time to time, in connection with such review, the
Company has determined that certain of such centers should be closed or marketed
for sale to third parties. Factors considered in the Company's review include
revenue trends, cash flow contribution, capital investment requirements as well
as geographic competitive pressures. In connection with this review, seven
centers were closed in 1999 and an additional seven centers have been sold or
closed during the first quarter of 2000. As a result of these determinations,
the Company has recorded losses on the sale or closure of diagnostic imaging
centers of $1,330,000 for the year ended December 31, 1999. See "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXPANDING IMAGING SERVICES OFFERED. The Company expands the imaging
services offered by centers operated and/or managed by the Company by upgrading
existing technology and adding new modalities at certain centers. From
January 1, 1998 through December 31, 1999, the Company made significant
technological upgrades and expanded service modalities at 20 centers. The
imaging centers operated and/or managed by the Company utilize state of the art
imaging equipment for which new applications are continually being developed.
New developments and system upgrades frequently have the ancillary benefit of
reducing imaging time and thus increasing capacity of the centers' imaging
equipment. The development and improvement of diagnostic quality "open" MR
systems have expanded the public acceptance and potential market for MR imaging
services. The Company currently operates 29 centers that provide MR imaging
services using "open" systems and the Company plans to expand this coverage in
markets where it believes such expansion is economically justified.
ESTABLISHING JOINT VENTURES WITH STRATEGIC PARTNERS. The Company is seeking
to establish joint venture or similar relationships with strategic partners
(such as local hospital systems) in the communities served by the Company's
imaging centers. Such joint ventures will provide the Company with broader
access to patient referrals and sustained competitive advantage in the markets
it serves.
APPLY SOPHISTICATED OPERATING, FINANCIAL AND INFORMATION SYSTEMS AND
PROCEDURES. The Company provides management expertise, financial and operating
controls, and capital resources to acquired centers in an attempt to optimize
their performance. The financial systems and operating procedures of acquired
centers are, over time, integrated with those of existing centers. In that
regard, since the beginning of 1998, the Company has completed the installation
of the ICIS system developed by Dalcon in 63 acquired centers, bringing to 75
the total number of centers now on ICIS. The ICIS system enables the Company to
standardize reporting of each center and provide management with on-line access
to its centers nationwide. In addition, the Company is able to achieve economies
of scale and provide cost savings in developing managed care contracts and
negotiating group purchasing of goods and services.
UTILIZE TARGETED LOCALIZED MARKETING. The Company develops and coordinates
marketing programs, which center managers, sales representatives and affiliated
interpreting physicians utilize to establish referral relationships and to
maximize facility usage and reimbursement yield. The Company's marketing
programs emphasize the capabilities of available imaging equipment, the quality
and timeliness of the imaging results and reports, and the high level of patient
and referring physician service.
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DEVELOP NETWORK MANAGEMENT SERVICES. The Company plans to develop and
expand further its network management services business. As a network manager,
the Company enters into contracts with managed care organizations to coordinate
the demand for imaging services and to provide certain administrative functions
related to the delivery of such services. The Company includes certain of the
centers operated or managed by the Company in these networks and believes that
the inclusion of these centers in the networks will increase their utilization.
In addition, the Company believes that its network management services enhance
its relationships with managed care organizations and its ability to enter into
additional contracts with such entities.
CENTER OPERATIONS AND IMAGING SERVICES PROVIDED BY THE COMPANY
GENERAL. The diagnostic imaging centers operated or managed by the Company
provide diagnostic imaging services in a comfortable, service-oriented
environment located mainly in an outpatient setting to patients referred by
physicians. Of the Company's 83 centers, 77 provide magnetic resonance imaging,
which accounts for a majority of the Company's diagnostic imaging revenues. Many
of the centers operated and/or managed by the Company also provide some or all
of the following services: Computerized Tomography, Ultrasound, Nuclear
Medicine, General Radiology and Fluoroscopy and Mammography.
INTERPRETING PHYSICIAN ARRANGEMENTS. At each of the Company's centers, and
subject to the various applicable Federal and state regulations, all medical
services are performed exclusively by physicians or physician groups (the
"Physician Group" or the "Interpreting Physician(s)"), generally consisting of
radiologists, with whom the Company enters into facility service agreements
pursuant to which the Company, among other duties, provides the Physician Group
with the diagnostic imaging facility and equipment, performs all marketing and
administrative functions at the centers and is responsible for the maintenance
and servicing of the equipment and leasehold improvements. The Physician Group
is solely responsible for, and has complete and exclusive control over, all
medical and professional services performed at the centers, including, most
importantly, the interpretation of diagnostic images, as well as the supervision
of technicians, and medical-related quality assurance and communications with
referring physicians.
Insofar as the Physician Group has complete and exclusive control over the
medical services performed at the centers, including the manner in which medical
services are performed, the assignment of individual physicians to center duties
and the hours that physicians are to be present at the center, the Company
believes that the Interpreting Physician(s) who perform medical services at the
centers are either independent contractors or employees of the Physician Group.
In addition, Physician Groups that furnish professional services at the centers
generally have their own medical practices and, in most instances, perform
medical services at non-Company related facilities. The Company's employees do
not perform professional medical services at the centers. Consequently, the
Company believes that it does not engage in the practice of medicine in
jurisdictions that prohibit or limit the corporate practice of medicine. The
Company performs only administrative and technical services and does not
exercise any control over the practice of medicine by physicians at the centers
or employ physicians to provide medical services.
As part of its administrative responsibilities under the terms of the
facility service agreements, the Company is usually responsible for the
administrative aspects of billing and collection functions at the centers.
Certain third-party payor sources, such as Medicare, insurance companies and
managed care organizations, require that they receive a single or "global"
billing statement for the imaging services provided at the Company's centers.
Consequently, billing is done in the name of the Physician Group because such
billings include a medical component. The Physician Group typically grants a
power of attorney to the Company authorizing the Company to establish bank
accounts on behalf of the Physician Group related to that center's collection
activities and to access such accounts. In states where permitted by law, such
as Florida, the Company generally renders bills in the center's name. In such
circumstances, the Physician Group has no access to associated collections.
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The Company recognizes revenue under its agreements with Interpreting
Physician(s) or Physician Groups in one of three ways: (I) pursuant to facility
service agreements with Interpreting Physician(s) or Physician Groups, the
Company receives a technical fee for each diagnostic imaging procedure performed
at the center, the amount of which is fixed based upon the type of the procedure
performed; (II) the Company pays the Interpreting Physician(s) a fixed
percentage of fees collected at the center, or a contractually fixed amount
based upon the specific diagnostic imaging procedures performed; or,
(III) pursuant to a facility services 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 for the affiliated
physician association and for administrative and technical services performed at
the centers and the affiliated physician association pays the Physician Group
based upon a percentage of the cash collected at the center. All of such amounts
and the basis for payments are negotiated between the Physician Group and the
Company and are subject to certain regulatory requirements based on the state of
operation of the center.
For the year ended December 31, 1999, the fees received or retained by the
Company under the three types of agreements with Interpreting Physician(s) and
Physician Groups described above, expressed as a percentage of the gross
billings net of contractual allowances for the imaging services provided, range
from 78% to 89% for the agreements described in item (I), 77% to 91% for the
agreements described in item (II) and 77% to 89% for the agreements described in
item (III). The agreements generally have terms ranging from one to ten years.
For additional information pertaining to the Company's arrangements with
Physician Groups and Interpreting Physicians, see Note 1 to the Company's
Consolidated Financial Statements--Revenue Recognition.
SALES AND MARKETING. The Company develops and coordinates marketing
programs which center managers, sales representatives, affiliated Interpreting
Physician(s) and corporate managers utilize in an effort to establish and
maintain profitable referring physician relationships and to maximize procedure
reimbursements. These marketing programs identify and target selected market
segments consisting of area physicians with certain desirable medical
specialties and reimbursement rates. Corporate and center managers determine
these market segments based upon an analysis of competition, imaging demand,
medical specialty and/or payor mix of each referral from the local market. The
Company also directs marketing efforts at managed care organizations.
Managed care organizations are an important factor in the diagnostic imaging
industry, and, consequently, the Company places major emphasis on cultivating
and developing relationships with such organizations. The Company employs
industry professionals who have significant experience in dealing with managed
care and other providers. The Company believes that the geographic concentration
of centers operated and/or managed by the Company, the presence of
multi-modality centers in all of its regions, its ability to offer cost
effective services and its experience in developing relationships with various
managed care organizations will constitute a competitive advantage with managed
care organizations.
PERSONAL INJURY REVENUE. A significant percentage of the net service
revenues from imaging centers operated and/or managed by the Company is derived
by providing imaging services to individuals involved in personal injury claims,
mainly involving automobile accidents. Imaging revenue derived from personal
injury claims, mainly involving automobile accidents, represented approximately
10% of the Diagnostic Imaging business net service revenues for 1999. Due to the
greater complexity in processing receivables relating to personal injury claims
with automobile insurance carriers (including dependency on the outcome of
settlements or judgments for collections directly from such individuals), such
receivables typically require a longer period of time to collect, compared to
the Company's other receivables and, in the experience of the Company, incur a
higher bad debt expense.
While the collection process employed by the Company varies from
jurisdiction to jurisdiction, the processing of a typical personal injury claim
generally commences with the Company obtaining and verifying automobile, primary
health and secondary health insurance information at the time services are
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rendered. The Company then generates and sends a bill to the automobile
insurance carrier, which under state law, typically has an extended period of
time (usually up to 105 days) to accept or reject a claim. The amount of
documentation required by the automobile insurance carriers to support a claim
is substantially in excess of what most other payors require and carriers
frequently request additional information after the initial submission of a
claim. If the individual is subject to a co-payment or deductible under the
automobile insurance policy or has no automobile insurance coverage, the Company
generally will bill the individual's primary and secondary health policies for
the uncovered balance. The automobile insurance carrier may reject coverage or
fail to accept a claim within the statutory time limit on the basis of, among
other reasons, the failure to provide complete documentation. In such
circumstances, the Company may pursue arbitration, which typically takes up to
90 days for a judgment, to collect from the carrier.
The Company will then pursue collection of the remaining receivable from the
individual. Although the Company attempts to bill promptly after providing
services and typically requests payment upon receipt of invoice, the Company
generally defers aggressive collection efforts for the remaining balance until
the individual's claim is resolved in court, which frequently takes longer than
a year and may take as long as two or three years. Consequently, the Company's
practice is to attempt to obtain a written assurance from the individual and the
individual's legal counsel, under which the individual confirms in writing his
or her obligation to pay the outstanding balance regardless of the outcome of
any settlement or judgment of the claim. If the settlement or judgment proceeds
received by the individual are insufficient to cover the individual's obligation
to the Company, and the individual does not otherwise satisfy his or her
liability to the Company, the Company either (i) commences collection
proceedings, which may ultimately result in the Company taking legal action to
enforce collection rights against the individual regarding all uncollected
accounts, or (ii) accepts a reduced amount in full satisfaction of the
individual's outstanding obligation. As a result of the foregoing, the average
age of receivables relating to personal injury claims is greater than for
non-personal injury claim receivables.
MANAGED CARE CAPITATION AGREEMENTS. A number of the imaging centers operated
and/or managed by the Company have entered into "capitated contracts" with third
party payors which typically provide for the payment of a fixed fee per month on
a per member basis, without regard to the amount or scope of services rendered.
Because the obligations to perform service are not related to the payments, it
is possible that either the cost or the value of the services performed may
significantly exceed the fees received. While approximately 7% of the Company's
1999 net service revenues were derived from capitated contracts, and although
prior to entering into any such contracts careful analysis is performed to
analyze the potential risks of capitation arrangements, there can be no
assurances that any capitated contracts to which the Company is or may in the
future become a party will not generate significant losses to the Company.
In addition, certain types of capitation agreements may be deemed a form of
risk contracting. Many states limit the extent to which any person can engage in
risk contracting, which involves the assumption of a financial risk with respect
to providing services to a patient. If the fees received are less than the cost
of providing the services, the center may be deemed to be acting as a de facto
insurer. In some states, only certain entities, such as insurance companies,
HMOs and independent practice associations, are permitted to contract for the
financial risk of patient care. In such states, risk contracting in certain
cases has been deemed to be engaging in the business of insurance. The Company
believes that no center operated and/or managed by the Company is in violation
of any restrictions on risk bearing or engaging in the business of insurance. If
the Company is held to be unlawfully engaged in the business of insurance, such
finding could result in civil or criminal penalties or require the restructuring
of some or all of the Company's operations, which could have a material adverse
effect upon the Company's business.
BILLINGS AND COLLECTIONS. Under the facility services agreements, the
Company is generally responsible for preparing and submitting bills. The
preparation and submission of bills is completed by each center, or by a
regional billing office, generally on behalf of and in the name of the
appropriate Interpreting Physician or Physicians Group. Prior to 1998, each
center was also responsible for collecting its own receivables and pursuing any
parties that were delinquent in payment of their bills. In February 1998, the
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Company commenced a restructuring of its collection efforts for the purpose of
ultimately consolidating all collection activities within four or more regional
collection offices. The restructuring is in response to the need to improve
overall collection results and controls, and to better coordinate collection
efforts previously employed by individual centers (especially where third
parties had been retained to manage the center's collection efforts), as well as
the need to integrate the Company's 1997 acquisitions and to insure consistent
Company-wide collection policies and practices.
MANAGEMENT INFORMATION SYSTEMS. The Company acquired Dalcon in
September 1997. Since the beginning of 1998, the Company has converted 63 of the
imaging centers operated and/or managed by the Company onto Dalcon's ICIS
radiology information system, bringing to 75 the total number of centers now on
ICIS. The ICIS radiology information system is designed to, among other things,
enhance the efficiency and productivity of the centers operated or managed by
the Company, lower operating costs, facilitate financial controls, increase
reimbursement and assist in the analysis of sales, marketing and referral data.
The ICIS system provides on-line, real-time information, reporting and access to
managers with respect to billing, patient scheduling, marketing, sales, accounts
receivable, referrals and collections, as well as other matters.
HEALTHCARE REFORM AND COST REDUCTION EFFORTS. Third-party payors, including
Medicare, Medicaid, managed care/HMO organizations and certain commercial payors
have taken extensive steps to contain or reduce the costs of healthcare. In
certain areas, the payors are subject to regulations, which limit the amount of
payments. Discussions within the Federal government regarding national
healthcare reform are emphasizing containment of healthcare costs. In addition,
certain managed care organizations have negotiated capitated payment
arrangements for imaging services or limited access to provider panels in
certain geographic areas. Under capitation arrangements, diagnostic imaging
service providers are compensated using a fixed rate per member of the managed
care organization regardless of the number of procedures performed or the total
cost of rendering diagnostic services to the members. The inability of the
Company to properly manage the administration of capitated contracts could
materially adversely affect the Company. Although patients are ultimately
responsible for payment of services rendered, substantially all of the Company's
imaging centers' revenues are derived from third-party payors. Successful
reduction of reimbursement amounts and rates, changes in services covered,
delays or denials of reimbursement claims, negotiated or discounted pricing,
exclusion from provider panels and other similar measures could materially
adversely affect the Company's respective imaging centers' revenues,
profitability and cash flow.
The Company's management believes that overall reimbursement rates will
continue to gradually decline for some period of time due to factors such as the
expansion of managed care organizations and continued national healthcare reform
efforts. The Company enters into contractual arrangements with managed care
organizations, which, due to the size of their membership, are able to command
reduced rates for services. The Company expects these agreements to increase the
number of procedures performed due to the additional referrals from these
managed care entities. However, there can be no assurance that the increased
volume of procedures associated with these contractual arrangements will offset
the reduction in reimbursement rate per procedure.
ACQUIRED CENTERS; COMMON STOCK PRICE PROTECTION OBLIGATIONS; EARNOUT OBLIGATIONS
Since 1996, the Company has grown by aggressively acquiring imaging centers
and integrating their operations. The Company acquired 92 imaging centers
through 27 acquisitions during 1996 and 1997. When the Company acquires an
imaging center, it generally acquires assets that relate to the provision of
technical, financial, administrative and marketing services, which support the
provision of medical services performed by the Interpreting Physicians. Such
assets typically include equipment, furnishings, supplies, trade names of the
center, books and records, contractual rights with respect to leases, managed
care and other agreements and, in most instances, accounts receivable. Other
than with respect to such accounts receivable for services performed by the
acquired company in certain cases, the Company does not acquire
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any rights with respect to or have any direct relationship, with patients.
Patients have relationships with referral sources who are the primary or
specialty care physicians for such patients. These physicians refer their
patients to diagnostic imaging centers which may include the centers operated
and/or managed by the Company where the Physicians Group or Interpreting
Physicians provide professional medical services. The acquired imaging centers
do not constitute either a radiology, primary care or specialty care medical
practice. In connection with an acquisition of a center, the Company will
generally enter into a facility services agreement, as described above, with a
Physician Group to perform medical services at the center.
The Company continually reviews the financial performance and operations of
its imaging centers. From time to time, in connection with such review, the
Company has determined that certain of such centers should be closed or marketed
for sale to third parties. Factors considered in the Company's review include
revenue trends, cash flow contribution, capital investment requirement's as well
as geographic competitive pressures. In connection with this review, seven
centers were closed in 1999 and an additional seven centers have been sold or
closed during the first quarter of 2000. As a result of these determinations,
the Company has recorded losses on the sale or closure of diagnostic imaging
centers of $1,330,000 for the year ended December 31, 1999. See "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In connection with certain of the Company's acquisitions, 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 an additional $1,658,000 in cash with respect to all such Price
Protection Shortfall obligations. As of December 31, 1999, the Company had paid
$1,153,000 with respect to such Price Protection Shortfall obligations and
$505,000 remains due and payable in 2000.
COMPETITION
The Company's business is highly competitive. In the Company's diagnostic
imaging business, competition focuses primarily on attracting physician
referrals at the local market level and, increasingly, referrals through
relationships with managed care and physician/hospital organizations. The
Company believes that principal competitors in each of the Company's markets are
hospitals, independent or management company-owned imaging centers, individually
owned imaging centers and mobile MR units. Many of these competitors have
greater financial and other resources than the Company. Principal competitive
factors include quality and timeliness of test results, ability to develop and
maintain relationships with managed care organizations and referring physicians,
type and quality of equipment, facility location, convenience of scheduling and
availability of patient appointment times. Competition for referrals can also be
affected by the ownership or affiliation of competing centers or hospitals.
GOVERNMENT REGULATION
The healthcare industry is highly regulated at the Federal, state and local
levels. While the Company believes that it complies in all material respects
with all applicable regulations, the assertion of a violation (even if
successfully defended by the Company) could have a material adverse effect on
the Company. The following factors affect the Company's operation and
development activities:
CORPORATE PRACTICE OF MEDICINE AND FEE SPLITTING
The laws of many states prohibit unlicensed, non-physician-owned entities or
corporations from performing medical services or physicians from splitting fees
with non-physicians. The Company is unlicensed to provide certain of the
services offered at the centers operated and/or managed by the
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Company. The Company does not believe however, that it engages in the unlawful
practice of medicine or the delivery of medical services in any state where it
is prohibited, and is not licensed to practice medicine in states which permit
such licensure. Professional medical services, such as the interpretation of MRI
scans and the supervision of certain medical personnel, are separately provided
by independent contractor Interpreting Physicians or physician groups pursuant
to agreements with the Company. The Company performs only certain administrative
and technical services and does not exercise control over the practice of
medicine by physicians or employ physicians to provide medical services.
However, in many jurisdictions, the laws restricting the corporate practice of
medicine and fee-splitting have been subject to limited judicial and regulatory
interpretation and, therefore, there can be no assurance that, upon review, some
of the Company's activities would not be found to be in violation of such laws.
If such a claim were successfully asserted against it, the Company could be
subject to civil and criminal penalties and could be required to restructure its
contractual relationships. In addition, certain provisions of its contracts with
Interpreting Physicians, including the payment of management fees and
restrictive covenants could be held to be unenforceable. Such results or the
inability of the Company to restructure its contractual relationships on a
timely basis could have a material adverse effect upon the Company.
STARK LAW PROHIBITION ON PHYSICIAN REFERRALS
The Federal "Stark Law" as amended in 1993 provides that when a physician
has a "financial relationship" with a provider of "designated health services"
(including, among other activities, the provision of MR and other radiology
services which are provided by the Company), the physician will be prohibited
from making a referral of patients under Medicare, Medicaid or other
governmental health insurance programs to the healthcare provider, and the
provider will be prohibited from billing such payors, for the designated health
service. In August 1995, regulations were issued pursuant to the Stark Law as it
existed prior to its amendment in 1993 (when it only applied to clinical
laboratories). Draft regulations for the provisions of the Stark Law applicable
to MR and other radiology services were issued in January, 1998. Submission of
improper claims may result in a denial of payment or refunds of received
payments. Additionally, submission of a claim that a provider knows, or should
know, is for services for which payment is prohibited under the amended Stark
Law, could result in civil money penalties of not more than $15,000 for each
service billed, and possible exclusion from Federal government programs. Under
the amended Stark Law, providers are also subject to civil money penalties not
to exceed $100,000 for any arrangements which indirectly result in referrals
which would be prohibited under the amended Stark Law if directly made.
The Stark Law provides exceptions from its prohibition for referrals which
include certain types of employment, personal service arrangements and
contractual relationships. The Company continues to review all aspects of its
operations and endeavors to comply in all material respects with applicable
provisions of the Stark Law. Due to the broad and sometimes vague nature of this
law, the ambiguity of related regulations, the absence of final regulations, and
the lack of interpretive case law, there can be no assurance that an enforcement
action will not be brought against the Company or that the Company will not be
found to be in violation of the Stark Law.
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MEDICARE ANTI-KICKBACK PROVISIONS
The Federal Medicare and Medicaid Anti-Kickback Statute (the "Anti-Kickback
Statute") prohibits the offering, payment, solicitation or receipt of any form
of remuneration in return for the referral of patients covered by Medicare,
Medicaid or certain other Federal and state healthcare programs, or in return
for the purchase, lease or order or provision of any item or service that is
covered by Medicare or Medicaid or certain other Federal and state healthcare
programs. Violation of the Anti-Kickback Statute is punishable by substantial
fines, imprisonment for up to five years, or both. In addition, the Medicare and
Medicaid Patient and Program Protection Act of 1987 (the "Protection Act")
provides that persons guilty of violating the Anti-Kickback Statute may be
excluded from the Medicare or Medicaid programs. Investigations leading to
prosecutions and/or program exclusion may be conducted by the Office of
Inspector General ("OIG") of the Department of Health and Human Services
("HHS").
The OIG has issued "safe harbor" regulations which describe practices that
will not be considered violations of the Anti-Kickback Statute. The fact that a
particular arrangement does not fall within a safe harbor does not mean that the
arrangement does not comply with the Anti-Kickback Statute. The safe harbor
regulations simply provide a guarantee that qualifying arrangements do not
violate this Federal law. They do not extend the scope of the statutory
prohibitions. Thus, arrangements that do not qualify for safe harbor protection
are in largely the same position as they were prior to the promulgation of these
regulations, meaning that they must be carefully evaluated in light of the
provisions of the Anti-Kickback Statute itself. To the extent possible, the
Company will structure its agreements with referral sources, such as physicians,
to comply with applicable safe harbors, but there can be no assurances that it
will be able to do so with every contract. Further, these safe harbor
regulations have so far been relatively untested in practice. No assurances can
be given that a Federal or state agency charged with enforcement of the
Anti-Kickback Statute and similar laws might not assert a contrary position or
that new Federal or state laws or new interpretation of existing laws might not
adversely affect relationships established by the Company with healthcare
providers, including physicians, or result in the imposition of penalties on the
Company or certain of its centers. The assertion of a violation, even if
successfully defended by the Company, could have a material adverse effect upon
the Company.
FALSE CLAIMS ACT
A number of Federal laws impose civil and criminal liability for knowingly
presenting or causing to be presented a false or fraudulent claim, or knowingly
making a false statement to get a false claim paid or approved by the
government. Under one such law, the False Claims Act, civil damages may include
an amount that is three times the government's loss plus $5,000 to $10,000 per
claim. Actions to enforce the False Claims Act may be commenced by a private
citizen on behalf of the Federal government, and such private citizens receive
between 15 and 30 percent of the recovery. Efforts have been made to assert that
any claim resulting from a relationship in violation of the Anti-Kickback
Statute or the Stark Law is false and fraudulent under the False Claims Act. The
Company carefully monitors its submissions to HCFA and all other claims for
reimbursement to assure that they are not false or fraudulent.
STATE LAWS
Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting kickbacks and payment of
remuneration for patient referrals and physician self-referral restrictions and
other types of financial arrangements with healthcare providers, which, while
similar in certain respects to the Federal legislation, vary from state to
state. Some states expressly prohibit referrals by physicians to facilities in
which such physicians have a financial interest. Sanctions for violating these
state restrictions may include loss of licensure and civil and criminal
penalties assessed against either the referral source or the recipient provider.
Certain states also have begun requiring healthcare practitioners to disclose to
patients any financial relationship with other providers, including advising
patients of the availability of alternative providers.
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The Company continues to review all aspects of its operations and endeavors
to comply in all material respects with applicable provisions of the
Anti-Kickback Statute, the Stark Law and applicable state laws governing fraud
and abuse and physician self-referral as well as licensing and certification.
Due to the broad and sometimes vague nature of these laws and requirements, the
evolving interpretations of these laws (as evidenced by the recent draft
regulations for the Stark Law), there can be no assurance that an enforcement
action will not be brought against the Company or that the Company will not be
found to be in violation of one or more of these regulatory provisions. Further,
there can be no assurance that new laws or regulations will not be enacted, or
existing laws or regulations interpreted or applied in the future in such a way
as to have a material adverse effect on the Company, or that Federal or state
governments will not impose additional restrictions upon all or a portion of the
Company's activities, which might adversely affect the Company's business.
CERTIFICATES OF NEED, LICENSING AND CERTIFICATION
A number of the states in which the Company currently operates or may
operate have laws that may require a certificate of need or similar licensure
("CON") in certain circumstances to establish, construct, acquire or expand
healthcare facilities and services or for the purchase, expansion or replacement
of major movable equipment, including outpatient diagnosis imaging centers
utilizing MR or other major medical equipment. At the present time, the CON laws
of New York, Illinois, Florida, Maryland and California pertain to the Company's
activities. In states with CON programs, regulatory approvals are frequently
required for capital expenditures exceeding certain amounts, if such
expenditures relate to certain types of medical services or equipment.
State CON statutes generally provide that prior to construction of new
facilities or the introduction of new services, a state health planning agency
(a "Planning Agency") must determine that a need exists for those facilities or
services. The CON process is intended to promote comprehensive healthcare
planning, assist in providing high quality health care at the lowest possible
cost and avoid unnecessary duplication by ensuring that only those healthcare
facilities that are needed will be built.
The necessity for these CON approvals serves as a barrier to entry in
certain markets which the Company wishes to service and has the potential to
increase the costs and delay the Company's acquisition, addition or expansion of
centers. A CON program or similar requirement has the potential to curtail the
Company's expansion which could have a material adverse effect on the Company's
future growth.
The Company may also have to comply with Federal certification requirements.
For example, the Company's centers which provide mammography examinations must
be certified by the Federal government. Further, additional certification
requirements may affect the Company's centers, but such certification generally
will follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements often is monitored
by annual on site inspections by representatives of various government agencies.
The Company believes that it currently has obtained all necessary
certifications, but the failure to obtain a necessary certification could have a
material adverse effect on the Company's imaging business.
In addition to the CON programs and Federal certification described above,
the operations of outpatient imaging centers are subject to Federal and state
regulations relating to licensure, standards of testing, accreditation of
certain personnel and compliance with government reimbursement programs. The
operation of these centers requires a number of Federal and state licenses,
including licenses for the center itself, its personnel and certain equipment.
Although the Company believes that currently it has obtained or is in the
process of obtaining all such necessary CON approvals and licenses, the failure
to obtain a required approval could have a material adverse effect on the
Company's diagnostic imaging business. The Company believes that diagnostic
testing will continue to be subject to intense regulation at the Federal and
state levels and cannot predict the scope and effect of such regulation nor the
cost to the Company of such compliance.
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EMPLOYEES
As of December 31, 1999, the Company had approximately 1,059 full time
employees. The Company is not a party to any collective bargaining agreements
and considers its relationship with its employees to be good.
INSURANCE
The nature of the services provided by the Company exposes the Company to
risk that certain parties may attempt to recover from the Company for alleged
wrongful acts committed by others. As a result of this risk, the Company
maintains workmen's compensation insurance, comprehensive and general liability
coverage, fire, allied perils coverage and professional liability insurance in
amounts deemed adequate by management to cover all potential risk. There can be
no assurance that potential claims will not exceed the coverage amounts, that
the cost of coverage will not substantially increase or require the Company to
insure itself or that certain coverage will not be reduced or become
unavailable.
ITEM 2: PROPERTIES
The Company leases its approximately 24,000 square foot principal and
executive offices pursuant to a lease with a term of five years remaining. The
Company's 83 imaging centers range in size from approximately 1,500 to 11,400
square feet. Each center consists of a waiting/reception area and one room per
modality, dressing rooms, billing/administration rooms and radiologist
interpreting rooms. The Company owns the real property in which certain of its
centers operate, and leases its remaining centers under leases which expire on
various dates through November 2011 with options, in certain cases, to renew for
additional periods. The Company believes that if it were unable to renew the
lease on any of these facilities, other suitable facilities would be available
to meet the Company's needs.
ITEM 3: LITIGATION
SECURITIES CLASS ACTIONS. 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, 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 per share
equal to $2.62.
Notwithstanding the settlement of the class actions, the Company continues
to defend several lawsuits 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. The Company believes
that it has meritorious defenses to these seller lawsuits and will continue to
defend against them vigorously.
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FARRELL ET AL V. MEDICAL RESOURCES, INC. ET AL. 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. Discovery has commenced in the case and the Company
intends to continue to defend itself vigorously against the allegations.
WESLEY ACQUISITION. 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. On February 19,
1999, the Company filed a motion to dismiss the Ash Complaint. The Company
believes that it has meritorious defenses to the claims asserted by plaintiff,
and intends to defend itself vigorously.
OTHER LITIGATION. 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 litigation will not have a material adverse effect on
the Company's financial position, cash flows or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three months ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND STOCK PRICE
Prior to April 22, 1999, the Company's Common Stock was traded on the
National Association of Securities Dealers System (NASDAQ) National Market under
symbol "MRII". 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 following table sets forth for the periods indicated below the high and
low sales prices per share of the Common Stock as reported by NASDAQ and gives
effect to the one-for-three reverse stock split of the Common Stock effected on
July 24, 1998:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
First Quarter............................................... $33.38 $14.63
Second Quarter.............................................. $19.13 $ 6.19
Third Quarter............................................... $12.75 $ 2.50
Fourth Quarter.............................................. $ 4.38 $ 1.50
1999
First Quarter............................................... $ 2.47 $ 1.44
Second Quarter.............................................. $ 2.25 $ 1.38
Third Quarter............................................... $ 1.81 $ 1.25
Fourth Quarter.............................................. $ 1.34 $ .19
</TABLE>
As of the close of business on March 1, 2000, the last reported sales price
per share of the Company's Common Stock was $0.47.
There were 531 holders of record of the Company's Common Stock at the close
of business on March 1, 2000. Such number does not include persons, whose shares
are held by a bank, brokerage house or clearing company, but does include such
banks, brokerage houses and clearing companies.
No cash dividends have been paid on the Company's Common Stock since the
organization of the Company and the Company does not anticipate paying dividends
in the foreseeable future. The payment by the Company of cash dividends is
prohibited by the terms of the agreement related to its issuance of the Senior
Notes. The Company currently intends to retain earnings for future growth and
expansion opportunities.
There were no securities sold by the Company during the period covered by
this Report on Form 10-K not previously included in the Company's Quarterly
Reports which, pursuant to the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), were not registered
under the Securities Act.
18
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated historical financial data of the Company
is derived from the Company's consolidated financial statements for the periods
indicated and, as such, reflects the impact of acquired entities from the
effective dates of such transactions and the Statement of Operations Data
reflects StarMed as a discontinued operation due to its August 1998 sale. The
information in the table and the notes thereto should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT SUPPLEMENTAL AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net service revenues................................. $157,640 $179,056 $144,412 $64,762 $35,860
Operating income (loss)(5)........................... (39,406) (10,354) (21,297) 13,700 7,194
Income (loss) from continuing operations before
extraordinary item................................. (51,856) (25,072) (31,968) 6,983 4,246
Income (loss) from continuing operations per common
share:
Basic(4)............................................. (5.45) (3.23) (4.96) 1.86 1.65
Diluted(4)........................................... (5.45) (3.23) (4.96) 1.72 1.64
Supplemental Data(1):
Number of consolidated imaging centers at end of
period............................................. 90 96 98 39 11
Total procedures at consolidated imaging centers..... 666,731 678,795 527,477 209,970 124,302
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT SUPPLEMENTAL AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(1)
Working capital (deficit) surplus(3).................. $(75,723) $30,985 $(58,174) $42,775 $10,738
Total assets.......................................... 220,056 285,914 338,956 164,514 44,136
Debt and capital lease obligations classified as
current (3)......................................... 108,426 20,374 118,129 12,721 4,202
Long term debt and capital lease obligations
(excluding current portion)(3)...................... 7,748 107,657 37,900 21,011 11,157
Convertible debentures................................ -- -- -- 6,988 4,350
Stockholders' equity.................................. 58,890 112,223 126,904 106,384 16,966
</TABLE>
- --------------------------
(1) Statement of Operations Data, Supplemental Data and Balance Sheet Data
reflect the impact of a substantial number of acquisitions during 1997. See
Note 13 of the Notes to Consolidated Financial Statements.
(2) Statement of Operations Data has been restated to reflect the financial
results of StarMed as discontinued operations. See Note 15 of the Notes to
the Consolidated Financial Statements.
(3) As a result of the Company's default of certain covenants under the
Company's Senior Notes, the Company's Senior Notes and other loans and
capital leases also subject to acceleration as a result thereof are shown as
current liabilities as of December 31, 1999 and December 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(4) Earnings per share amounts for 1999, 1998 and 1997 include charges related
to restricted common stock and convertible preferred stock of $434,000,
$496,000 and $1,938,000, respectively.
(5) Operating loss for 1999, 1998 and 1997 include unusual charges. See Note 3
of The Notes to the Consolidated Financial Statements.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
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(s), 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 I net service revenues
for 1999 and 1998 were $45,928,000 and $93,127,000, respectively, or 30% and 53%
of Diagnostic Imaging revenues, respectively.
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 its Consolidated
Statements of Operations. The Company bears the risk of loss due to
uncollectible amounts from patients and third party payors, and the Company has
established reserves for the estimated uncollectible amount. Type II net service
revenues for 1999 and 1998 were $62,336,000 and $68,843,000, respectively, or
41% and 40% of Diagnostic Imaging revenues, respectively.
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 services 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. Type III net service revenues for 1999 and 1998 were $44,526,000 and
$12,710,000, respectively, or 29% and 7% of Diagnostic Imaging revenues,
respectively.
During 1999, the Company changed the billing structure of 19 imaging centers
from Type I and II into Type III centers.
20
<PAGE>
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 year ended December 31, 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 89% for Type I
agreements, 77% to 91% for Type II agreements and 77% to 89% for Type III
agreements. These agreements generally have terms ranging from one to ten years.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, total Company net service revenues
were $157,640,000 compared to $179,056,000 for the year ended December 31, 1998,
a decrease of $21,416,000, or 12%. The decrease in net service revenues was due
principally to a decline in personal injury claims business as a result of
regulatory changes in New Jersey, an ongoing decline in reimbursement rates of
managed care payors and the sale or closure of seven imaging centers during
1999. Despite the decline in personal injury claims business, 1999 procedure
volumes remained constant on a same center basis compared to 1998. Relating to
the decline in personal injury claims business, net service revenues from such
business comprised approximately 10% of diagnostic imaging net revenues in 1999,
down from approximately 15% in 1998. Management believes this decrease is
permanent in nature and resulted principally from the effects of the recent
legislation in New Jersey aimed at reducing auto insurance costs. Charges
related to uncollectible accounts receivable for the Company's Type III centers,
which are reflected as a reduction of net revenues, declined to $2,455,000 in
1999 from $2,956,000 in 1998.
In general, healthcare providers have been experiencing gradual
reimbursement rate declines over the past two years and this is expected to
continue through the year 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 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 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, and such growth will 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 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.
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 has replaced or
upgraded fourteen MRI systems and ten CT systems in its centers during 1999. In
addition, the Company expects to replace or upgrade an additional fifteen MRI
systems and six 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 the majority of 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
21
<PAGE>
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 year ended December 31, 1999 were $106,800,000
compared to $115,025,000 for the year ended December 31, 1998, a decrease of
$8,225,000 or 7%. This decrease was due primarily to the sale or closure of
seven imaging centers in 1999 and center-level cost reduction initiatives
implemented since the beginning of 1998.
Gross profit margins, which represent net service revenue less cost of
services as a percent of net service revenue, decreased for the year ended
December 31, 1999 to 32% from 36% for the year ended December 31, 1998. This was
due primarily to the impact of the decline in personal injury claims business
and reimbursement rates described above.
The provision for uncollectible accounts receivable for the year ended
December 31, 1999 was $12,482,000, or 8% of related net service revenues,
compared to the year ended December 31, 1998 provision of $16,459,000, or 9% of
related net service revenues. The decrease in the provision for uncollectible
accounts receivable, as a percentage of net service revenues, was due
principally to the Company's efforts to improve its billing and collection
activities. The Company is continuing to focus efforts on reducing its provision
for uncollectible accounts receivable through improvements made in information
systems, reorganization of billing management and increased emphasis in
rebilling and disputing denials by the Company's payors.
Corporate general and administrative expense for the year ended
December 31, 1999 was $11,891,000, as compared to $11,887,000 for the year ended
December 31, 1998.
Equipment lease expense for the year ended December 31, 1999 was
$10,481,000, as compared to $6,519,000 for the year ended December 31, 1998 due
to the equipment replacement program described above.
Depreciation and amortization expense for the year was $21,825,000, compared
to $24,550,000 for 1998, or a decrease of $2,725,000. The decrease was due to
lower diagnostic equipment depreciation, which was primarily the result of the
Company entering into operating leases during late 1998 and 1999 in connection
with the equipment replacement program described above. In addition,
depreciation and amortization declined in 1999 due to write-down of goodwill and
other long-lived assets of $29,825,000 during the third quarter of 1999.
During 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 $21,863,000, other intangibles of $169,000 and fixed
assets of $7,793,000. The impairment relates primarily to eleven of the
Company's diagnostic imaging centers that were under-performing. The Company
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 continually reviews the financial performance and operations of
its imaging centers. From time to time, in connection with such review, the
Company has determined that certain of such centers should be closed or marketed
for sale to third parties. Factors considered in the Company's review included
revenue trends, cash flow contribution, capital investment requirements, as well
as geographic competitive pressures. In connection with this review, nine
centers were sold or closed in 1998, seven centers were sold or closed in 1999
and an additional seven centers have been sold or closed during the
22
<PAGE>
first quarter of 2000. As a result of these determinations, the Company has
recorded losses on the sale or closure of diagnostic imaging centers of
$1,330,000 and $3,489,000 during 1999 and 1998, respectively. The 1999 loss
consists of (i) $910,000 for estimated equipment removal, facility restoration
and related costs and (ii) $420,000 for legal and professional fees and employee
termination costs. In addition, the Company remains obligated under certain
facility leases related to such centers aggregating approximately $90,000 per
month until such time as the facilities are subleased, or the lease expires. The
1998 loss consists of (i) $841,000 for the estimated costs to exit equipment
lease and maintenance agreements and related facility costs, (ii) $1,562,000 for
the write-off of fixed assets, goodwill and other intangibles and other assets,
and (iii) $1,086,000 for estimated equipment removal, facility restoration and
related costs.
The Company could incur additional unusual charges during the year 2000
related to the center closures described above and related to the possible sale
or closure of additional centers during the year 2000.
During the 1999 and 1998, the Company recorded other unusual charges of
$2,412,000 and $11,481,000, respectively. The 1999 charge consists of
(i) $1,245,000 of defense 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 the investigation of possible strategic alternatives by the Company,
(iii) $850,000 of severance costs and (iv) $102,000 of other costs. The 1998
charge consists of (i) $5,327,000 ($1,194,000 of which was a non-cash charge
related to the issuance of 117,000 common stock warrants) for penalties
associated with the delay in the effectiveness the Company's Registration
Statement, (ii) $4,554,000 for defense costs associated with the shareholder
class action lawsuit and other related litigation, (iii) $883,000 for costs
associated with the investigation of related party transactions which was
concluded in April 1998, (iv) $380,000 for professional fees attributable to
obtaining the waiver and amendment under the Company's Senior Note obligations
and (v) $337,000 for management termination benefits and related costs.
The Company expects to incur additional unusual charges during the year 2000
related to its efforts at restructuring its $75,000,000 principal amount of
Senior Notes.
Net interest expense for the year ended December 31, 1999 was $11,074,000 as
compared to $13,652,000 for the year ended December 31, 1998, a decrease of
$2,578,000. This decrease was primarily attributable to the retirement of notes
payable and capitalized lease obligations.
The Company's loss for the year ended December 31, 1999 was increased by
$906,000 attributable to minority interests, as compared to an increase in the
Company's loss of $413,000 for the year ended December 31, 1998.
The provision for income taxes for the year ended December 31, 1999 was
$470,000 as compared to $653,000 for the comparable period last year. The
provision for income taxes for the years ended December 31, 1999 and 1998
consists entirely of estimated state income taxes. The income tax benefit
calculated based upon the Company's pre-tax loss in both 1999 and 1998 was
eliminated by an income tax valuation allowance of $17,494,000 and $1,783,000,
respectively. These valuation allowances were recorded due to the uncertainty
regarding the recognition of the full amount of the Company's deferred income
tax assets.
The Company's net loss from continuing operations for the year ended
December 31, 1999 was $51,856,000 compared to $25,072,000 for the year ended
December 31, 1998. The increase is due to the reasons discussed above.
The net loss applicable to common stockholders (used in computing loss per
common share) in the years ended December 31, 1999 and 1998 includes charges of
$434,000 and $496,000, respectively, as a result of the accretion of the
Company's convertible preferred stock.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, total Company net service revenues
were $179,056,000 versus $144,412,000 for the year ended December 31, 1997, an
increase of $34,644,000 or 24%. This increase resulted from the inclusion for
all of 1998 of centers acquired during 1997, which contributed $37,568,000 in
revenues, net of a $2,924,000 decline in revenues at imaging centers operated by
the Company since January 1, 1997. Revenues at imaging centers operated since
January 1, 1997 decreased 4% to $77,370,000 for the year ended December 31,
1998, from $80,294,000 in 1997, due to the combined effects of an intentional
payor mix change away from personal injury claim business toward more managed
care business, a gradual modality mix change toward lower priced procedures, and
a continuing gradual decline in overall reimbursement rates. Procedure volumes
at imaging centers that have been operated by the Company since the beginning of
1997 were relatively unchanged in 1998 versus 1997. Charges related to doubtful
accounts receivable for the Company's Type III centers, which are reflected as a
reduction of net service revenues, declined to $2,956,000 in 1998 from
$6,777,000 in 1997.
Net service revenues from personal injury claims, mainly involving
automobile accidents, comprised approximately 15% of Diagnostic Imaging net
revenues for 1998, down from approximately 24% for 1997. This decrease resulted
principally from the Company's intentional shift away from such higher-priced
but more problematic business, toward somewhat lower-priced but more reliable
managed care business. Personal injury claim business has historically suffered
from a high bad debt rate and a very long collection cycle.
Cost of services for the year ended December 31, 1998 were $115,025,000
compared to $87,676,000 for the year ended December 31, 1997, an increase of
$27,349,000 or 31%. The increase in costs of services was due to the inclusion
for all of 1998 of centers acquired during 1997, which added $22,707,000 to 1998
costs and inclusion in 1998 of three newly-opened centers, which added an
additional $2,713,000 to 1998 costs. Center level cost of services at imaging
centers operated since the beginning of 1997 increased 2% to $53,703,000 from
$52,720,000.
Gross profit margins, which represent net service revenue less cost of
services as a percent of net service revenue, decreased for the year ended
December 31, 1998 to 36% from 39% for the year ended December 31, 1999. This was
due primarily to the impact of an intentional payor mix change away from
personal injury claim business toward more managed care business, a gradual
modality mix change toward lower priced procedures, and a continuing gradual
decline in overall reimbursement rates as described above.
The 1998 provision for doubtful accounts was $16,459,000, or 9% of net
service revenues, compared to $20,364,000, or 14% of net service revenues in
1997. The percentage decrease in the 1998 provision resulted principally from
generally improved performance in billing and collections and from the
installation, over the course of the 1998 year, of the Company's ICIS radiology
information system in the majority of its imaging centers that were acquired in
1997. Nevertheless, both periods experienced bad debt levels significantly
higher than the industry norm. Since the beginning of 1998, the Company has
converted 69 of the imaging centers operated or managed by the Company onto the
ICIS system, bringing to 83 the total number of centers on ICIS as of
December 31, 1998. While this has improved the Company's financial reporting and
billing and collections capabilities on a going forward basis, it also
effectively created many disparate "legacy" receivables systems comprised of
many thousands of relatively small dollar transactions. Over the course of 1998,
Company personnel maintained, and improved their proficiency on the ICIS system,
while concurrently attempting to pursue (directly and indirectly through
unaffiliated collection companies) the collection of the legacy systems'
receivables. Although 76% of the legacy systems' receivables were collected
during 1998, the increasing age of the remaining receivables contributed
significantly to the 1998 provision for doubtful accounts.
24
<PAGE>
Corporate general and administrative expense for the year ended
December 31, 1998 was $11,887,000, a decrease of $2,044,000 from the $13,931,000
recorded for the year ended December 31, 1997. This decrease was primarily due
to lower stock based compensation expense in 1998.
Equipment lease expense for the year ended December 31, 1998 was $6,519,000,
as compared to $2,320,000 for the year ended December 31, 1997 due to medical
equipment upgrades and replacements and inclusion of three newly opened centers
in 1998.
Depreciation and amortization expense for the year ended December 31, 1998
was $24,550,000, compared to $18,733,000 for the year ended December 31, 1997,
or an increase of $5,817,000. The increase was due primarily to the inclusion
for all of 1998 of depreciation and goodwill amortization related to centers
acquired during 1997.
During the year ended December 31, 1998, the Company recorded unusual
charges of $11,481,000 consisting of (i) $5,327,000 ($1,194,000 of which was a
non-cash charge related to the issuance of 117,000 common stock warrants) for
penalties associated with the delay in the effectiveness the Company's
Registration Statement, (ii) $4,554,000 for defense costs associated with the
shareholder class action lawsuit and other related litigation, (iii) $883,000
for costs associated with the investigation of related party transactions which
was concluded in April 1998, (iv) $380,000 for professional fees attributable to
obtaining the waiver and amendment under the Company's Senior Note obligations
and (v) $337,000 for management termination benefits and related costs.
The unusual charges attributable to center closings of $3,489,000 are a
result of the Company's review of under-performing centers and its determination
that it would sell or close eight imaging centers during 1998 and early 1999. In
most cases, the Company decided to sell or close these centers due to general
competitive pressures and because of their close proximity to other imaging
centers of the Company which have more advanced imaging equipment or other
competitive advantages. Such charge consists of (i) $841,000 for the estimated
costs to exit equipment lease and maintenance agreements and related facility
costs, (ii) $1,562,000 for the write-off of fixed assets, goodwill and other
intangibles and other assets, and (iii) $1,086,000 for estimated equipment
removal, facility restoration and related costs.
During the year ended December 31, 1997, the Company recorded a $12,962,000
loss on impairment of goodwill and other long-lived assets, and $9,723,000 of
other unusual charges.
Net interest expense for the year ended December 31, 1998 was $13,652,000 as
compared to $8,814,000 for the year ended December 31, 1997, an increase of
$4,838,000. This increase was primarily attributable to the inclusion of twelve
months of interest associated with the Senior Notes and higher average
borrowings under other notes payable and lines of credit.
The Company's loss for the year ended December 31, 1998 was increased by
$413,000, attributable to minority interests, as compared to an increase in the
Company's loss of $636,000 for the year ended December 31, 1997.
The provision for income taxes for the year ended December 31, 1998
decreased to $653,000 from $1,221,000 in the prior year. The provision for
income taxes for the year ended December 31, 1998 consists entirely of state
income taxes. The income tax benefit calculated based upon the Company's pre-tax
loss in both 1998 and 1997 was eliminated by an income tax valuation allowance
of $1,783,000 and $10,700,000, respectively. These valuation allowances were
recorded due to the uncertainty regarding the recognition of the full amount of
the Company's deferred income tax assets.
The Company's net loss from continuing operations for the year ended
December 31, 1998 was $25,072,000 compared to net loss from continuing
operations for the year ended December 31, 1997 of $31,968,000.
The net loss applicable to common stockholders (used in computing loss per
common share) in the year ended December 31, 1998 includes charges of $496,000
which resulted from accretion of the
25
<PAGE>
Company's convertible preferred stock, compared to charges of $1,938,000
primarily related to Common Stock subject to redemption in the year ended
December 31, 1997.
RESULTS OF DISCONTINUED OPERATIONS
PERIOD FROM JANUARY 1, 1998 TO AUGUST 15, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997
Net service revenues for StarMed were $51,087,000 for the period ended
August 15, 1998 (which represents seven and one-half months) compared to
$57,974,000 for the year ended December 31, 1997, representing an increase of
41% in average monthly revenues. This increase resulted principally from the
opening of new Per Diem Division offices during 1997 and 1998.
Operating costs for StarMed for the period ended August 15, 1998 were
$40,568,000 compared to $47,123,000 for the year ended December 31, 1997,
representing an increase of 38% in average monthly operating costs. This
increase also resulted principally from the opening of new Per Diem Division
offices during 1997 and 1998.
Net earnings related to StarMed increased to $1,806,000 for the period ended
August 15, 1998 from $729,000 for the year ended December 31, 1997.
STARMED SALE
Effective August 18, 1998, the Company sold 100% of its stockholdings in
StarMed to RehabCare Group, Inc. (the "StarMed Sale") for gross proceeds of
$33,000,000 (before repayment of $13,786,000 of StarMed's outstanding third
party debt in accordance with the terms of sale). Due to the StarMed Sale, the
results of operations of StarMed are herein reflected in the Company's
Consolidated Statements of Operations as discontinued operations.
Gross cash proceeds from the StarMed Sale were used as follows:
(i) $13,786,000 was used to retire StarMed's outstanding third-party debt (in
accordance with the terms of sale) (ii) $2,000,000 was placed in escrow to be
available, for a specified period of time, to fund indemnification obligations
that may be incurred by the Company (part or all of this amount may be payable
to the Company over time), and (iii) $2,186,000 was used to fund cash costs
associated with the sale. The remaining net proceeds of $15,028,000 increased
the Company's consolidated cash balances at closing. For accounting purposes,
the sale resulted in an after-tax gain of $3,905,000 in 1998. In connection with
the sale of StarMed, $2,000,000 of net proceeds was applied as a partial
repayment of the Company's $78,000,000 of Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the year ended December 31, 1999, the Company's primary source of
cash flow was comprised of $9,550,000 from operations, a reduction in the
Company's cash balances of $11,637,000 and other borrowings of $2,515,000. The
primary use of cash was the repayment of principal amount of capital lease
obligations and notes and mortgages payable totaling $20,337,000 and capital
expenditures of $3,573,000.
During the year ended December 31, 1998, the Company's primary source of
cash flow was from proceeds from the sale of the Company's StarMed Staffing
subsidiary of $28,814,000 (before repayment of StarMed's third party debt but
after the expenses of sale) and cash flow provided by operating activities of
$14,225,000. The primary use of cash during the period was the repayment of
$36,745,000 of interest bearing debt (including $13,786,000 of StarMed's
third-party debt repaid in accordance with the terms of the StarMed Sale) and
principal amount of capital lease obligations. The Company also used cash of
$8,621,000 for the repurchase of Common Stock subject to redemption as a result
of the exercise of repurchase rights granted by the Company in connection with
certain 1997 center acquisitions.
During 1997, the Company's primary source of cash flow was from financing
activities, including net proceeds from the Senior Notes of $76,523,000, net
proceeds from the issuance of convertible preferred stock of $16,965,000, and
other financing activities. The primary use of cash was to fund acquisitions
which
26
<PAGE>
totaled $73,121,000 and to fund the repayment of certain notes and capital lease
obligations of $13,764,000. Operating activities resulted in a net use of cash
of $5,322,000 during 1997 due primarily to increases in accounts receivable.
The Company has never declared a dividend on its Common Stock and, under the
Company's Senior Note agreement, the payments of such dividends is not
permitted.
FINANCIAL RESOURCES AND LIQUIDITY
Since September 30, 1999, the Company failed to meet certain 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 Notes indebtedness since January 2000 and the required monthly interest
and principal 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 are 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 certain 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 elect to exercise their right to accelerate the obligations under the
Senior Notes or the other loans and leases, such acceleration would have a
material adverse effect on the Company, its operations and its financial
condition. In addition, if such obligations were to be accelerated, in whole or
in part, management does not believe it would be successful in identifying or
consummating financing necessary to satisfy the obligations which would become
immediately due and payable. As a result of the uncertainty related to the
defaults and corresponding remedies described above, the Senior Notes and the
other loans and capital leases are shown as current liabilities on the Company's
Consolidated Balance Sheets at December 31, 1999. Accordingly, the Company has a
deficit in working capital of $75,723,000 at December 31, 1999. Furthermore, the
Company has generated net losses in each of the last three years aggregating
$102,456,000. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The report of the Company's independent
auditors, Ernst & Young LLP, on the consolidated financial statements of the
Company for the year ended December 31, 1999 contains an explanatory paragraph
with respect to the issues that raise substantial doubt about the Company's
ability to continue as a going concern as mentioned in Note 2 to the Company's
consolidated financial statements.
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. Also, under
this agreement-in-principle, which is subject to certain conditions, including
internal approval by certain holders of the Senior Notes, it is contemplated
that the Company's remaining equity will distributed among junior creditors
(including plaintiffs in current lawsuits pending against the Company), other
claim holders and the Company's equity holders (including the Company's
Convertible Preferred Stock). The Company plans to affect these conversions
through filing a pre-negotiated Plan of Reorganization under Chapter 11 of the
Federal Bankruptcy Code. The plan for reorganization, which is subject to
Bankruptcy Court approval, is expected to be filed in April 2000. It is
contemplated that such reorganization will only impact the parent company of
Medical Resources, Inc., and that physician relationships, trade credit and
employee obligations of the Company would not be impaired. There can be no
assurance that the Company will be successful in consummating the reorganization
as described above.
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
27
<PAGE>
the fourth quarter of 1999 and early 2000, the Company sold or closed nine
underperforming centers that had generated aggregate pretax operating losses of
$4,267,000 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 December 31, 1999, the Company's debt,
including capitalized lease obligations, totaled $116,174,000. Cash available to
the Company for general corporate use declined from $13,479,000 at December 31,
1998 to $3,827,000 as of December 31, 1999. 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 2000 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 expected 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 average monthly cash
flows during 2000 to improve from the level achieved during 1999. Provided that
the Company is able to complete the sale of certain of its centers and its cash
collections show improvement, and assuming that the Company reaches satisfactory
resolution with the Senior Note holders regarding the current financial covenant
defaults, 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.
MARKET RISK DISCLOSURE
The Company's financial instruments consist principally of its notes payable
and mortgages with a carrying amount of $99,930,000 as of December 31, 1999.
Practically all such notes and mortgages have fixed interest rates. The impact
of a 2% increase in market interest rates on the fair value of such notes and
mortgages would be a reduction in fair value of $5,418,000.
WORKING CAPITAL
The Company has a working capital deficit of $75,723,000 at December 31,
1999 compared to a working capital surplus of $30,985,000 at December 31, 1998.
The deficit is primarily due to classification of $75,000,000 of Senior Notes
due 2001 through 2005 and certain other debt and capital leases as current
liabilities as a result of covenant defaults under such agreements.
OTHER OBLIGATIONS OF THE COMPANY
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 December 31, 1999, the Company had paid $1,153,000 with
respect to such Price Protection Shortfall obligations and $505,000 remained due
and payable in 2000.
28
<PAGE>
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, providing 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 2, 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 shares of Common Stock at
an exercise price of $38.85 per share (the "January 1998 Warrants") (such
warrants having an estimated value, for accounting purposes, 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 1997 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 Warrants was reduced to $2.73 per share. As of
December 31, 1999, no principal or interest was outstanding on the RGC Penalty
Notes.
As of December 31, 1999, 14,275 shares of the Company's Series C Preferred
Stock were issued and outstanding. In March 2000, 100 shares were converted into
308,141 shares of common stock.
In addition to matters discussed above, the Company is subject to litigation
that may require additional future cash outlays. See "ITEM 3: LITIGATION"
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.
SEASONALITY AND INFLATION
The Company believes that its business in 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 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.
29
<PAGE>
IMPACT OF YEAR 2000 ON COMPANY'S COMPUTER SOFTWARE
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 created potential risks
for the Company, including the inability to recognize or properly treat dates
occurring on or after January 1, 2000, which may have resulted 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 late 1999, the Company completed its remediation and testing of systems
to address the potential Year 2000 Problem. As a result of the planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company incurred approximately $83,000 in costs during 1999 in connection
with remediation of its systems. The Company is not aware of any material
disruptions resulting from Year 2000 issues, either with its products, it
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and third party payors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly. Notwithstanding
the discussion above, there can be no assurance that there will be no future
effect of Year 2000 that might materially adversely impact the Company's results
of operations or adversely affect the Company's relationships with suppliers and
third party payors.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant's response to this item is incorporated herein by reference to
the consolidated financial statements and consolidated financial statement
schedule and the reports thereon of independent auditors, listed in Item
14(a)(l) and (2) and appearing after the signature page to this Annual Report on
Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Items 10, 11, 12 and 13 have been omitted from this report inasmuch as the
Company intends to file with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report a definitive Proxy Statement for the Annual Meeting of Stockholders of
the Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statements:
1. Financial Statements:
The following consolidated financial statements and consolidated financial
statement schedule of Medical Resources, Inc. and the reports thereon of
independent auditors are filed as part of this Annual Report on Form 10-K and
are incorporated by reference in Item 8.
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of December 31, 1999 and 1998.
(iii) Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.
(iv) Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
(v) Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.
(vi) Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following consolidated financial statement schedule of Medical
Resources, Inc. and subsidiaries is submitted herewith in response to Item
14(d)2:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
3. Exhibits
See the accompanying Exhibit Index which precedes the Exhibits filed with
this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On January 22, 1999, the Company filed a Current Report of Form 8-K
reporting (i) the agreement in principle to settle the class action litigation
pending against the Company and (ii) the grant of a hearing before the Nasdaq
Qualifications Hearing Panel relating to the Company's request to move its stock
listing from the Nasdaq National Market to the Nasdaq SmallCap Market.
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Company's Certificate of Incorporation, as amended to date.*
3.2 Company's By-Laws, as amended.*
3.3 Certificate of Designations, Preferences and Rights of the
Company's Series C Convertible Preferred Stock.**
4.1 Common Stock Specimen Certificate.*
4.2 Shareholder Rights Plan of the Company, dated September 15,
1996.***
10.1 Note Purchase Agreement ($52,000,000 7.77% Senior Notes),
dated as of February 20, 1997, between the Company and the
Purchasers listed therein.****
10.2 Note Purchase Agreement ($20,000,000 8.10% and $6,000,000
8.01% Senior Notes), dated as of June 26, 1997, between the
Company and the Purchasers listed therein.*****
10.3 Waiver and Amendment Agreement, dated September 23, 1998,
between the Company and the Senior Note Purchasers listed
therein.***********
10.4 Second Waiver and Amendment, dated as of March 15, 1999,
between the Company and the Senior Note Purchasers listed
therein.***********
10.5 Third Waiver and Amendment, dated as of August 6, 1999,
between the Company and the Senior Note Purchasers listed
therein.************
10.6 Amended and Restated Promissory Note, dated December 21,
1999, between the Company and DVI Financial Services, Inc.#
10.7 Securities Purchase Agreement, dated as of July 21, 1997,
between the Company and RGC International Investors, LDC.**
10.8 Registration Rights Agreement, dated as of July 21, 1997,
between the Company and RGC International Investors, LDC.**
10.9 $15,000,000 Promissory Note, dated December 29, 1997,
payable to DVI Financial Services Inc. together with
Warrant, dated 1997 to purchase 100,000 shares of Common
Stock*********
10.10 1992 Stock Option Plan.*
10.11 1995 Stock Option Plan of the Company.******
10.12 1996 Stock Option Plan of the Company.*******
10.13 1996 Stock Option Plan B of the Company.*******
10.14 1998 Stock Option Plan.**********
10.15 1998 Non-Employee Director Stock Option Plan.**********
10.16 Warrant, dated December 30, 1997, to purchase 817,000 shares
of Common Stock issued to RGC International, LDC.*********
10.17 Employment Agreement, dated January 30, 1998, between the
Company and Duane C. Montopoli.*********
10.18 Consulting Agreement, dated November 9, 1999, between the
Company and Duane C. Montopoli.#
10.19 Employment Agreement, dated March 23, 1998, between the
Company and Geoffrey A. Whynot.*********
10.20 Employment Agreement, dated April 6, 1998, between the
Company and Christopher J. Joyce.*********
</TABLE>
32
<PAGE>
<TABLE>
<C> <S>
21.1 List of Subsidiaries.*************
23.1 Consent of Independent Auditors--Ernst & Young LLP.#
27.1 Financial Data Schedule.#
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* Incorporated herein by reference from the Company's
Registration Statement on Form S-1 (File No. 33-48848).
** Incorporated herein by reference from the Company's Current
Report on Form 8-K dated July 21, 1997.
*** Incorporated herein by reference from the Company's Current
Report on Form 8-K dated September 13, 1996.
**** Incorporated herein by reference from the Company's Current
Report on Form 8-K dated March 4, 1997.
***** Incorporated herein by reference from the Company's Current
Report on Form 8-K dated June 26, 1997.
****** Incorporated herein by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
******* Incorporated herein by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
******** Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
********* Incorporated herein by reference from the Company's
Registration Statement on
Form S-1 (File No. 333-24865).
********** Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the nine months ended September 30,
1998.
*********** Incorporated herein by reference from the Company's Annual
Report on Form 10-K Filed for the year ended December 31,
1998.
************ Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the six months Ended June 30, 1999.
************* Incorporated by references from the Company's Annual Report
on Form 10-K/A filed for the year-ended December 31, 1998.
# Filed herewith.
</TABLE>
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunder duly authorized.
<TABLE>
<S> <C> <C>
MEDICAL RESOURCES, INC.
By: /s/ CHRISTOPHER J. JOYCE
-----------------------------------------
Christopher J. Joyce
Dated: March 30, 2000 CO-CHIEF EXECUTIVE OFFICER
By: /s/ GEOFFREY A. WHYNOT
-----------------------------------------
Geoffrey A. Whynot
CO-CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on March 30, 2000.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED
--------- ------------------------
<C> <S>
/s/ D. GORDON STRICKLAND Chairman of the Board of Directors
--------------------------------------
D. Gordon Strickland
/s/ GARY N. SIEGLER Director
--------------------------------------
Gary N. Siegler
/s/ JOHN JOSEPHSON Director
--------------------------------------
John Josephson
/s/ SALLY W. CRAWFORD Director
--------------------------------------
Sally W. Crawford
/s/ PETER B. DAVIS Director
--------------------------------------
Peter B. Davis
/s/ DUANE C. MONTOPOLI Director
--------------------------------------
Duane C. Montopoli
</TABLE>
34
<PAGE>
MEDICAL RESOURCES, INC.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Medical Resources, Inc.
We have audited the accompanying consolidated balance sheets of Medical
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement schedule
listed in the index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Medical Resources, Inc. and Subsidiaries at December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company's incurred a net loss in each of the three years in the period ended
December 31, 1999 and has a working capital deficiency at December 31, 1999. In
addition, the Company has not complied with certain covenants of loan and lease
agreements and its intentions are to seek reorganization under Chapter 11 of the
Federal Bankruptcy Code. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 2, 2000, except for the
third paragraph of Note 2,
as to which the date
is March 29, 2000.
F-1
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 9,360 $ 20,997
Restricted cash............................................. 600 1,182
Accounts receivable, net.................................... 50,177 54,451
Other receivables........................................... 8,579 8,140
Prepaid expenses............................................ 3,638 3,819
Income taxes recoverable.................................... -- 2,322
-------- --------
Total current assets...................................... 72,354 90,911
Property and equipment, net................................. 33,718 50,791
Goodwill and other intangible assets, net................... 112,474 141,079
Other assets................................................ 1,510 3,133
-------- --------
Total assets.............................................. $220,056 $285,914
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior Notes due 2001 through 2005, classified as current... $ 75,000 $ --
Long-term notes and mortgages payable, classified as
current................................................... 10,999 --
Capital lease obligations, classified as current............ 4,901 --
Current portion of notes and mortgages payable.............. 9,718 11,019
Current portion of capital lease obligations................ 7,808 9,355
Accounts payable............................................ 11,327 10,946
Accrued expenses and other current liabilities.............. 28,324 23,356
Accrued shareholder settlement cost......................... -- 5,250
-------- --------
Total current liabilities................................. 148,077 59,926
Notes and mortgages payable, less current portion........... 4,213 92,556
Obligations under capital leases, less current portion...... 3,535 15,101
Other long term liabilities................................. 768 1,061
-------- --------
Total liabilities......................................... 156,593 168,644
Minority interest........................................... 4,573 5,047
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000 shares,
9,756 issued and outstanding at December 31, 1999 and
9,336 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 December
31, 1999 and 15 shares issued and outstanding at December
31, 1998 (liquidation preference of 3% per annum)......... 15,321 15,547
Additional paid-in capital.................................. 144,909 146,165
Accumulated deficit......................................... (101,438) (49,582)
-------- --------
Total stockholders' equity................................ 58,890 112,223
-------- --------
Total liabilities and stockholders' equity................ $220,056 $285,914
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net service revenues........................................ $157,640 $179,056 $144,412
Cost of services............................................ 106,800 115,025 87,676
-------- -------- --------
Gross profit.............................................. 50,840 64,031 56,736
Provision for doubtful accounts............................. 12,482 16,459 20,364
Corporate general and administrative expenses............... 11,891 11,887 13,931
Equipment leases............................................ 10,481 6,519 2,320
Depreciation and amortization............................... 21,825 24,550 18,733
Loss on impairment of goodwill and other assets............. 29,825 -- 12,962
Loss on sale and closure of centers......................... 1,330 3,489 --
Other unusual charges....................................... 2,412 11,481 9,723
-------- -------- --------
Operating loss............................................ (39,406) (10,354) (21,297)
Interest expense, net....................................... 11,074 13,652 8,814
Minority interest........................................... 906 413 636
-------- -------- --------
Loss from continuing operations before income taxes....... (51,386) (24,419) (30,747)
Provision for income taxes.................................. 470 653 1,221
-------- -------- --------
Loss from continuing operations........................... (51,856) (25,072) (31,968)
Discontinued operations:
Income from discontinued operations (net of income tax
provision of $117 and $1,079, respectively)............. -- 1,806 729
Gain on sale of discontinued operations (net of income tax
provision of $250)...................................... -- 3,905 --
-------- -------- --------
Income from discontinued operations..................... -- 5,711 729
-------- -------- --------
Net loss................................................ (51,856) (19,361) (31,239)
Charges related to convertible preferred stock.............. (434) (496) (1,938)
-------- -------- --------
Net loss applicable to common stockholders.............. $(52,290) $(19,857) $(33,177)
======== ======== ========
Basic and diluted loss per common share:
Continuing operations................................... $ (5.45) $ (3.23) $ (4.96)
Discontinued operations................................. -- 0.72 0.11
-------- -------- --------
Net loss per share...................................... $ (5.45) $ (2.51) $ (4.85)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(51,856) $(19,361) $(31,239)
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 21,825 24,550 19,334
Provision for uncollectible accounts receivable........... 12,482 16,459 20,656
Deferred income tax provision............................. -- 4,845 (836)
Expense incurred in connection with warrants and notes
issued to preferred stockholders........................ -- 3,644 2,051
Write-off of goodwill and other long lived assets......... 29,825 1,562 12,962
Gain on sale of discontinued business..................... -- (3,905) --
Other, net................................................ (302) 765 2,648
Changes in operating assets and liabilities:
Accounts receivable....................................... (9,198) (20,219) (30,270)
Other receivables......................................... (439) (1,210) (2,219)
Other current assets...................................... 2,486 6,872 (9,971)
Other assets.............................................. 1,603 1,413 (3,253)
Accounts payable and accrued expenses..................... 3,417 (2,073) 16,560
Other liabilities......................................... (293) 883 (1,745)
-------- -------- --------
Total adjustments....................................... 61,406 33,586 25,917
-------- -------- --------
Net cash provided by (used in) operating activities..... 9,550 14,225 (5,322)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net..................... (3,573) (3,304) (5,429)
Disposition of diagnostic imaging centers, net of cash
sold...................................................... 781 -- --
Proceeds from sale of discontinued business................. -- 28,814 --
Contingent consideration related to prior year
acquisitions.............................................. -- (2,900) --
Acquisition of diagnostic imaging centers and Dalcon
Technologies, net of cash acquired........................ -- -- (58,498)
Investment in diagnostic imaging center joint venture....... -- -- (1,000)
Costs associated with refinancing of assets under capital
leases.................................................... -- -- (1,461)
Sale (purchase) of short-term investments, net.............. -- -- 6,109
Other, net.................................................. 582 (258) 176
-------- -------- --------
Net cash provided by (used in) investing activities....... (2,210) 22,352 (60,103)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations.......... (11,280) (11,771) (6,651)
Principal payments on notes and mortgages payable........... (9,057) (11,188) (5,312)
Proceeds from borrowings under notes payable and line of
credit.................................................... 2,515 6,847 11,594
Retirement of debt in connection with sale of discontinued
business.................................................. -- (13,786) --
Repurchase of Common Stock subject to redemption............ -- (8,621) --
Proceeds from Senior Notes, net of issuance costs........... -- -- 76,523
Proceeds from issuance of preferred stock, net.............. -- -- 16,965
Proceeds from sale/leaseback transactions................... -- -- 9,866
Proceeds from exercise of options and warrants.............. -- -- 2,696
Note and capital lease repayments in connection with
acquisitions.............................................. -- -- (13,799)
Note and capital lease repayments in connection with Senior
Notes transaction......................................... -- -- (13,764)
Note and capital lease repayments in connection with
sale/leaseback transactions............................... -- -- (4,822)
Other, net.................................................. (1,155) (259) (19)
-------- -------- --------
Net cash provided by (used in) financing activities....... (18,977) (38,778) 73,277
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (11,637) (2,201) 7,852
Cash and cash equivalents at beginning of year.............. 20,997 23,198 15,346
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 9,360 $ 20,997 $ 23,198
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the year for--
Income taxes, net......................................... $ (2,566) $ (7,948) $11,091
Interest.................................................. 11,518 15,138 7,201
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations and notes payable incurred for
diagnostic imaging and computer equipment................. 845 -- 13,654
Capital lease obligations assumed in connection with
acquisitions.............................................. -- -- 26,612
Notes payable obligations assumed in connection with
acquisitions.............................................. -- -- 36,505
Conversion of subordinated debentures to Common Stock, net
of issuance costs......................................... -- -- 6,636
Issuance of Common Stock in connection with acquisitions.... -- -- 17,281
Accrual of Common Stock subject to redemption............... -- (1,114) 9,734
Issuance of warrants in connection with acquisitions........ -- -- 3,853
Issuance of warrants and notes payable to convertible
preferred stockholders.................................... -- 3,644 2,051
Issuance of notes payable in connection with acquisitions... -- 1,200 4,250
Conversion of preferred stock............................... 660 3,191 --
Conversion of notes payable................................. -- 1,750 --
Issuance of warrants to Senior Note holders................. -- 503 --
Issuance of subordinated debentures in connection with
shareholder settlement.................................... 5,250 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
MEDICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED TREASURY
COMMON STOCK TO PREFERRED PAID-IN EARNINGS SHARES
TOTAL STOCK BE ISSUED STOCK CAPITAL (DEFICIT) AT COST
-------- -------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997..................... $106,384 $62 $ 1,721 $ -- $103,052 $ 2,956 $(1,433)
Net loss....................................... (31,239) (31,239)
Unrealized appreciation on investment.......... (26)
--------
Total comprehensive loss....................... (31,265)
Issuance of Common Stock related to acquisition
of diagnostic imaging centers................ 10,673 4 (1,721) 10,957 1,433
Issuance of Common Stock related to acquisition
of staffing offices.......................... 2,000 -- 2,000
Issuance of Common Stock related to acquisition
of Dalcon Technologies....................... 1,934 -- 1,934
Warrants issued related to acquisition of
diagnostic imaging centers................... 3,853 3,853
Warrants issued in connection with preferred
stock........................................ 2,051 2,051
Warrants issued in connection with long-term
borrowings................................... 337 337
Conversion of debentures....................... 6,635 5 6,630
Exercise of stock options and warrants......... 2,696 1 2,695
Stock-option based compensation expense........ 2,536 2,536
Tax benefit from exercise of stock options..... 1,000 1,000
Common Stock issued in connection with
acquisition earnout.......................... 2,676 1 2,675
Issuance of Convertible Preferred Stock........ 16,965 18,000 (1,035)
Accretion of Convertible Preferred Stock....... -- 242 (242)
Increase in price protection related to certain
restricted Common Stock...................... (1,696) (1,696)
Other, net..................................... 125 125
-------- --- ------- ------- -------- --------- -------
BALANCE AT DECEMBER 31, 1997................... 126,904 73 -- 18,242 138,810 (30,221) --
Net loss....................................... (19,361) (19,361)
Warrants issued in connection with preferred
stock........................................ 1,194 1,194
Conversion of preferred stock.................. -- 7 (3,191) 3,184
Conversion of promissory note.................. 1,750 7 1,743
Termination of common stock repurchase
rights....................................... 1,114 1,114
Exercise of stock options and warrants......... 129 129
Stock-option based compensation expense........ 374 374
Accretion of Convertible Preferred Stock....... -- 496 (496)
Other, net..................................... 119 6 113
-------- --- ------- ------- -------- --------- -------
BALANCE AT DECEMBER 31, 1998................... 112,223 93 -- 15,547 146,165 (49,582) --
Net loss....................................... (51,856) (51,856)
Conversion of preferred stock.................. 5 (660) 655
Stock-option based compensation expense........ 184 184
Accretion of Convertible Preferred Stock....... 434 (434)
Purchase price protection...................... (1,661) (1,661)
-------- --- ------- ------- -------- --------- -------
BALANCE AT DECEMBER 31, 1999................... $ 58,890 $98 $ -- $15,321 $144,909 $(101,438) $ --
======== === ======= ======= ======== ========= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 sells radiology industry
information systems through its subsidiary, Dalcon Technologies, Inc.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MRII, its wholly-owned subsidiaries, majority-owned joint ventures and limited
partnerships in which the Company is a general partner. All material
intercompany balances and transactions have been eliminated in consolidation. As
general partner, the Company is subject to all the liabilities of a general
partner and is entitled to share in partnership profits, losses and
distributable cash as provided in the partnership agreements. The limited
partnership interests are shown in the accompanying financial statements as
minority interest. Under certain of the partnerships, the Company also is paid a
monthly management fee based on patient cash collections and/or patient volume
under management agreements. Partnership losses allocable to limited partners in
excess of their respective capital accounts are charged to the Company as
general partner. Future income related to such partnerships will be allocated to
the Company as general partner until such time as the Company has recovered the
excess losses. Certain of the limited partnership agreements require limited
partners to make cash contributions in the event their respective capital
accounts are reduced below zero due to partnership operating losses. The Company
has not reflected this potential recovery from the limited partners due to
uncertainty regarding the ultimate receipt of the cash contributions.
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 facility service or independent contractor agreements.
Pursuant to such agreements, the Company agrees 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 Federal and
state regulations, imaging centers operated or managed by the Company recognize
revenue under one of the following three types of agreements with Interpreting
Physician(s):
TYPE I--Pursuant to facility service agreements with Interpreting
Physician(s) or Physician Group(s) the Company receives a technical fee for
each diagnostic imaging procedure performed at a
F-7
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 such amounts.
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 services 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 third party payors and patients less Interpreting
Physician(s) fees and, in certain centers, 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
are reduced by an estimate of patient and third party payor contractual
allowances and by a provision for estimated uncollectible amounts.
During 1999, the Company changed the billing structure of 19 imaging centers
from Type I and II into Type III centers.
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.
RECLASSIFICATION
Certain prior year items have been reclassified to conform to the current
year presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues, expenses, assets
and liabilities, and the disclosure of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The most significant
estimates relate to contractual allowances, the provision for doubtful accounts
receivable, income taxes, contingencies and the useful lives of equipment. In
addition, healthcare industry reforms and reimbursement practices will
F-8
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
continue to impact the Company's operations and the determination of contractual
and other allowance estimates. Actual results could differ from management's
estimates.
CASH AND CASH EQUIVALENTS
For financial statement purposes cash equivalents include short-term
investments with an original maturity of ninety days or less. Cash shown on the
Consolidated Balance Sheets include cash balances held by non-wholly owned
affiliates. Restricted cash consists of amounts held pursuant to expected
distributions to limited partners.
INVESTMENTS IN JOINT VENTURES AND LIMITED PARTNERSHIPS
The minority interests in the equity of consolidated joint ventures and
limited partnerships, are reflected in the accompanying consolidated financial
statements. Investments by the Company in joint ventures and limited
partnerships over which the Company can exercise significant influence but does
not control are accounted for using the equity method.
The Company suspends recognition of its share of joint ventures losses in
entities in which it holds a minority interest when its investment is reduced to
zero. The Company does not provide for additional losses unless, as a partner or
joint venturer, the Company has guaranteed obligations of the joint venture or
limited partnership.
PROPERTY AND EQUIPMENT
Property and equipment procured in the normal course of business is stated
at cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years, or the term of a capital lease, if applicable. Leasehold
improvements are being amortized over the shorter of the useful life or the
remaining lease term. Expenditures for maintenance and repairs are charged to
operations as incurred. Renewals and betterments are capitalized.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of purchase price of businesses over the fair value of assets
acquired is recorded as goodwill and is amortized on a straight line basis
generally over twenty years. Other intangible assets consist of covenants not to
compete, value of managed care contracts related to acquired businesses and
deferred financing costs and are amortized on a straight line basis over their
respective initial estimated
F-9
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
lives of three to ten years. Gross intangible assets and related accumulated
amortization are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Goodwill and other intangibles, net
Goodwill.................................................. $128,159 $149,967
Other intangibles......................................... 10,405 10,141
Less accumulated amortization............................. (26,090) (19,029)
-------- --------
Net..................................................... $112,474 $141,079
======== ========
</TABLE>
Amortization expense from continuing operations for goodwill was $7,688,000,
$7,788,000 and $5,626,000 in 1999, 1998 and 1997, respectively. Amortization
expense for other intangibles was $1,510,000, $1,122,000 and $1,151,000 in 1999,
1998 and 1997, respectively.
The Company periodically reviews long-lived assets to assess recoverability
based upon expectations of undiscounted cash flows and operating income of each
entity having a material long-lived asset balance. An impairment would be
recognized in operating results, if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying value of
the related long-lived assets. The amount of the impairment would be measured by
comparing the carrying value of long-lived assets to their fair values. See
discussion of impairment loss in Note 3 of the Notes to Consolidated Financial
Statements.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period. Diluted earnings per share is based on the
weighted average number of Common Shares outstanding during the period plus the
potentially issuable common shares related to outstanding stock options,
warrants and convertible debt.
F-10
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The computations of basic earnings per share and diluted earnings per share
for the years ended December 31, 1999, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Basic and diluted earnings (loss) per share information
- ------------------------------------------------------------
Loss from continuing operations............................. $(51,856) $(25,072) $(31,968)
Total income from discontinued operations................... -- 5,711 729
-------- -------- --------
Net loss.................................................... (51,856) (19,361) (31,239)
Charges related to restricted Common Stock and Convertible
Preferred Stock........................................... (434) (496) (1,938)
-------- -------- --------
Net loss applicable to common stockholders.................. $(52,290) $(19,857) $(33,177)
======== ======== ========
Weighted average number of Common Shares.................... 9,598 7,910 6,832
======== ======== ========
Net loss per share before discontinued operations........... $ (5.45) $ (3.23) $ (4.96)
Discontinued operations..................................... -- 0.72 0.11
-------- -------- --------
Basic and diluted loss per share............................ $ (5.45) $ (2.51) $ (4.85)
======== ======== ========
</TABLE>
Warrants, options and the Series C Convertible Preferred Stock are not
dilutive in 1999, 1998 and 1997.
STOCK OPTIONS
The Company has elected to continue to measure compensation cost for stock
options using the accounting methods prescribed by APB No. 25 and will disclose
the amount of the proforma compensation expense, required to be disclosed under
SFAS No. 123. See disclosure in Note 8 of the Notes to the Consolidated
Financial Statements.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. As of December 31, 1999 and 1998, the
Company has provided a valuation reserve against its net deferred income tax
assets due to uncertainty regarding the ultimate recovery of such deferred
income tax assets. See further discussion in Note 9 of the Notes to the
Consolidated Financial Statements.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
Since September 30, 1999, the Company failed to meet certain financial
covenants under its $75,000,000 of Senior Notes indebtedness. In addition, the
Company has deferred payment of the required
F-11
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
(CONTINUED)
monthly interest payments on the Senior Notes indebtedness since January 2000
and the required monthly interest and principal 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
are 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 certain 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 elect to exercise their right to accelerate the obligations under the
Senior Notes or the other loans and leases, such acceleration would have a
material adverse effect on the Company, its operations and its financial
condition. In addition, if such obligations were to be accelerated, in whole or
in part, management does not believe it would be successful in identifying or
consummating financing necessary to satisfy the obligations which would become
immediately due and payable. As a result of the uncertainty related to the
defaults and corresponding remedies described above, the Senior Notes and the
other loans and capital leases are shown as current liabilities on the Company's
Consolidated Balance Sheets at December 31, 1999. Accordingly, the Company has a
deficit in working capital of $75,723,000 at December 31, 1999. Furthermore, the
Company has generated net losses in each of the last three years aggregating
$102,456,000. These matters raise substantial doubt about the Company's ability
to continue as a going concern.
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 which is subject to certain conditions, including internal approval
by certain 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. The Company plans to affect these conversions through filing a
pre-negotiated Plan of Reorganization under Chapter 11 of the Federal Bankruptcy
Code. The plan of reorganization, which is subject to Bankruptcy Court approval,
is expected to be filed in April 2000. There can be no assurance that the
Company will be successful in consummating the reorganization as described
above.
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 the fourth quarter of 1999 and
early 2000, the Company sold or closed nine underperforming centers that had
generated aggregate pretax operating losses of $4,267,000 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.
F-12
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. UNUSUAL CHARGES AND LOSS ON IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED
ASSETS
LOSS ON IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
During 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 $21,863,000, other intangibles of $169,000 and fixed
assets of $7,793,000. The impairment relates primarily to eleven of the
Company's diagnostic imaging centers that are 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.
During the fourth quarter of 1997, the Company recorded a $12,962,000 loss
on the impairment of goodwill and other long-lived assets. This loss consists of
the write-off of goodwill of $10,425,000, covenants not to compete of $118,000
and fixed assets of $2,419,000. The write-down of fixed assets primarily relates
to imaging equipment. The entire impairment primarily relates to eight of the
Company's diagnostic imaging centers that were under-performing. The Company
recorded impairment losses for these centers because the sum of the expected
future cash flows, determined based on an assumed continuation of operating
methods and structures in effect in 1997, did not cover the carrying value of
the related long-lived assets.
LOSS ON SALE AND CLOSURE OF CENTERS
During 1999 and 1998, the Company also recorded losses on the sale and
closure of diagnostic imaging centers of $1,330,000 and $3,489,000,
respectively. In most cases, the Company decided to sell or close these centers
due to general competitive pressures and because of proximity to other imaging
centers of the Company which have more advanced imaging equipment. The 1999 loss
consists of (i) $910,000 for the estimated equipment removal, facility
restoration and related costs and (ii) $420,000 for legal and professional fees
and employee termination costs. In addition, the Company remains obligated under
certain facility leases related to such centers aggregating approximately
$90,000 per month until such time as the facilities are subleased, or the lease
expires. The 1998 loss consists of (i) $841,000 for the estimated costs to exit
equipment lease and maintenance agreements and related facility costs,
(ii) $1,562,000 for the write-off of fixed assets, goodwill and other
intangibles and other assets, and (iii) $1,086,000 for estimated equipment
removal, facility restoration and related costs.
OTHER UNUSUAL CHARGES
During 1999 and 1998, the Company recorded other unusual charges of
$2,412,000 and $11,481,000, respectively. The 1999 charge consists of
(i) $1,245,000 of defense 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, see Note 10), (ii) $215,000 of costs
associated with the investigation of possible strategic alternatives by the
Company, (iii) $850,000 for management termination benefits and related costs
and (iv) $102,000 of other costs. The 1998 charge consists of (i) $5,327,000
($1,194,000 of which was a non-cash charge related to the issuance of 117,000
common stock warrants) for penalties associated with
F-13
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. UNUSUAL CHARGES AND LOSS ON IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED
ASSETS (CONTINUED)
the delay in the effectiveness of the Company's Registration Statement,
(ii) $4,554,000 for defense costs associated with the shareholder class action
lawsuit and other related litigation, (iii) $883,000 for costs associated with
the investigation of related party transactions which was concluded in
April 1998, (iv) $380,000 for professional fees attributable to obtaining the
waiver and amendment under the Company's Senior Note obligations and
(v) $337,000 for management termination benefits and related costs.
During the fourth quarter of 1997, the Company also recorded $9,723,000 of
other unusual charges consisting of (i) $3,256,000 for the estimated net costs
associated with the resolution of the shareholder and employee lawsuits (see
discussion of litigation in Note 10 of the Notes to the Consolidated Financial
Statements), (ii) $2,243,000 for higher than normal professional fees,
(iii) $2,169,000 ($2,051,000 of which was a non-cash charge related to the
issuance of 272,000 warrants) for penalties associated with delays in the
registration of the Company's common stock issued in connection with
acquisitions or issuable upon conversion of convertible preferred stock,
(iv) $1,150,000 for the loss on investment related to a potential acquisition
not consummated, (v) $469,000 for costs associated with the investigation of
related party transactions which was concluded in April 1998 and (vi) $436,000
for management termination benefits and related costs. The Company accrues for
legal fees as incurred.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Management fee receivables (net of contractual allowances)
Due from unaffiliated physicians (Type I revenues)........ $22,604 $33,810
Due from affiliated physicians (Type III revenues)........ 15,998 5,436
Patient and third party payor accounts receivable (Type II
revenues)................................................. 26,988 29,230
------- -------
Accounts receivable before allowance for doubtful
accounts.................................................. 65,590 68,476
Less: Allowance for doubtful accounts....................... (15,413) (14,025)
------- -------
Total accounts receivable, net.............................. $50,177 $54,451
======= =======
</TABLE>
Accounts receivable is net of contractual allowances which represent
standard fee reductions negotiated with certain third party payors. Contractual
allowances amounted to $137,159,996, $128,218,000 and $93,490,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company's receivables relate to a variety of different structures (see
discussion of revenue recognition in Note 1 as well as a variety of payor
classes, including third party medical reimbursement organizations, principally
insurance companies. Approximately 10% and 15% of the Company's 1999 and 1998
imaging revenues was derived from the delivery of services where the timing of
payment is substantially contingent upon the timing of settlement of pending
litigation involving the recipient of services and third parties (Personal
Injury Type accounts receivable). The Company undertakes certain measures to
identify and document the individual's obligation to pay for services rendered
regardless of the outcome of the pending litigation. By its nature, the
realization of a substantial portion of these receivables is expected to extend
beyond one year from the date the service was rendered. The Company anticipates
that a material amount of its Personal Injury Type accounts receivable will be
outstanding for
F-14
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE, NET (CONTINUED)
periods in excess of twelve months in the future. The Company considers the
aging of its accounts receivable in determining the amount of allowance for
doubtful accounts. For Personal Injury Type accounts receivable, the Company
provides for uncollectible accounts at substantially higher rates than any other
revenue source.
5. PROPERTY AND EQUIPMENT
Property and equipment stated at cost are set forth below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Diagnostic equipment........................................ $50,400 $62,177
Leasehold improvements...................................... 16,259 19,591
Furniture and fixtures...................................... 10,751 10,077
Land and buildings.......................................... 4,081 5,050
------- -------
81,491 96,895
Less: accumulated depreciation and amortization............. (47,773) (46,104)
------- -------
$33,718 $50,791
======= =======
</TABLE>
Depreciation and amortization expense from continuing operations related to
property and equipment amounted to $12,627,000, $15,640,000 and $11,955,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accrued professional fees................................... $ 4,394 $ 4,947
Accrued payroll and bonuses................................. 2,791 1,956
Accrued interest............................................ 488 552
Accrued radiologist fees.................................... 3,329 3,622
Accrued costs associated with center closings............... 1,882 1,114
Other accrued expenses...................................... 15,440 11,165
------- -------
$28,324 $23,356
======= =======
</TABLE>
F-15
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Outstanding debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Senior Notes due 2001 through 2005.......................... $ 75,000 $ 76,000
Subordinated convertible notes.............................. 5,250 --
Notes and mortgages payable in monthly installments through
2010 with a weighted average interest rate of 10.16% and
12.20% at December 31, 1999 and 1998, respectively,
secured by related assets................................. 14,281 16,742
Unsecured promissory note................................... 5,399 6,826
RGC penalty notes........................................... -- 2,135
Convertible notes........................................... -- 1,872
-------- --------
Total..................................................... 99,930 103,575
Less: Current portion..................................... (9,718) (11,019)
Less: Debt classified as current due to covenant
defaults................................................ (85,999) --
-------- --------
Long-term portion........................................... $ 4,213 $ 92,556
======== ========
</TABLE>
During 1997, the Company borrowed $78,000,000 of Senior Notes (the "Senior
Notes") from a group of insurance companies led by the John Hancock Mutual Life
Insurance Company ("John Hancock"). The notes are subject to annual sinking fund
payments commencing February 2001 and have a final maturity in February 2005.
The Senior Notes are guaranteed by substantially all of the Company's diagnostic
imaging subsidiaries and collateralized by certain partnership interests owned
through subsidiaries by the Company. In addition, the agreement relating to the
issuance of the Senior Notes imposes certain affirmative and negative covenants
on the Company and its restricted subsidiaries, including restrictions on the
payment of dividends.
On September 23, 1998, the Company signed a waiver and amendment agreement
with the Senior Note lenders with respect to covenant defaults and certain
covenant modifications pursuant to which the lenders agreed to waive all
existing covenant defaults at the time and to modify the financial covenants
applicable over the remaining term of the Senior Notes. In consideration for the
waivers and covenant modifications, the Company increased the effective blended
interest rate on the Senior Notes from 7.87% to 9.00% and issued to the Senior
Note lenders warrants to acquire 375,000 shares of the Company's Common Stock at
an exercise price of $7.67 per common share. In addition, the Company repaid
$2,000,000 in principal outstanding on the Senior Notes (without premium) and
paid a fee to the Senior Note lenders of $500,000. During the third quarter of
1999, in connection with obtaining a waiver, the Company paid $1 million of
principle on the senior notes and amended the exercise price of these warrants
to $2.62 per common share.
The Company is currently in default of certain financial covenants under the
Senior Notes. See Note 2 of the Notes to the Consolidated Financial Statements,
Basis of Financial Statement Presentation and Issues Affecting Liquidity.
In the event that the Senior Note lenders or the holders of the Cross
Default Debt elect to exercise their right to accelerate the obligations under
the Senior Notes or the other loans and leases, such acceleration would have a
material adverse effect on the Company, its operations and its financial
condition. As a result of the uncertainty related to the defaults and
corresponding remedies described
F-16
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
above, the Senior Notes and the Cross Default Debt have been shown as current
liabilities on the Company's Consolidated Balance Sheet at December 31, 1999.
On August 9, 1999, in connection with the settlement of the class action
lawsuits (as more fully described in Note 10), the Company issued $5,250,000 of
Convertible Subordinated Notes bearing interest at the rate of 8% per annum. The
Convertible Subordinated Notes are due on the earlier of August 1, 2005 or when
the Company's presently outstanding Senior Notes are paid in full, and may be
repaid in cash by the Company at any time after issuance subject to 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 a result of the Company's failure to register the RGC Conversion Shares
until October 2, 1998, the Company issued promissory notes bearing interest at
13% per annum (the "RGC Penalty Notes") in the aggregate principal amount of
$2,450,000 due and payable, as amended, in eleven monthly payments beginning on
December 1, 1998 and ending on October 1, 1999.
In August 1997, as part of the purchase price for the acquisition of the
business assets of certain centers, the Company issued up to $3,700,000 in notes
convertible into the Company's Common Stock, of which, $1,200,000 in principal
amount was contingent upon the non-occurrence of certain events. During 1998 the
$1,200,000 additional notes were issued. The notes ($1,872,000 outstanding at
December 31, 1998) bore interest at 11% at December 31, 1998 and were retired in
January 1999.
On December 29, 1997, the Company entered into an unsecured promissory note
with a third party financing corporation (the "Note") under which during 1998
the Company was advanced $8 million. In consideration for making the Note
available to the Company, the lender received warrants to purchase an aggregate
of 17,777 shares of Common Stock at an exercise price of $28.63 per Common
Share. On December 21, 1999 the Company amended and restated if this Note. The
interest rate on the Note is 10.265 percent per year and is payable in monthly
installments of $324,889 through June 2001. As of December 31, 1999 and 1998,
$5,399,000 and $6,826,000, respectively, remain outstanding under the Note.
Aggregate originally scheduled maturities (prior to classification of
certain amounts as current due to financial covenant defaults) of the Company's
Senior Notes and other notes and mortgages payable for years 2000 through 2004
and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 9,718
2001........................................................ 21,751
2002........................................................ 18,073
2003........................................................ 15,258
2004........................................................ 15,259
Thereafter.................................................. 19,871
-------
$99,930
=======
</TABLE>
F-17
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
AUTHORIZED STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 100,000 shares of Preferred Stock,
par value $.01 per share ("Preferred Stock"). The Company has a Shareholders'
Rights Plan (described below) which requires the issuance of Series C Junior
Participating Preferred Stock, in connection with the exercise of certain stock
purchase rights. At December 31, 1999, there were (i) 9,756,087 shares of Common
Stock issued and outstanding and, (ii) 14,275 shares of Series C Convertible
Preferred Stock outstanding (the "Convertible Preferred Shares").
SHAREHOLDERS' RIGHTS PLAN
Pursuant to the Shareholders' Rights Plan, holders of the Common Stock
possess three rights (the "Rights") to purchase one ten thousandth of a share of
Series C Junior Participating Preferred Stock for each share of Common Stock
owned. The Rights will generally become exercisable ten days after a person or
group acquires 15% of the Company's outstanding voting securities or ten
business days after a person or group commences or announces an intention to
commence a tender or exchange offer that could result in the acquisition of 15%
of any such securities. Ten days after a person acquires 15% or more of the
Company's outstanding voting securities (unless this time period is extended by
the Board of Directors) each Right would, subject to certain adjustments and
alternatives, entitle the rightholder to purchase Common Stock of the Company or
stock of the acquiring company having a market value of twice the $24.00
exercise price of the Right (except that the acquiring person or group and other
related holders would not be able to purchase Common Stock of the Company on
these terms). The Rights are nonvoting, expire in 2006 and may be redeemed by
the Company at a price of $.001 per Right at any time prior to the tenth day
after an individual or group acquired 15% of the Company's voting stock, unless
extended.
The purpose of the Rights is to encourage potential acquirers to negotiate
with the Company's Board of Directors prior to attempting a takeover and to give
the Board leverage in negotiating on behalf of the shareholders the terms of any
proposed takeover.
CONVERTIBLE PREFERRED STOCK
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, providing 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 shares of Common Stock at
an
F-18
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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. Pursuant to an agreement with RGC, entered into
as of May 1, 1998, the exercise price of certain December 1997 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 Warrants was reduced to $2.73 per
share.
In addition, as a result of the Company's failure to register the RGC
Conversion Shares prior to September 15, 1998, RGC may demand a one-time
additional penalty of $1,490,000, payable, at the option of RGC, in cash or
additional shares of Common Stock.
In 1998 and 1999, respectively, 3,100 and 625 shares of Series C Preferred
Stock were converted into 713,567 and 420,169 shares of Common Stock,
respectively. Accordingly, as of December 31, 1999, 14,275 shares of the
Company's Series C Preferred Stock remain outstanding. In March 2000, 100 shares
were converted into 308,141 shares of Common Stock.
STOCK OPTIONS AND EMPLOYEE STOCK GRANTS
The Company's six stock option plans provide for the awarding of incentive
and non qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally at the fair value of the
Company's Common Stock on the date of grant. Options granted to consultants are
accounted for based on the fair value of the options issued.
During 1998 the Company granted 402,164 options at the current market price
on the dates of grant under the 1998 stock option plan, 1998 Non-Employee
Director Stock Option Plan and 1998 Employment Incentive Option Plan. Each plan
authorizes the issuance of options to purchase shares of Common Stock, with
vesting periods from four to ten years and a maximum term of ten years.
During 1996 and the first quarter of 1997, options were granted to employees
under stock option plans which were approved by the Company's Shareholders in
May 1997. The difference between the exercise price of the options and the
market price of the Company's Common Stock on the date of plan approval resulted
in compensation aggregating $3,381,000. The 1999, 1998 and 1997 expense of
$184,000, $380,000 and $2,536,000 representing the portion of such options
vested in each year is included in corporate general and administrative expense
in the accompanying Consolidated Statements of Operations. The remaining balance
of $281,000 will be recognized ratably over the remaining vesting period of the
options. In the following tables, these options are treated as if they were
granted on the date of the plan approvals in May 1997.
Had the fair-value based method of accounting been adopted to recognize
compensation expense for the above plans, the Company's net earnings and
earnings per share would have been reduced to the pro
F-19
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
forma amounts for the years ended December 31, 1999, 1998 and 1997 as indicated
below (in thousands except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported............................................... $(52,290) $(19,857) $(33,177)
Pro forma................................................. (53,602) (20,534) (34,049)
Basic and diluted loss per share:
As reported............................................... (5.45) (2.51) (4.85)
Pro forma................................................. (5.58) (2.60) (4.98)
</TABLE>
The amount may not necessarily be indicative of the pro-forma effect of SFAS
No. 123 for future periods in which options may be granted.
The fair value of each option granted under all plans is estimated on the
date of grant using the Black-Scholes option-pricing model based on the
following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
All Plans:
Dividend yield............................................ 0% 0% 0%
Expected volatility....................................... 76% 78% 70%
Expected life (years)..................................... 5 4 2
</TABLE>
The risk-free interest rates for 1999, 1998 and 1997 were based upon rates
with maturities equal to the expected term of the option. The weighted average
interest rate in 1999, 1998 and 1997 amounted to 6.0%, 4.6% and 5.52%,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1999, 1998 and 1997 amounted to $2.28, $8.24 and
$12.60, respectively.
F-20
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Stock option share activity and weighted average exercise price under these
plans and grants for the years ended December 31, 1999, 1998 and 1997, were as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding, January 1, 1997................................ 543,906 20.28
Granted................................................... 133,000 25.38
Exercised................................................. (78,285) 15.51
Forfeited................................................. (105,167) 21.99
--------
Outstanding, December 31, 1997.............................. 493,454 22.53
Granted................................................... 402,164 9.69
Exercised................................................. (8,993) 14.32
Forfeited................................................. (133,265) 23.77
--------
Outstanding, December 31, 1998.............................. 753,360 15.68
Granted................................................... 30,000 6.51
Forfeited................................................. (49,198) 15.65
--------
Outstanding, December 31, 1999.............................. 734,162 15.55
========
Exercisable at:
December 31, 1997......................................... 376,547 20.94
December 31, 1998......................................... 383,052 20.84
December 31, 1999......................................... 457,991 16.85
</TABLE>
The exercise price for options outstanding as of December 31, 1999 ranged
from $2.13 to $33.38. The following table summarizes information about stock
options outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------- --------------------
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- -------------------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$2.13 to 15.00.................................. 388,751 7 years $ 8.95 152,580 $ 6.81
$16.50.......................................... 68,333 2 years $16.50 68,333 $16.50
$18.27 to 19.65................................. 49,189 2 years $19.51 49,189 $19.51
$20.25 to 25.50................................. 170,555 2 years $23.96 130,555 $25.10
$27.00 to 30.00................................. 16,667 7 years $27.00 16,667 $27.00
$31.14 to 33.38................................. 40,667 2 years $32.24 40,667 $32.24
------- -------
$2.13 to 33.38.................................. 734,162 457,991
======= =======
</TABLE>
All the options described above were issued with exercise prices at or above
fair market value on the date of grant.
STOCK PURCHASE WARRANTS
The Company does not have a formal stock warrant plan. The Company's Board
of Directors authorizes the issuance of stock purchase warrants at its
discretion. The Company's Board of Directors
F-21
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
have generally granted warrants in connection with purchase and financing
transactions. The number of warrants issued and related terms are determined by
a committee of independent directors. All the warrants described below were
issued with exercise prices at or above fair market value on the date of grant.
As of December 31, 1999, the Company had granted warrants, which are
currently outstanding, to purchase its Common Stock with the following terms:
<TABLE>
<CAPTION>
WARRANTS NUMBER OF RANGE OF
EXPIRING IN SHARES EXERCISE PRICE
- ----------- --------- --------------
<S> <C> <C>
2000........................................................ --
2001........................................................ 175,458 10.08 to 36.00
2002........................................................ 553,333 2.73 to 37.77
2003........................................................ 392,188 2.75 to 13.08
2004........................................................ 24,653 17.10 to 28.63
2006........................................................ 41,667 25.50 to 27.00
2008........................................................ 116,666 2.73
---------
1,303,965
=========
</TABLE>
For services rendered by 712 Advisory in connection with several
acquisitions, the Company issued warrants (the "Acquisition Warrants") to
purchase shares of the Company's Common Stock at exercise prices equal to the
market price of the Company's Common Stock on the date of issuance. The fair
value of such warrants was considered part of the purchase price of the related
acquisition, and was determined (for accounting purposes only) using the
Black-Scholes option pricing model using the following assumptions: Dividend
yield 0%; expected volatility 62%; Expected life three to five years and a risk
free interest rate of 5.6% as set forth below. The Acquisition Warrants are
exercisable at prices ranging from $30.93 to $37.77 per share. As of March 1,
2000, none of the Acquisition Warrants had been exercised, and the closing sale
price of the Common Stock was $0.47.
During 1997, warrants were issued in connection with various acquisitions of
diagnostic imaging centers located throughout the United States to purchase
225,000 shares of the Company's Common Stock at an exercise price ranging from
$30.93 to $37.77 per share. The warrants have terms from three to five years,
are exercisable from the date of grant and had an aggregate estimated fair value
of $3,853,000.
Effective December 1997, the Company issued warrants to RGC to purchase
272,333 shares of the Company's Common Stock with an exercise price of $34.86
per share. These warrants had a term of five years and are exercisable from the
date of grant. The warrants had an estimated fair value of $2,051,000. The fair
value of such warrants was estimated using the Black-Scholes option pricing
model using the following assumptions: Dividend yield 0%, Expected volatility
62%, Expected life one year and a risk free interest rate of 5.50% based upon
the expected life of the warrants. Pursuant to an agreement with RGC, the
exercise price of warrants to acquire 77,667 of these shares was reduced to
$2.73 per share.
Effective January 1998, the Company issued warrants to RGC to purchase
116,666 shares of the Company's Common Stock with an exercise price of $38.85
per share. These warrants had a term of five years and are exercisable from the
date of grant. The warrants had an estimated fair value of $1,194,000. The fair
value of such warrants was estimated using the Black-Scholes option pricing
model using the following assumptions: dividend yield 0%, expect volatility 62%,
expected life one year and a risk free
F-22
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
interest rate of 5.5% based upon the expected life of the warrants. Pursuant to
an agreement with RGC, the exercise price of these warrants was reduced to $2.73
per share.
In September 1998, the Company issued warrants to Senior Note holders to
purchase 375,000 shares of the Company's Common Stock with an exercise price of
$7.67 per share. These warrants had a term of five years and are exercisable
from the date of the grant. The warrants have an estimated fair value of
$503,000. The fair value of such warrants was estimated using the Black-Scholes
option pricing model using the following assumptions: dividend yield 0%,
expected volatility 62%, expected life two years and a risk free investment rate
of 5.5% based upon the expected life of the warrants. During the third quarter
of 1999, in connection with obtaining a waiver, the Company amended the exercise
price of these warrants to $2.62.
In December 1997, the Company granted warrants to a financing company in
connection with a line of credit entered into by the Company. The warrants to
purchase 17,778 shares of the Company's Common Stock at an exercise price of
$28.62 per share have a term of seven years and are exercisable from the date of
grant. The warrants had an estimated fair value of $337,000 which was recorded
as a deferred financing expense and is being amortized as additional interest
over the term of the facility. The fair value of each warrant was estimated
using the Black-Scholes option pricing model using the following assumptions:
Dividend yield 0%, Expected volatility 62%, Expected life seven years and a risk
free interest rate of 5.63% based on the expected life of the warrants.
2,088,387 shares of the Company's Common Stock were reserved for the
issuance related to the above described stock options and warrants.
F-23
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The components of the Company's income tax provision (benefit) from
continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------
FEDERAL STATE TOTAL
-------- -------- --------
<S> <C> <C> <C>
Current provision................................. $ -- $ 470 $ 470
Deferred provision................................ -- -- --
------- ------ -------
Income tax provision.............................. $ -- $ 470 $ 470
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------
FEDERAL STATE TOTAL
-------- -------- --------
<S> <C> <C> <C>
Current provision (benefit)....................... $(4,845) $ 653 $(4,192)
Deferred provision................................ 4,845 -- 4,845
------- ------ -------
Income tax provision.............................. $ -- $ 653 $ 653
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
FEDERAL STATE TOTAL
-------- -------- --------
<S> <C> <C> <C>
Current provision................................. $ 993 $ 990 $ 1,983
Deferred benefit.................................. (879) 117 (762)
------- ------ -------
Income tax provision.............................. $ 114 $1,107 $ 1,221
======= ====== =======
</TABLE>
The tax benefit associated with the exercise of employee stock options which
has been credited to stockholders' equity consists of $6,000 and $1,000,000 for
the years ended December 31, 1998 and 1997, respectively.
A reconciliation of the enacted federal statutory income tax to the
Company's recorded effective income tax rate for continuing operations is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory Federal income tax at 34%.................. (34.0)% (34.0)% (34.0)%
State income tax expense (benefit) net of Federal
benefit............................................ .50 1.70 (1.20)
Meals and entertainment.............................. .05 .60 .40
Change in valuation allowance........................ 27.60 21.50 34.80
Goodwill amortization................................ 7.55 4.20 2.80
Accrued RGC registration penalties................... -- 7.00 2.40
Other................................................ (.90) 1.70 (1.20)
----- ----- -----
Effective tax rate................................... .8% 2.7% 4.0%
===== ===== =====
</TABLE>
F-24
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities
Property and equipment.................................... $ (2,302) $ (2,302)
Other..................................................... (63) (106)
-------- --------
Deferred tax liabilities.................................. (2,365) (2,408)
-------- --------
Deferred tax assets:
Net operating losses...................................... 6,051 2,956
Tax credit carryforwards.................................. 827 962
Accounts receivable reserves.............................. 8,942 2,249
Goodwill and other intangible assets written off for book
purposes, but amortized for tax purposes................ 7,647 3,874
Property and equipment written off for book purposes, but
depreciated for tax purposes............................ 3,824 --
Accrued expenses.......................................... 3,592 3,392
Deferred Compensation..................................... 1,190 1,119
Other....................................................... 269 339
-------- --------
Deferred tax assets......................................... 32,342 14,891
-------- --------
Subtotal.................................................. 29,977 12,483
-------- --------
Less: Valuation allowance................................... (29,977) (12,483)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
</TABLE>
The Company's existing deferred tax assets at December 31, 1999 and 1998
have been reduced by a valuation allowance due to the uncertainty regarding the
realization of the full amount of such deferred tax assets. The valuation
allowance represents the amount required to reduce the net deferred income tax
asset to zero.
At December 31, 1999, the Company has available federal net operating loss
carryforwards of approximately $15,715,000 expiring in years 2000 through 2019.
The Tax Reform Act of 1986 enacted a complex set of rules ("Section 382")
limiting the utilization of net operating loss carryforwards in periods
following a corporate ownership change. In general, a corporate ownership change
is deemed to occur if the percentage of stock of a loss corporation owned
(actually, constructively and in certain cases deemed owned) by one or more "5%
shareholders" has increased by 50 percentage points over the lowest percentage
of such stock owned during a specified testing period (generally a three year
period). The utilization of a significant portion of the Company's available net
operating loss carryforwards is subject to such limitations.
In addition, the Company also has available approximately $827,000 of
alternative minimum tax credits which can be utilized against the Company's
regular Federal income tax liability in future years and have an unlimited
carryforward period.
F-25
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into noncancelable leases for certain medical
diagnostic equipment, computer equipment, and furniture and fixtures, and has
capitalized the assets relating to these leases. In most cases, the leases are
collateralized by the related equipment. Certain leases included renewal options
for additional periods.
The following is a summary of assets under capital leases which amounts are
included in Property and Equipment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Equipment and associated leaseholds...................... $ 20,376 $25,343
Less: Accumulated amortization........................... (10,064) (9,572)
-------- -------
$ 10,312 $15,771
======== =======
</TABLE>
Amortization expense relating to property and equipment under capital leases
at December 31, 1999, 1998 and 1997 was $3,737,000, $4,860,000 and $3,496,000,
respectively.
The following analysis schedules the minimum future lease payments under
capital leases as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $ 9,373
2001........................................................ 5,358
2002........................................................ 2,360
2003........................................................ 1,115
2004........................................................ 19
-------
Total minimum lease payments................................ 18,225
Less: amount representing interest.......................... (1,981)
-------
Present value of minimum lease payments..................... 16,244
Less current installments................................... (7,808)
Less capital leases shown as current due to covenant
defaults.................................................. (4,901)
-------
Obligations under capital leases, shown as long-term........ $ 3,535
=======
</TABLE>
In connection with certain of the Company's acquisitions, the Company
entered into agreements for the sale and leaseback of medical diagnostic
equipment. Included in future minimum lease payments listed above are $1,782,000
for each of the years 2000, 2001 and $803,000 for 2002, relating to these
transactions.
The Company leases its corporate offices and certain centers for periods
generally ranging from three to ten years. These leases include rent escalation
clauses generally tied to the consumer price index and contain provisions for
additional terms at the option of the tenant. The leases generally require the
Company to pay utilities, taxes, insurance and other costs. Rental expense under
such leases was approximately $8,617,000, $8,485,000 and $6,585,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. Nine of the offices
are subleased to affiliated Physicians. By reason of the sublease
F-26
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
arrangements, if the respective Physicians should be unable to pay the rental on
the site, the Company would be contingently liable. As of December 31, 1999, the
Company has subleased the operating sites to the Physicians for the base rental
as stipulated in the original lease. The related sublease income has been offset
by the lease rent expense. The Company also has operating leases for diagnostic
imaging equipment installed in certain of its imaging centers.
The following summary of non-cancelable obligations includes the sublease
arrangements described above, certain equipment leases, maintenance agreements
and the Company's corporate rentals. As of December 31, 1999, the aggregate
future minimum operating lease payments and sublease rentals are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, LEASES SUBLEASES NET
- ----------------------- -------- --------- --------
<S> <C> <C> <C>
2000............................................. $20,786 $ (954) $19,832
2001............................................. 20,105 (554) 19,551
2002............................................. 17,230 (356) 16,874
2003............................................. 12,904 (224) 12,680
2004............................................. 8,399 (215) 8,184
thereafter....................................... 4,192 (319) 3,873
------- ------- -------
$83,616 $(2,622) $80,994
======= ======= =======
</TABLE>
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, 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 per share
equal to $2.62 per share.
Notwithstanding the settlement of the class actions, the Company continues
to defend several lawsuits 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. The Company
F-27
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
believes that it has meritorious defenses to these seller lawsuits and will
continue to defend against them 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 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. Discovery has
commenced in the case and the Company intends to continue to defend itself
vigorously against the allegations.
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,
and intends to defend itself vigorously. On February 19, 1999, the Company filed
a motion to dismiss the Ash Complaint.
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. See discussion of reserves for net costs associated with such
litigation in Note 3.
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.
F-28
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 December 31, 1999, the Company had paid $1,153,000 with
respect to such Price Protection Shortfall obligations and $505,000 remained due
and payable in 2000.
11. RELATED PARTY TRANSACTIONS
During 1998, for legal services rendered to the Company, the Company paid
legal fees in the amount of approximately $180,000 to Werbel & Carnelutti, of
which Stephen Davis, a director of the Company through July 1998, is a partner.
During 1997, in connection with the placement of the Preferred Stock, the
Company paid $967,000 in fees and expenses to Arnhold & S. Bleichroeder, Inc.,
of which Gary Fuhrman, a director of the Company, is an executive officer and
director. Also during 1997, for legal services rendered to the Company, the
Company paid legal fees in the amount of $971,000 to Werbel & Carnelutti, of
which Stephen Davis, a director of the Company through July 1998, is a partner.
In addition, during 1997, the Company reimbursed the managing underwriter of the
Company's October 1997 public offering $84,000 in charter fees for the use by
the managing underwriter and the Company of an airplane owned by an affiliate of
the then Chairman of the Board and current board member, Mr. Gary N. Siegler
("Mr. Siegler") during the public offering roadshow.
In 1997 and previous years, the Company paid an annual financial advisory
fee to 712 Advisory Services, Inc., a financial advisory firm and affiliate of
Mr. Siegler, ("712 Advisory"). Mr. Neil H. Koffler, a director of the Company
until July 1998, is also an employee of 712 Advisory. Such fees amounted to
$112,500 in 1997. During the year ended December 31, 1997, the Company also paid
transaction related advisory fees and expenses (including fees associated with
the issuance of the Senior Notes) to 712 Advisory of $1,761,000 and issued to
712 Advisory warrants to purchase 225,000 shares of the Company's Common Stock
exercisable at between $30.93 and $37.77 per share for financial advisory
services rendered to the Company in connection with such transactions. Pursuant
to recommendations made by the Special Committee of the Board of Directors
convened to investigate certain of the Company's related party transactions
("Special Committee"), 712 Advisory has reimbursed the Company $1,536,000 of the
fees paid to 712 Advisory for services (included acquisition advisory services)
rendered in 1997 and waived $112,500 of fees payable in 1997.
In order to compensate officers, directors, employees and consultants to the
Company for services rendered or to be rendered to the Company, the Company from
time to time has granted options at fair market value to such individuals. Stock
options to purchase 489,555 shares of the Company's Common Stock have been
issued to Mr. Siegler and Mr. Koffler. Included in this amount are stock options
to purchase 250,000 shares and 5,000 shares of the Company's Common Stock which
were granted in May 1997 to Mr. Siegler and Mr. Koffler, respectively, under the
Company's 1997 Stock Option Plan (the
F-29
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
"1997 Plan"). The exercise price for the options granted to Mr. Siegler and
Mr. Koffler is $39.38, the fair market value of the Common Stock on the date of
grant. Pursuant to recommendations made by the Special Committee, Mr. Siegler
and Mr. Koffler agreed in April 1998 to relinquish the stock options that were
granted to them under the 1997 Plan.
In September 1997, the Company acquired, for $3,250,000, a limited
partnership interest in Dune Jet Services, L.P. (the "Partnership"), a Delaware
limited partnership formed for the purposes of acquiring and operating an
airplane for the partner's business uses and for third party charter flights.
The general partner of the Partnership is Dune Jet Services, Inc., a Delaware
corporation, the sole stockholder of which is Mr. Siegler. In October 1997,
following discussions among management (members of which expressed objections to
such acquisition), the Special Committee, and other members of the Board of
Directors (including Mr. Siegler), the Company's interest in the partnership was
repurchased by the partnership at cost plus interest.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgement is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 9,360 $ 9,360
Restricted cash........................................... 600 600
Patient receivables and due from physician associations,
net..................................................... 50,177 50,177
Liabilities:
Notes payable and mortgages............................... 99,930 94,066
Capital lease obligations................................. 16,244 15,985
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 20,997 $20,997
Restricted cash........................................... 1,182 1,182
Patient receivables and due from physician associations,
net..................................................... 54,451 54,451
Liabilities:
Notes payable, line of credit and mortgages............... 103,575 92,592
Capital lease obligations................................. 24,456 23,740
</TABLE>
F-30
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts of cash and cash equivalents, restricted cash and due
from affiliated physician associations and patient receivables, net and
convertible debentures are a reasonable estimate of their fair value. The fair
value of the Company's notes and mortgage payable, capital lease obligations,
and convertible debentures are based upon a discounted cash flow calculation
utilizing rates under which similar borrowing arrangements can be entered into
by the Company.
13. ACQUISITIONS
During 1997 the Company acquired 60 diagnostic imaging centers located
throughout the United States through 19 acquisitions for approximately
$68,727,000 in cash, 1,104,925 shares of the Company's Common Stock valued at
$22,157,000, and assumption of indebtedness of approximately $9,526,000. In
connection with certain acquisitions, a portion of the purchase price was
contingent on the Company achieving certain financial objectives. The Company
has paid $7,280,000 of contingent consideration through December 31, 1999. The
Company is currently in dispute with regard to potential contingent
consideration in connection with three of the acquired centers. The shares of
the Company's Common Stock issued in connection with certain of these
acquisitions were subject to registration rights and price protection equal to
the difference between the issuance price and the market price at effectiveness
of the registration statement. The Company was able to satisfy any price
deficiency by the issuance of additional unregistered shares of Common Stock or
by the payment of cash. The Company has paid $10,444,000 in cash and issued an
additional 590,147 shares of common stock in satisfaction of these Purchase
Price Protections. The excess of the purchase price and direct acquisition
costs, including 225,000 warrants, with an exercise price ranging from $30.93 to
$37.77, valued at $3,853,000 issued to 712 Advisory for financial advisory
services, over the fair value of net assets acquired amounted to approximately
$102,035,000 and is being amortized on a straight-line basis over 20 years (see
Note 3).
On January 10, 1997, the Company, through its wholly owned subsidiary,
StarMed, acquired the assets of National Health Care Solutions, Inc. a medical
staffing company in Detroit, Michigan for approximately $50,000 in cash. The
excess of the purchase price and direct acquisition costs over the fair value of
net assets acquired amounted to approximately $311,000 and was being amortized
on a straight-line basis over 20 years. During 1998, the Company sold the stock
of StarMed to RehabCare (see Note 15).
On June 24, 1997, the Company acquired the assets of Wesley Medical
Resources, Inc. ("Wesley") a medical staffing company in San Francisco,
California 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. In the
event that substantially all of the capital stock or assets of Wesley was sold
by the Company prior to the completion of the measurement period, the
measurement period would be deemed to be completed as of the date of such sale.
The shares issued in connection with the acquisition were subject to
registration rights. Contingent consideration based upon future cash flow is
payable within 90 days of the end of the measurement period. During 1998, and as
a result of the sale of Wesley to RehabCare Group, Inc. in August 1998, the
Company paid $82,000 and reserved for issuance 45,740 shares of Common Stock
related to the contingent consideration. The excess of the purchase price and
direct acquisition costs over the fair value of net assets acquired amounted to
approximately $2,530,000 and is being amortized on a straight-line basis over
20 years. See Note 15.
On September 24, 1997, the Company acquired Dalcon Technologies, Inc.
("Dalcon") located in Nashville, Tennessee a software developer and provider of
radiology information systems for $645,000 in cash and 35,722 shares of the
Company's stock valued at $1,934,000. The shares of the Company's
F-31
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ACQUISITIONS (CONTINUED)
Common Stock issued at the closing were subject to registration rights. The
excess of the purchase price and direct acquisition costs over the fair value of
net liabilities assumed amounted to approximately $2,615,000 and is being
amortized on a straight-line basis over 5 years.
Each of the above acquisitions consummated in 1997 (the "1997 Acquisitions")
was accounted for under the purchase method of accounting. The operations of the
imaging center acquisitions are included as part of continuing operations in the
Consolidated Statements of Operations from the date of purchase. With respect to
the 1997 Acquisitions, the fair value of the assets acquired and liabilities
assumed, in the aggregate, was approximately $64,759,000 and $64,908,000,
respectively. Contingent consideration associated with acquisitions is recorded
as additional purchase price when resolved.
The following table summarizes the unaudited pro forma results of continuing
operations for the years ended December 31, 1997, assuming the imaging center
acquisitions had occurred on January 1, 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
1997
-----------
(UNAUDITED)
<S> <C>
Revenue, net................................................ $185,309
Operating income (loss)..................................... (17,323)(a)
Income (loss) before income taxes........................... (30,134)
Net income (loss) from continuing operations................ (31,355)
Basic net income (loss) per share from continuing
operations................................................ $ (4.87)
</TABLE>
- ------------------------
(a) 1997 pro forma results include a $12,962,000 loss on the impairment of
goodwill and other long-lived assets and other unusual charges of $9,723,000
(See Note 3 for further details).
14. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly consolidated financial
results of continuing operations for the years ended December 31, 1999 and 1998
(in thousands except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Revenue, net.......................................... $41,888 $40,720 $37,551 $37,481
Operating income (loss)............................... 1,791 1,287 (38,055) (4,429)
Net loss.............................................. (1,468) (2,057) (41,061) (7,270)
Basic and diluted loss per common share............... (0.17) (0.23) (4.22) (0.76)
1998
Revenue, net.......................................... $47,022 $46,626 $44,176 $41,232
Operating income (loss)............................... (1,742) 2,668 (2,376) (8,904)
Net loss from continuing operations................... (5,488) (1,442) (6,196) (11,946)
Basic and diluted loss per common share from
continuing operations............................... (0.77) (0.22) (0.82) (1.33)
</TABLE>
During the first, second, third and fourth quarters of 1999, the Company
recorded unusual charges of $280,000, $434,000, $2,162,000 and $866,000,
respectively. The aggregate amount of such unusual charges
F-32
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
of $3,742,000 primarily relates to the resolution of the shareholder class
action lawsuit, severance costs and costs associated with center closings. In
addition, the Company recorded a $29,825,000 loss on the impairment of goodwill
and other long-lived assets during the third quarter of 1999. The impairment
related to primarily eleven of the Company's diagnostic imaging centers that are
under performing (See Note 3).
During the first, second, third and fourth quarters of 1998, the Company
recorded unusual charges of $3,760,000, $1,640,000, $4,379,000 and $5,191,000,
respectively. The aggregate amount of such unusual charges of $14,970,000
primarily relates to Convertible Preferred Stock penalties associated with the
delay in the effectiveness of the Company's Registration Statement, the
resolution of the shareholder class action lawsuit, and costs associated with
center closings (see Note 3).
15. DISCONTINUED OPERATIONS
On August 18, 1998, the Company sold 100% of its stockholdings in StarMed to
RehabCare Group, Inc. (the "StarMed Sale") for gross proceeds of $33,000,000
(before repayment of $13,786,000 of StarMed's outstanding third party debt in
accordance with the terms of sale). Due to the StarMed Sale, the results of
operations of StarMed are herein reflected in the Company's Consolidated
Statements of Operations as discontinued operations.
Net cash proceeds from the StarMed Sale were used as follows:
(i) $13,786,000 was used to retire StarMed's outstanding third-party debt (in
accordance with the terms of sale) (ii) $2,000,000 was placed in escrow to be
available, for a specified period of time, to fund indemnification obligations
that may be incurred by the Company (part or all of this amount may be payable
to the Company over time), (iii) an additional $2,000,000 was applied as a
partial repayment of the Company's $78,000,000 of Senior Notes, and
(iv) $2,186,000 was used to fund cash costs associated with the sale. For
accounting purposes, the sale resulted in an after-tax gain of $3,905,000 in
1998.
The following table shows summary statements of operations for StarMed
through August 15, 1998, the date of sale and for the year ended December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1998(A) 1997
-------- --------
<S> <C> <C>
Net service revenues........................................ $51,087 $57,974
Office level operating costs and provisions for
uncollectible accounts receivable......................... 40,568 47,123
Corporate general and administrative........................ 7,394 8,089
Depreciation and amortization............................... 414 601
------- -------
Operating income............................................ 2,711 2,161
Interest expense, net....................................... 788 353
------- -------
Income before income taxes.................................. 1,923 1,808
Provision for income taxes.................................. 117 1,079
------- -------
Income after income taxes................................... 1,806 729
Gain on sale of StarMed (after tax of $250)................. 3,905 --
------- -------
Total income from discontinued operations................... $ 5,711 $ 729
======= =======
</TABLE>
- ------------------------
(a) 1998 amounts reflect results through August 15, 1998, the date of sale of
StarMed.
F-33
<PAGE>
MEDICAL RESOURCES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE ADDITIONS/(DEDUCTIONS) PERIOD
- ----------- ------------ ---------- ---------------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Total Allowances for Doubtful 292 (1)
Accounts.............................. 10,368 20,364 (12,102)(2) 18,922
Year ended December 31, 1998
Total Allowances for Doubtful (477)(1)
Accounts.............................. 18,922 16,459 (20,879)(2) 14,025
Year ended December 31, 1999
Total Allowances for Doubtful (11,094)(2)
Accounts.............................. 14,025 12,482 15,413
</TABLE>
- ------------------------
(1) Represents provision for bad debts of discontinued operations.
(2) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED
PROMISSORY NOTE
NO. 2437
$5,399,316.86 Doylestown, Pennsylvania
December 21, 1999
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, MEDICAL RESOURCES,
INC., a Delaware corporation with an office at 155 State Street, Hackensack, New
Jersey 07601 ("BORROWER"), hereby promises to pay to the order of DVI FINANCIAL
SERVICES INC. with an office at 500 Hyde Park, Doylestown, Pennsylvania 18901
("LENDER"), the principal sum of Five Million Three Hundred Ninety-Nine Thousand
Three Hundred Sixteen Dollars and Eighty-Six cents ($5,399,316.86), together
with interest thereon upon the terms and conditions hereinafter set forth.
1. INTEREST RATE. Interest on the unpaid principal balance hereof
will accrue from the date hereof until final payment thereof at the rate of ten
and two hundred sixty-five one hundredths percent (10.265%) per annum. Interest
shall be calculated on the basis of a three hundred sixty (360) day year
comprised of twelve (12) 30-day months for the actual number of days elapsed in
such calendar year.
2. DEFAULT RATE. Notwithstanding the foregoing, interest will accrue
and be payable on the outstanding principal amount hereof and all other sums
payable under the Loan Documents, as defined in SECTION 8 hereof, following the
occurrence of an Event of Default, until paid, at a rate of eighteen percent
(18%) per annum (the "DEFAULT RATE"). Any judgment obtained for sums due
hereunder or under the Loan Documents will accrue interest at the Default Rate
until paid.
3. PAYMENTS. Principal and accrued interest thereon is due and
payable in (i) seventeen (17) equal consecutive monthly payments in the amount
of Three Hundred Twenty-Four Thousand Eight Hundred Eighty-Nine Dollars
($324,889.00) each, with the first such payment due and payable on January 30,
2000 and like payments due on the thirtieth (30th) day of each month thereafter;
and (ii) one final payment in the amount of the outstanding principal balance
hereof, together with all accrued and unpaid interest thereon and all other
fees, costs and expenses payable hereunder or under the Loan Documents (as
hereinafter defined), due on June 30, 2001.
4. FEES. On or before the date hereof, Borrower shall pay to Lender
a refinance fee of Fifty-Three Thousand Nine Hundred Ninety-Three Dollars and
Seventeen Cents ($53,993.17) and shall bring current its payments due
(including, without limitation, the payment due in December 1999) under the
Prior Note (as defined below) in the aggregate amount of One Hundred Seventy
Thousand Nine Hundred Sixty-Two Dollars and Eleven Cents ($170,962.11).
5. PREPAYMENT. The obligations of the Borrower hereunder may be
prepaid, in whole or in part, at any time without penalty.
1
<PAGE>
6. PLACE OF PAYMENT. Principal and interest hereunder shall be
payable at the office of Lender set forth in the heading hereof, or at such
other place as Lender, from time to time, may designate in writing.
7. APPLICATION OF PAYMENTS. Any and all payments on account of this
Note shall be applied, at the option of Lender, to accrued and unpaid interest,
outstanding principal and other sums due hereunder or under the Loan Documents,
in such order as Lender, in its sole discretion, elects. Borrower agrees that,
to the extent Borrower makes a payment or payments and such payment or payments,
or any part thereof, are subsequently invalidated, declared to be fraudulent or
preferential, set aside or are required to be repaid to a trustee, receiver, or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then to the extent of such payment or payments, the obligations
or part thereof hereunder intended to be satisfied shall be revived and
continued in full force and effect as if said payment or payments had not been
made.
8. LOAN DOCUMENTS. This Note, those certain Common Stock Purchase
Warrant Nos. 1 and 2 granted by Borrower to DVI, and all other documents
executed or delivered in connection herewith, as any of them may be amended from
time to time, shall be collectively referred to as the "LOAN DOCUMENTS". All of
Borrower's obligations and liabilities hereunder and under any of the other Loan
Documents shall be collectively referred to as the "DVI INDEBTEDNESS".
9. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents
and warrants to Lender as follows:
(a) Borrower is duly organized and existing under the laws of
the State of its formation without limit as to the duration of its existence,
and is authorized and in good standing to do business in said State; Borrower
has corporate powers and adequate authority, rights and franchises to own its
own property and to carry on its business as now conducted, and is duly
qualified and in good standing in each state in which the character of the
properties owned by it therein or the conduct of its business makes such
qualifications necessary; and Borrower has the corporate power and adequate
authority to make and carry out this Agreement.
(b) The execution, delivery and performance of this Note and
the other Loan Documents are duly authorized and do not, to the best of the
Borrower's knowledge, require the consent or approval of any governmental body
or other regulatory authority; are not in contravention of or in conflict with
any law, regulation or any term or provision of its articles of formation or
bylaws, and this Note and the other Loan Documents are valid and binding
obligations of Borrower legally enforceable in accordance with their terms.
(c) The execution, delivery and performance of this Note and
the other Loan Documents will not contravene or conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound by or affected, and will not cause any lien, charge or
other encumbrance to be created or imposed upon any such property by reason
thereof.
2
<PAGE>
10. EVENTS OF DEFAULT. For purposes hereof, each of the following
shall constitute an Event of Default ("EVENT OF DEFAULT") hereunder and under
each of the Loan Documents: (a) The failure of Borrower to pay any amount of
principal or interest on this Note, any fee or other sums payable hereunder or
any other DVI Indebtedness on the date on which such payment is due, whether on
demand, at the stated maturity or due date thereof or otherwise and such failure
continues unremedied for a period of five (5) days after the date such payment
is first due; (b) The failure of Borrower to duly perform or observe any
obligation, covenant or agreement on its part contained herein or in any other
Loan Document not otherwise specifically constituting an Event of Default under
this SECTION 10 and such failure continues unremedied for a period of fifteen
(15) days after notice of the existence of such failure from Lender; (c) The
occurrence of an event of acceleration under (i) the Loan Documents or any other
agreement, instrument or document by and between Borrower and Lender, whether or
not related to this Note, or (ii) under any loan, security agreement, mortgage
or other agreement, instrument or documents by and between Borrower and any
third party evidencing any material indebtedness for borrowed money; (d) The
adjudication of Borrower as a bankrupt or insolvent, or the entry of an Order
for Relief against Borrower or the entry of an order appointing a receiver or
trustee for Borrower or any of their property or approving a petition seeking
reorganization or other similar relief under the bankruptcy or other similar
laws of the United States or any state or any other competent jurisdiction; (e)
A proceeding under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law is filed by or (unless
dismissed or stayed within 60 days) against Borrower, or Borrower makes an
assignment for the benefit of creditors or Borrower takes any action to
authorize any of the foregoing; (f) The entry of a final judgment for the
payment of money against Borrower in an amount in excess of One Hundred Fifty
Thousand Dollars, individually or in the aggregate, which, within twenty (20)
days after such entry, shall not have been discharged or execution thereof
stayed pending appeal; (g) Any representation or warranty of Borrower in any of
the Loan Documents is discovered to be untrue in any material respect or any
statement, certificate or data furnished by Borrower pursuant hereto is
discovered to be untrue in any material respect as of the date as of which the
facts therein set forth are stated or certified; (h) Borrower voluntarily or
involuntarily dissolves or is dissolved, liquidates or is liquidated; or (i) The
validity or enforceability of this Note or any of the Loan Documents is
contested by the Borrower; or Borrower denies that it has any or any further
liability or obligation hereunder or thereunder.
11. REMEDIES. Upon the occurrence of an Event of Default, Lender, at
its option and without notice to Borrower, may declare immediately due and
payable the entire DVI Indebtedness, together with interest accrued thereon at
the applicable rate specified herein to the date of the Event of Default and
thereafter at the Default Rate. Payment thereof may be enforced and recovered in
whole or in part at any time by one or more of the remedies in this Note or in
the Loan Documents, or as may be available to Lender at law or in equity.
12. DELAY OR OMISSION NOT WAIVER. Neither the failure nor any delay
on the part of Lender to exercise any right, remedy, power or privilege under
the Loan Documents upon the occurrence of any Event of Default or otherwise
shall operate as a waiver thereof or impair any such right, remedy, power or
privilege.
3
<PAGE>
13. REMEDIES CUMULATIVE. The rights, remedies, powers and privileges
provided for herein or in the Loan Documents shall not be deemed exclusive, but
shall be cumulative and shall be in addition to all other rights, remedies,
powers and privileges in Lender's favor at law or in equity.
14. SUBMISSION TO JURISDICTION. Borrower hereby consents to the
jurisdiction of any state or federal court located within the Commonwealth of
Pennsylvania, and irrevocably agrees that, subject to Lender's election, any
actions or proceedings relating to the Loan Documents or the transactions
contemplated hereunder may be litigated in such courts, and Borrower waives any
objection which it may have based on lack of personal jurisdiction, improper
venue or FORUM NON CONVENIENS to the conduct of any proceeding in any such court
and waives personal service of any and all process upon it, and consents that
all such service of process be made by mail or messenger directed to it at the
address set forth in SECTION 16. Nothing contained in this SECTION 14 shall
affect the right of Lender to serve legal process in any other manner permitted
by law or affect the right of Lender to bring any action or proceeding against
Borrower or its property in the courts of any other jurisdiction.
15. FEES, COSTS AND EXPENSES. Borrower shall pay upon demand all
reasonable third-party costs and expenses incurred by Lender in connection with
the negotiation, documentation, administration and enforcement of the Loan
Documents and the DVI Indebtedness, including without limitation all reasonable
legal fees and costs.
16. COMMUNICATIONS AND NOTICES. All notices, requests and other
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first-class mail, in all cases, with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Obligor:
Medical Resources, Inc.
155 State Street
Hackensack, NJ 07601
Attention: Geoffrey A. Whynot,
Co-Chief Executive Officer & Chief Financial Officer
Telecopier: (201) 342-1784
4
<PAGE>
To Lender:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Vice President - Credit
Telecopier: (215) 230-8108
With a copy to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Legal Department
Telecopier: (215) 345-7759
17. LIMITATION OF INTEREST TO MAXIMUM LAWFUL RATE. In no event shall
the rate of interest payable hereunder exceed the maximum rate of interest
permitted to be charged by applicable law (including the choice of law rules)
and any interest paid in excess of the permitted rate shall be refunded to
Borrower. Such refund shall be made by application of the excessive amount of
interest paid against any sums outstanding and shall be applied in such order as
Lender may determine. If the excessive amount of interest paid exceeds the sums
outstanding, the portion exceeding the said sums outstanding shall be refunded
in cash by Lender. Any such crediting or refund shall not cure or waive any
default by Borrower hereunder. Borrower agrees, however, that in determining
whether or not any interest payable under this Note exceeds the highest rate
permitted by law, any non-principal payment, including, without limitation, late
charges, loan fees and expenses are and shall be deemed to the extent permitted
by law to be late charges, loan fees or expenses, as applicable, and not
interest.
18. NO NOVATION. This Promissory Note amends and restates that
certain Promissory Note dated December 29, 1997 by Borrower in favor of Lender
in the original principal amount of Fifteen Million Dollars ($15,000,000.00)
(the "PRIOR NOTE"). Nothing contained herein shall be deemed to constitute a
novation, termination or release of Borrower's obligations under the Prior Note;
provided, however, that this Note evidences the entire indebtedness of Borrower
hereunder and under the Prior Note and to the extent of any inconsistency
between this Note and the Prior Note, this Note shall prevail.
19. LAW GOVERNING. This Note will be construed in accordance with and
governed by the laws of the Commonwealth of Pennsylvania (without giving effect
to any principles of conflicts of law).
20. ASSIGNMENT OR SALE BY LENDER. Upon Borrower's prior written
consent, which shall not be unreasonably withheld, Lender may sell, assign or
participate all or a portion of its interest in this Note and/or any of the Loan
Documents and in connection therewith may make available to any prospective
purchaser, assignee or participant any information relative to Borrower in its
possession. Nothing contained in this provision shall be deemed to prohibit
Lender from pledging this Note or any of the Loan Documents as collateral for
Lender's indebtedness to its lenders.
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<PAGE>
21. NO ASSIGNMENT BY BORROWER. Borrower may not assign any of its
rights hereunder without the prior written consent of Lender, and Lender shall
not be required to lend hereunder except to Borrower as it presently exists.
22. BINDING EFFECT. This Note and all rights and powers granted
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
23. MODIFICATIONS. No modification of this Note or any of the Loan
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
24. JURY TRIAL WAIVER. BORROWER AND LENDER WAIVE ANY RIGHT TO TRIAL
BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF
THE LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO
THE DEALINGS OF BORROWER OR LENDER WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR
THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. BORROWER AND LENDER AGREE AND CONSENT THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY, AND THAT ANY PARTY TO THE LOAN DOCUMENTS MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF BORROWER AND LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
BORROWER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL
REGARDING THIS SECTION, THAT IT FULLY UNDERSTANDS ITS TERMS, CONTENT AND EFFECT,
AND THAT IT VOLUNTARILY AND KNOWINGLY AGREES TO THE TERMS OF THIS SECTION.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
MEDICAL RESOURCES, INC.
By: /s/ GEOFFREY A. WHYNOT
---------------------------
Name: GEOFFREY A. WHYNOT
---------------------------
Title: CFO
---------------------------
6
<PAGE>
The undersigned hereby joins in this Note for the sole purpose of evidencing its
agreement to the waiver of jury trial contained in SECTION 24.
DVI FINANCIAL SERVICES INC.
By: /s/ RICHARD E MILLER
---------------------------
Name: RICHARD E MILLER
---------------------------
Title: PRESIDENT
---------------------------
<PAGE>
Exhibit 10.18
CONSULTING AGREEMENT
This CONSULTING AGREEMENT is made and entered into this 9th day of
November, 1999, by and between Medical Resources, Inc., a Delaware corporation
with its principal place of business at 125 State Street, Suite 200, Hackensack,
New Jersey, on behalf of itself and each of its subsidiaries (hereinafter,
individually and collectively, the "Company") and Duane C. Montopoli, an
individual residing at 108 Campion Road, North Andover, Massachusetts
(hereinafter, "Consultant").
WHEREAS, the Company and Consultant have entered into an Employment
Agreement dated as of January 30, 1998 and as amended (as amended, the
"Employment Agreement"); and
WHEREAS, pursuant to Section 10 (b) of the Employment Agreement, the
Employment Agreement may be amended or modified only by a written agreement
executed by the parties thereto; and
WHEREAS, the Company and Consultant have mutually agreed that, as of the
Effective Date (as defined below), the Consultant's services as an employee
under the Employment Agreement shall terminate and Consultant shall be retained
by the Company as a consultant, as set forth herein; and
WHEREAS, the Company now desires that Consultant provide advisory and
consulting services to the Company including, in particular, services related to
the Company's pursuit of strategic alternatives; and
WHEREAS, the Company and Consultant have mutually agreed that, as of the
Effective Date and except as expressly set forth herein, this Consulting
Agreement shall supersede and render null and void the Employment Agreement in
its entirety and all other agreements, plans or policies pursuant to which
Consultant may have any compensatory or other claims against the Company, in
their entirety; and
WHEREAS, the Company and Consultant have mutually agreed that they shall
be bound by this Consulting Agreement.
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties do hereby agree as follows:
1. EFFECTIVE DATE, TERMINATION DATE AND TERM. This Consulting Agreement is
effective as of November 10, 1999 (the "Effective Date"). The term of this
Consulting Agreement shall commence on the Effective Date and shall end on the
"Termination Date" which shall be February 9, 2001. For purposes of this
Consulting Agreement, the period commencing on the Effective Date and ending on
the Termination Date shall be referred to as the "Term."
1
<PAGE>
2. CONSULTING SERVICES AND RELATIONSHIP.
2.1 SERVICES. During the Term, Consultant shall provide consulting and
advisory services to the Company as may be mutually agreed upon by Consultant
and the Company from time to time; PROVIDED THAT, any failure of the parties to
agree to the specific consulting and advisory services to be performed by
Consultant hereunder shall not constitute a breach of this Consulting Agreement
by either party.
2.2 RELATIONSHIP. Consultant shall be an independent contractor, and not
an employee of the Company, within the meaning of all federal, state and local
laws and regulations governing employment insurance, workers' compensation,
industrial accidents, labor and taxes. From and after the Effective Date, except
as provided in Section 3.3 hereof, Consultant shall not, by reason of this
Consulting Agreement, acquire any additional benefits, privileges or rights
under any benefit plan operated by the Company or its subsidiaries or affiliates
for the benefit of their employees, including, without limitation, (a) any
pension or profit-sharing plans or (b) any "employee welfare plans" (as defined
in Section 3 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")).
3. COMPENSATION AND BENEFITS.
3.1 BASE COMPENSATION. During the Term of this Consulting Agreement, the
Company shall pay to Consultant the sum of $23,500 per month (or a pro-rata
portion of such amount for the months during which the Term commences or
expires), on or before the fifteenth day of each month, PROVIDED THAT,
Consultant must immediately advise the Company of any and all of his gross
earnings from personal services during the Term, whether earned as consultant,
proprietor, employee or agent (hereinafter, "Interim Earnings"), and such
Interim Earnings, when and as earned, shall be offset against and deducted from,
on a dollar-for-dollar basis, the amounts otherwise prospectively due and
payable to Consultant solely pursuant to this Section 3.1. Notwithstanding the
foregoing, Interim Earnings shall not include directors fees, stock-based gains
and compensation and employer-provided fringe benefits conveyed to Consultant in
any form other than cash and whether taxable or not. The first payment to
Consultant under this Section 3.1, if such amount shall become due and payable
hereunder, shall be due on December 15, 1999.
3.2 PARTIAL BONUS. If, and only if, the Company pays cash bonuses to one
or more of its corporate officers with respect to, in whole or in part, the 1999
calendar year, the Company shall pay to Consultant an amount of cash bonus
determined by the Company's Board of Director's, acting in good faith, to have
been earned by Consultant, in his capacity as an executive and senior officer of
the Company, for the portion of the 1999 calendar year that Consultant was
employed by the Company.
3.3 HEALTH INSURANCE. During the Term, the Company shall continue to
provide benefits to Consultant under the Company's health and dental insurance
plans at the same levels as such benefits shall have been provided to Consultant
in his capacity as an employee of the
2
<PAGE>
Company immediately prior to the Effective Date and, in connection therewith,
Consultant shall periodically pay to the Company amounts equivalent to that
which he paid as required employee contributions immediately prior to the
Effective Date; PROVIDED THAT, the Company shall not be required to provide any
such benefit if the effect thereof would be to violate the terms of any law,
plan or insurance policy or jeopardize the tax benefit associated with such
benefit to which the Company otherwise would be entitled, but in such event, the
Company shall pay to Consultant, in cash, an amount equal to the Company's
contribution to the cost of providing such benefit for Consultant as of the
Effective Date; AND PROVIDED FURTHER THAT, if Consultant becomes eligible to
receive health and/or dental insurance benefits under another group insurance
plan, the corresponding benefits described herein shall be terminated. Any such
benefits provided under another group insurance plan shall be promptly reported
by Consultant to the Company as Consultant becomes eligible therefor.
3.4 EXPENSE REIMBURSEMENT. Consultant shall be reimbursed in accordance
with the Company's current Travel And Entertainment Policy (the "T&E Policy")
for all reasonable "out-of-pocket" business expenses which are incurred both,
(a) during the Term, and (b) in connection with the performance of his duties
under this Consulting Agreement (hereinafter, "Reimbursable Expenses").
Reimbursable Expenses shall include, but shall not be limited to, expenses
incurred by Consultant traveling to and from the Hackensack, New Jersey area in
connection with the performance of his duties under this Consulting Agreement;
in this regard, round trip automobile mileage will be reimbursed at the rate of
$.31 per mile and round trip air travel will be reimbursed at coach class air
fare rates. Reimbursable Expenses shall also include temporary lodging expenses
incurred in the Hackensack, New Jersey area in connection with the performance
of his duties under this Consulting Agreement during any period that temporary
housing is not available to Consultant pursuant to Section 3.5 of this
Consulting Agreement. The reimbursement of Consultant's business expenses
pursuant to this Section 3.4 shall be upon presentation to and approval by the
Company of valid receipts and other appropriate documentation for such expenses.
3.5 TEMPORARY HOUSING. During the Term of this Consulting Agreement, the
Company shall reimburse Consultant for his actual cost of renting and
maintaining an apartment in the Hackensack, New Jersey area (including charges
for the telephone therein), up to a maximum of $3,500 per month, PROVIDED THAT,
the Company may terminate this benefit, at any time and at its discretion, upon
its giving Consultant at least one calendar month's advance notice.
3.6 CONTINUED USE OF COMPANY EQUIPMENT. During the Term of this
Consulting Agreement, Consultant may retain in his possession, for his business
and personal use and at no charge, that Company-owned portable computer,
dictation and cell phone equipment which he had the use of while an employee of
the Company immediately prior to the Effective Date. In connection therewith,
during the Term, Consultant shall be provided with Company-paid internet access
(i.e., an ISP account) and Company-paid cell phone usage services, PROVIDED
THAT, the Company-paid cost of such cell phone usage services shall be limited
to $100. per month. Cell phone service charges exceeding $100. per month shall
be reimbursable to the Company by Consultant when and as incurred and reasonably
after the presentation of an invoice by the Company to Consultant. As of the
Termination Date, all of the equipment described in this Section 3.6 shall be
returned by Consultant to the Company.
3
<PAGE>
4. TERMINATION.
4.1 BREACH. In the event that either party materially breaches any
obligation under this Consulting Agreement, and such breach is not remedied by
the breaching party within five (5) business days of receipt of written notice
from the other party hereto, such non-breaching party shall have no further
obligations hereunder.
4.2 DEATH. In the event of Consultant's death during the Term,
Consultant's services hereunder shall immediately terminate and the Company
shall, until the expiration of the Term, (a) pay to Consultant's estate, the
amounts described in Section 3.1 hereof, and (b) provide to or for Consultant's
family members those benefits specified in Section 3.3 hereof, PROVIDED THAT,
any cash payments that otherwise would be made to Consultant in accordance with
the first proviso in Section 3.3 hereof, shall instead be paid to Consultant's
estate, heirs or devisees, as appropriate under the circumstances. Except as
expressly set forth in this Section 4.2, in the event of Consultant's death, the
Company shall have no further obligations to Consultant under this Consulting
Agreement.
5. CONFIDENTIALITY OF TRADE SECRETS AND OTHER MATERIALS.
5.1 TRADE SECRETS. Other than in the performance of his duties
hereunder, Consultant agrees not to disclose, either during the Term or at any
time thereafter, to any person, firm or corporation any information concerning
the business affairs, the trade secrets or the customer lists and similar
confidential information of the Company including, but not limited to, trade
secrets, lists of past or present clients or customers, (which for purposes of
this Consulting Agreement shall include referring physicians and referring
medical entities such as managed care organizations), client or consultant
contracts, product or service development plans, marketing plans, pricing
policies, business acquisition plans (including acquisition targets) or any
portion or phase of any technical information, technique, method, process,
procedure, or technology used by the Company or any portion or phase of any
technical information, ideas, discoveries, designs, computer programs (including
source or object codes), processes, procedures, formulae or improvements of the
Company that is or are valuable (whether or not in written or tangible form) and
including all memoranda, notes, plans, reports, records, documents and other
evidence thereof and any other information of whatever nature gives the Company
an opportunity to obtain an advantage over its competitors who do not have
access or know-how to use such information shall be considered a "trade secret"
for the purposes of this Consulting Agreement.
5.2 OWNERSHIP OF TRADE SECRETS; ASSIGNMENT OF RIGHTS. Consultant hereby
agrees that all know-how, documents, reports, plans, proposals, marketing and
sales plans, client lists, client files and materials made by him or by the
Company are the property of the Company and shall not be used by him in any way
adverse to the Company's interests. Consultant shall not deliver, reproduce or
in any way allow such documents or things to be delivered or used by any third
party without specific direction or consent of the Board of Directors of the
Company. Consultant hereby assigns to the Company any rights which he may have
in any such trade secrets or proprietary information.
4
<PAGE>
6. AGREEMENT NOT TO COMPETE; AGREEMENT NOT TO BENEFIT.
6.1 AGREEMENT NOT TO COMPETE. In consideration of the compensation (and
other benefits) provided and to be provided to Consultant as set forth
hereunder, Consultant hereby covenants and agrees that during the Term and for a
period of six (6) months after the Termination Date (such period not to include
any period(s) of violation of this Section 6 or period(s) of time required for
litigation to enforce its provisions), Consultant will not, directly or
indirectly, engage in, enter into or participate in, at any place within the
United States of America, any business or commercial activity that competes with
or is reasonably likely to compete with or adversely affect the businesses or
services of the Company, either as an individual for his own account, or as a
partner or a joint venturer, or as an officer, director, independent contractor
or holder of more than a five percent equity interest in any other person, firm,
partnership or corporation, or as an employee, agent or salesperson for any
person.
6.2 AGREEMENT NOT TO BENEFIT. In consideration of the compensation (and
other benefits) provided and to be provided to Consultant as set forth
hereunder, Consultant covenants and agrees that during the Term and for a period
of six (6) months after the Termination Date (such period not to include any
period(s) of violation of this Section 6 or period(s) of time required for
litigation to enforce its provisions), Consultant will not, directly or
indirectly: (i) solicit, induce or influence, or otherwise have business contact
with, any person or entity who has, within the two-year period immediately prior
to the Effective Date, been a client, customer, supplier or service provider
(including, without limitation, a provider of radiology and/or consulting
services) of or to the Company, and with whom Consultant had any business
relationship or about whom Consultant acquired any significant knowledge during
the course of Consultant's employment by the Company, if such contact could
directly or indirectly divert business from or adversely affect the business of
the Company; (ii) interfere with the contractual relations between the Company
and any of its employees; or (iii) employ or cause to be employed in any
capacity, or retain or cause to be retained as a consultant, any person who was
employed by the Company at any time during the six (6) month period ended on the
Effective Date.
7. EMPLOYMENT AGREEMENT PROVISIONS INCORPORATED HEREIN BY REFERENCE. The
provisions of Section 9 (a) through (i), inclusive, of Consultant's Employment
Agreement, which covers INDEMNIFICATION, and the provisions of Section 4 (d) (A)
through (C), inclusive, of Consultant's Employment Agreement, which covers
CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY, are incorporated herein by reference
and made an integral part hereof in their entirety, PROVIDED THAT, for purposes
of this Consulting Agreement, the term "Executive" in each place where it
appears therein shall be replaced by and substituted with the term "Consultant"
herein and, PROVIDED FURTHER THAT, the scope of the provisions covering
INDEMNIFICATION herein shall be extended to cover Consultant's services to the
Company as a consultant under the terms of this Consulting Agreement.
8. INJUNCTIVE RELIEF. Consultant acknowledges and agrees that, in the event
of any breach or likely breach of any of the covenants of Sections 5 or 6
herein, the Company and any relevant affiliate(s) would incur damages in an
amount difficult to ascertain and/or be irreparably harmed and could not be made
whole solely by monetary damages. It is accordingly agreed that such persons, in
addition to any other remedy to which they may be entitled at law or in equity,
shall be entitled to injunctive relief in respect of such breach or likely
breach as may be ordered by any court of competent jurisdiction including, but
not limited to, an injunction restraining any violation of Sections 5 or 6
herein and without the proof of actual damages. It is intended to grant full
third party rights under this provision.
5
<PAGE>
9. INDEPENDENCE AND SEVERABILITY OF COVENANTS. Consultant acknowledges and
agrees that the covenants and other provisions set forth in Sections 5 and 6
herein are reasonable, including with respect to duration and subject matter,
and that he is receiving valuable and adequate consideration for such covenants
under this Consulting Agreement. The parties acknowledge that it is their
intention that all such covenants and provisions be enforceable to the fullest
extent possible under applicable law. If any of the provisions set forth in
Sections 5 or 6 are found to be unenforceable in any instance, such finding
shall not preclude any other enforcement of such provisions and reference is
made to Section 11. If any of the provisions set forth in Sections 5 or 6 are
found to be invalid, such finding or invalidity shall not effect the validity of
the remaining provisions and the provisions of Section 11 will apply.
10. ASSIGNMENT. This Consulting Agreement shall not be assigned or transferred
by either party hereto without the prior written consent of the other party.
This Consulting Agreement shall be binding upon and inure to the benefit of all
of the parties hereto and their respective permitted heirs, personal
representatives, successors and assigns.
11. SEVERABILITY/CONSTRUCTION. Nothing contained herein shall be construed to
require the commission of any act contrary to law. If any provision of this
Consulting Agreement, including all the covenants and agreements set forth
herein, or the application thereof to any person or circumstance, shall for any
reason and to any extent be unenforceable, including without limitation by
reason of such provision extending for too great a period of time or by reason
of its being too extensive in any other respect, such provision, to the specific
extent that it is unenforceable, shall be interpreted to extend only over the
maximum period of time and to the maximum extent as to which it is enforceable,
in order to effectuate the parties' intention, as represented hereby, to the
greatest extent possible. Any such interpretation shall have no effect on the
validity or enforceability of any remaining provision. If any material provision
or material portion of a material provision of this Consulting Agreement is
found to be void or invalid, the parties will use best efforts to maintain its
continuing effect, validity and enforceability in every other instance or, if
deemed necessary or appropriate by the party for whose benefit the provision was
intended, will endeavor to substitute a replacement having as far as possible
the same legal and economic effect.
12. GOVERNING LAW. This Consulting Agreement is made under and shall be
construed pursuant to the laws of the State of New Jersey, without regard to its
conflict-of-laws rules.
13. DISPUTE RESOLUTION.
(a) Without limiting the Company's rights and remedies set forth in
Section 8 herein, disputes relating to this Consulting Agreement shall be
settled by arbitration conducted in accordance with the CPR Non-Administered
Arbitration Rules, as more particularly described in
6
<PAGE>
this Section 10.4 (the "Arbitration Rules"). The arbitration shall be governed
by the United States Arbitration Act, 9 U.S.C. ss.ss.1-16, and (notwithstanding
anything herein to the contrary) judgment upon the award rendered by the
Arbitrator(s) may be entered by any court having competent jurisdiction. The
place of the arbitration shall be New York, New York.
(b) There will be three neutral arbitrators ("Arbitrators") who will be
practicing attorneys and will be selected as follows: one (1) by the Consultant,
one (1) by the Company, and one (1) by mutual agreement of the parties to the
arbitration and, in the absence of such agreement, will be chosen from the
professional staff of J.A.M.S./Endispute or, if it is not then in existence,
from the professional staff of another reputable dispute resolution firm agreed
to by the parties.
(c) The parties intend that the Arbitrators shall resolve any dispute
arising hereunder based upon the language of this Consulting Agreement and the
usual rules of contract interpretation. All awards and orders of the Arbitrators
may be enforced by any court of competent jurisdiction.
(d) The parties intend that the arbitration proceeding be conducted as
expeditiously as possible and that appropriate rights of discovery be granted to
each party to such arbitration (as determined by the Arbitrators). In that
regard, the parties to such arbitration agree to work together in good faith to
arrive upon mutually acceptable procedures regarding the time limits for, and
type and degree of, such rights of discovery and the periods of time within
which the matters submitted to arbitration must be heard and determined by the
Arbitrators. If the parties to such arbitration are unable to so agree, such
issues will be submitted to the Arbitrators for their determination. If proper
notice of any hearing has been given, the Arbitrators will have full power to
proceed to take evidence or to perform any other acts necessary to arbitrate the
matter in the absence of any party who fails to appear. The Arbitrators,
attorneys, parties to the arbitration, witnesses, experts, court reporters, or
other persons present at the arbitration shall agree in writing to maintain the
strict confidentiality of the arbitration proceedings.
(e) The parties to any arbitration, by written stipulation, may expand
or contract the rights, duties or obligations provided above, or otherwise
modify the arbitration procedures as suit their convenience, consistent with
what is otherwise permitted and feasible within the framework of the Arbitration
Rules.
(f) Any decision or award of the Arbitrators shall be final and binding
upon the parties to the arbitration proceeding, except to the extent otherwise
expressly provided by New Jersey law. The parties hereto hereby waive to the
extent permitted by law any rights to appeal or to a review of such award by any
court or tribunal. The parties agree that the award of the Arbitrators may be
enforced against the parties to the proceeding or their assets wherever they may
be found.
14. COUNTERPARTS. This Consulting Agreement may be executed in several
counterparts and all documents so executed shall constitute one agreement,
binding on all of the parties hereto, notwithstanding that all of the parties
did not sign the original or the same counterparts.
7
<PAGE>
15. ENTIRE AGREEMENT. This Consulting Agreement constitutes the entire
agreement and understanding of the parties with respect to the subject matter
hereof and supersedes all prior oral or written agreements, arrangements, and
understandings with respect thereto. No representation, promise, inducement,
statement or intention has been made by any party hereto that is not embodied
herein, and no party shall be bound or liable for any alleged representation,
promise, inducement, or statement not so set forth herein.
16. MODIFICATION. This Consulting Agreement may be modified, amended,
superseded, or canceled, and any of the terms, covenants, representations,
warranties or conditions hereof may be waived, only by a written instrument
executed by the party or parties to be bound by any such modification,
amendment, supersession, cancellation, or waiver.
17. WAIVER. The waiver by either of the parties, express or implied, of any
right under this Consulting Agreement or any failure to perform under this
Consulting Agreement by the other party, shall not constitute or be deemed as
a waiver of any other right under this Consulting Agreement or any other
failure to perform under this Consulting Agreement by the other party,
whether of a similar or dissimilar nature.
18. CUMULATIVE REMEDIES. Each and all of the several rights and remedies
provided in this Consulting Agreement, or by law or in equity, shall be
cumulative, and no one of them shall be exclusive of any other right or remedy,
and the exercise of any one or such rights or remedies shall not be deemed a
waiver of, or an election to exercise, any other such right or remedy.
19. HEADINGS. The section and other headings contained in this Consulting
Agreement are for reference purposes only and shall not in any way affect the
meaning and interpretation of this Consulting Agreement.
20. NOTICES. Any notice under this Consulting Agreement must be in writing,
may be telecopied, sent by express 24 hour guaranteed courier, or
hand-delivered, or may be served by depositing the same in the United States
mail, addressed to the party to be notified, postage-prepaid and registered or
certified with a return receipt requested. The addresses of the parties for the
receipt of notice shall be as follows:
If to the Company: If to Consultant:
Medical Resources, Inc. Duane C. Montopoli
125 State Street, Suite 200 108 Campion Road
Hackensack, NJ 07601 North Andover, MA 01845
Attn: CEO
Each notice given by registered or certified mail shall be deemed delivered and
effective on the date of delivery as shown on the return receipt, and each
notice delivered in any other manner shall be deemed to be effective as of the
time of actual delivery thereof. Each party may change its address for notice by
giving notice thereof in the manner provided above.
21. SURVIVAL. Any provision of this Consulting Agreement which imposes an
obligation after termination or expiration of this Consulting Agreement shall
survive the termination or expiration of this Consulting Agreement and be
binding on Consultant and the Company.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Consulting
Agreement to be executed as of the date first set forth above.
Medical Resources, Inc. Consultant
By: /s/ D. Gordon Strickland By: /s/ Duane C. Montopoli
------------------------ --------------------------
Name: D. Gordon Strickland Name: Duane C. Montopoli
Title: Chairman
9
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 333-4048) pertaining to the 1992, 1995 and 1996 Stock Option
Plans and Individual Officer and Director Stock Option Agreements and the
Registration Statement (Form S-8, No. 333-71017) pertaining to the 1998 Stock
Option Plan, 1998 Non-Employee Director Stock Option Plan, 1998 Employment
Incentive Option Plan, and the 1996 Stock Option Plan B of Medical Resources,
Inc. of our report dated March 2, 2000 (except for the third paragraph of
Note 2, as to which the date is March 29, 2000), with respect to the
consolidated financial statements and schedule of Medical Resources, Inc.,
included in the Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ ERNST & YOUNG LLP
---------------------
MetroPark, New Jersey
March 30, 2000
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