SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT 1934
Date of Report: November 12, 1996
US DIAGNOSTIC INC.
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(Exact name of registrant as specified in charter)
DELAWARE
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(State of other jurisdiction of incorporation)
1-13392 11-3146389
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(Commission File Number) (IRS Employer Identification No.)
777 South Flagler Drive, Suite 1201, East Tower, West Palm Beach, Florida 33401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no, including area code: (561) 832-0006
1
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
MEDICAL IMAGING CENTERS OF AMERICA, INC.
On November 12, 1996, the Company completed its previously announced merger (the
"Merger") with Medical Imaging Centers of America, Inc. ("MICA"). Pursuant to
the Merger, each outstanding share of MICA's common stock ("MICA Common Stock"),
was converted into a right to receive $11.75 in cash (the "Merger
Consideration"). Each option to purchase MICA Common Stock (each "MICA Option")
was cancelled and each holder of a MICA Option became entitled to a cash payment
equal to the product of the total number of shares subject to the MICA Option
and the excess of $11.75 over the exercise price per share of the MICA Common
Stock subject to the MICA Option.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
This amendment to Form 8-K previously filed on July 1, 1997 includes the
following financial statements and auditor's report.
(a) Financial Statements of Businesses Acquired.
Audited consolidated balance sheets of Medical Imaging Centers of
America, Inc. as of December 31, 1995 and 1994 and the related
consolidated statements of operations, shareholders' equity (net capital
deficiency) and cash flows for each of the three years in the period
ended December 31, 1995.
Unaudited Consolidated Financial Statements of Medical Imaging Centers
of America, Inc. as of and for the nine months ended September 30, 1996.
Report of Ernst & Young LLP, Independent Auditors
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned hereunto duly authorized.
US DIAGNOSTIC INC.
Dated: July 21, 1997 By: /s/ JOSEPH A. PAUL
----------------------------------------
Joseph A. Paul
Chief Executive Officer,
Chief Operating Officer and President
3
<PAGE>
REPORT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Medical Imaging Centers of America, Inc.
We have audited the accompanying consolidated balance sheets of Medical Imaging
Centers of America, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity (net capital
deficiency) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medical Imaging
Centers of America, Inc. at December 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
San Diego, California
February 2, 1996, except for Note 2
as to which the date is March 19, 1996
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
(in thousands except share information) 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents (includes restricted cash of
$422 in 1995 and $655 in 1994) $ 10,732 $ 8,524
Trade and notes receivable, net 7,711 9,524
Prepaid expenses and other current assets 725 1,550
--------------------------
Total current assets 19,168 19,598
Equipment and leasehold improvements, net 16,274 29,216
Equipment held for sale, net 800 400
Investment in and advances to unconsolidated entities, net 1,489 2,069
Intangible assets, net 1,087 1,269
Other assets 830 917
--------------------------
$ 39,648 $ 53,469
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Current liabilities:
Current portion long-term debt and capital lease obligations $ 11,161 $ 11,541
Current portion convertible subordinated debt 2,800 2,800
Accounts payable 1,107 2,062
Accrued compensation 697 1,493
Other accrued liabilities 3,066 3,430
--------------------------
Total current liabilities 18,831 21,326
Long-term debt and capital lease obligations 11,182 25,206
Minority interest in consolidated partnerships 1,222 1,598
Convertible subordinated debt 5,400 8,200
Commitments
Shareholders' equity (net capital deficiency):
Preferred stock, no par value, 5,000,000 shares authorized;
Series B preferred shares, no par value, 300,000 shares
authorized, no shares issued or outstanding --- ---
Common stock, no par value, 30,000,000 shares authorized;
2,479,460 and 2,426,645 shares issued and outstanding
at December 31, 1995 and 1994, respectively 54,691 54,473
Accumulated deficit (51,678) (57,334)
--------------------------
Total Shareholders' equity (net capital deficiency) 3,013 (2,861)
--------------------------
$ 39,648 $ 53,469
==========================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------
(in thousands except per share information) 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Medical services $43,192 $55,440 $ 65,786
Equipment and medical suite sales 3,345 1,866 3,011
------- ------- --------
Total revenues 46,537 57,306 68,797
COSTS AND EXPENSES:
Costs of medical services 25,387 33,693 42,786
Costs of equipment and medical suite sales 2,846 1,749 2,664
Marketing, general and administrative 2,773 5,550 7,872
Provision for doubtful accounts 1,059 1,343 2,643
Depreciation and amortization of equipment
and leasehold improvements 9,471 12,221 12,672
Amortization of intangibles and deferred costs 490 366 1,190
Equity in net income of unconsolidated entities (674) (708) (531)
Interest expense 3,557 5,258 6,459
Interest income (534) (454) (657)
Special charge -- -- 23,490
Gain on sale of assets (3,460) -- --
------- ------- --------
Total costs and expenses 40,915 59,018 98,588
------- ------- --------
Income (loss) before minority interest,
income taxes and extraordinary gain 5,622 (1,712) (29,791)
Minority interest in net (income) loss of
consolidated partnerships 214 (98) 178
------- ------- --------
Income (loss) before income taxes and extraordinary gain 5,836 (1,810) (29,613)
Income tax provision 180 -- --
------- ------- --------
Income (loss) before extraordinary gain 5,656 (1,810) (29,613)
Extraordinary gain -- 1,316 --
------- ------- --------
Net income (loss) $ 5,656 $ (494) $(29,613)
======= ======= ========
PRIMARY EARNINGS PER SHARE:
Income (loss) before extraordinary gain $ 2.19 $ (.75) $ (12.54)
Extraordinary gain $ -- $ .55 $ --
------- ------- --------
Net income (loss) $ 2.19 $ (.20) $ (12.54)
======= ======= ========
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) $ 1.96 $ (.20) $ (12.54)
======= ======= ========
SHARES USED IN PER SHARE AMOUNTS:
Primary 2,585 2,426 2,361
======= ======= ========
Fully Diluted 3,219 2,426 2,361
======= ======= ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
COMMON SHARES
------------------------------------------
ISSUED AND OUTSTANDING ISSUABLE
---------------------- ----------------- ACCUMULATED
(in thousands except per share information) SHARES AMOUNT SHARES AMOUNT DEFICIT
--------- -------- ------ ------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 2,361,085 $ 53,670 64,894 $ 800 $(27,227)
Net loss -- -- -- -- (29,613)
--------- -------- ------ ----- --------
Balance at December 31, 1993 2,361,085 53,670 64,894 800 (56,840)
Stock options exercised 666 3 -- -- --
Litigation settlement -
common shares issued 64,894 800 (64,894) (800) --
Net loss -- -- -- -- (494)
--------- -------- ------ ----- --------
Balance at December 31, 1994 2,426,645 54,473 -- -- $(57,334)
Stock options exercised 53,000 219 -- -- --
Cash paid for fractional shares resulting
from one-for-five reverse stock split (185) (1) -- -- --
Net income -- -- -- -- 5,656
--------- -------- ------ ----- --------
Balance at December 31, 1995 2,479,460 $ 54,691 -- $ -- $(51,678)
========= ======== ====== ===== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 5,656 $ (494) $(29,613)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 9,961 12,587 13,862
Amortization of deferred financing costs 97 135 135
Provision for doubtful accounts 1,059 1,343 2,643
Equity in net income of unconsolidated entities, net of distributions -- (430) (260)
Minority interest in net income (loss) of consolidated partnerships (214) 98 (178)
Net value of equipment sold 2,826 1,404 4,700
Gain on sale of Division assets (3,460) -- --
Extraordinary gain -- (1,316) --
Special charge -- -- 23,490
Change in assets and liabilities:
Decrease (increase) in trade receivables 1,081 1,937 (1,210)
Decrease in prepaid expenses and other current assets 823 346 1,125
Decrease in accounts payable and other accrued liabilities (1,623) (634) (2,180)
Decrease in accrued compensation (796) (61) (913)
Decrease in other -- -- 494
-------- -------- --------
Net cash provided by operating activities 15,410 14,915 12,095
INVESTING ACTIVITIES:
Proceeds from sale of Division assets 3,746 -- --
Capital expenditures (1,282) (3,065) (3,286)
Decrease in notes receivable -- 200 114
Decrease in investment in and advances to
unconsolidated entities, net 475 368 197
Acquisitions, net of cash (312) (657) --
Proceeds from the sale of long-term investments -- -- 2,750
Other, net (1) 80 387
-------- -------- --------
Net cash provided by (used in) investing activities 2,626 (3,074) 162
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations (15,901) (11,904) (15,510)
Proceeds from the issuance of long-term debt -- 1,123 7,089
Distribution to minority interests (151) (590) (459)
Other, net 224 (128) (57)
-------- -------- --------
Net cash used in financing activities (15,828) (11,499) (8,937)
-------- -------- --------
Net increase in cash and cash equivalents 2,208 342 3,320
Cash and cash equivalents at beginning of year 8,524 8,182 4,862
-------- -------- --------
Cash and cash equivalents at end of year $ 10,732 $ 8,524 $ 8,182
======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEAR ENDED DECEMBER 31,
----------------------------------------
(in thousands) 1995 1994 1993
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<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $3,488 $5,123 $5,918
====== ====== ======
Income taxes paid $ 180 $ 67 $ 88
====== ====== ======
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Additions to capital lease obligations $1,274 $8,545 $7,481
====== ====== ======
Retirement of debt and termination of capital lease
obligations in exchange for equipment $1,570 $7,075 $7,655
====== ====== ======
Assignment of debt related to sale of Division assets $1,047 $ -- $ --
====== ====== ======
Acquisitions:
Fair value of assets acquired, other than cash $ 11 $ 266 $ --
Excess of purchase price over fair value 301 875 --
Notes assumed -- (484) --
------ ------ ------
Acquisitions, net of cash $ 312 $ 657 $ --
====== ====== ======
</TABLE>
See accompanying notes.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Medical Imaging Centers of America, Inc.
("MICA" or the "Company") is a California corporation which provides medical
diagnostic imaging services to physicians, managed care providers and hospitals
nationwide. These services are provided to patients under DMC arrangements and
to hospitals primarily under fee-for-service arrangements which account for
approximately 61% and 39%, respectively, of medical services revenues.
PRINCIPLES OF CONSOLIDATION - The accompanying financial statements
consolidate the accounts of the Company, its wholly-owned subsidiaries, and
certain majority controlled Diagnostic Medical Centers ("DMCs"). Investments in
DMCs for which the Company does not have a controlling majority ownership are
accounted for using the equity method. All significant intercompany accounts
and transactions have been eliminated in consolidation.
REVENUES - Revenue is recognized when services are provided through
DMCs, fee-for-service arrangements with hospitals and management agreements
with unconsolidated and managed DMCs.
CASH AND CASH EQUIVALENTS - The Company considers cash equivalents to
be those instruments with original maturities of three months or less. At
December 31, 1995 and 1994, cash restricted for use in DMC operations was
$422,000 and $655,000, respectively.
NET INCOME (LOSS) PER SHARE - Net income (loss) per common share is
computed on the basis of the weighted average number of common shares
outstanding and common share equivalents and convertible debentures if
dilutive. The Company effected a one-for-five reverse stock split for
shareholders of record on October 16, 1995. All per share data has been
restated for all periods presented to give effect to the reverse stock split.
The Company's Common Stock trades on the OTC Bulletin Board under the new
symbol "MIGA".
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform with the 1995 presentation.
OTHER - See Notes 6, 7 and 11 for accounting policies related to
depreciation, amortization and income taxes.
2. SETTLEMENT AGREEMENT
On January 2, 1996, Steel Partners II, L.P. ("Steel"), which as of
March 19, 1996 owned 19.8% of the Company's outstanding common stock, filed
proxy materials with the Securities and Exchange Commission to replace the
current Board of Directors with its own representatives. The Company held a
special meeting of shareholders on February 26, 1996. On March 19, 1996, the
Company and Steel entered into an Agreement of Compromise and Settlement (the
"Settlement Agreement"). The Settlement Agreement calls for the dismissal of
all pending litigation and provides for mutual releases. The Settlement
Agreement also provides that the February 26, 1996 Special Meeting of
Shareholders will be adjourned without any final report from the Inspector of
Elections, leaving the current Board of Directors in place.
Pursuant to the Settlement Agreement, the Company is required to
initiate a process to sell or merge the Company ("Auction Process"). If the
process does not result in an announcement of a sale or merger transaction by
June 19, 1996, a definitive agreement for a sale or merger transaction by July
19, 1996, or the consummation of a sale or merger transaction by November 19,
1996, the current members of the Company's Board of Directors will resign from
their positions and be replaced by designees of Steel.
The Settlement Agreement calls for the company to amend the severance
agreements of the Company's chief executive officer and chief financial officer
to provide that the Company's failure to meet such deadlines shall constitute
an "involuntary termination" for purposes of their respective severance
packages.
<PAGE>
Steel has agreed that it will not acquire beneficial ownership of any
of the Company's securities during the Auction Process.
The Settlement Agreement also requires the Company to redeem all
outstanding Rights issued pursuant to the Company's shareholder rights plan and
prohibits the Company from enacting a new shareholder rights plan without the
prior written consent of Steel (see Note 12).
Simultaneous with its entering into the settlement, the Company
entered into a Standstill Agreement with Arrowhead Holdings Corporation, a
Delaware corporation ("Arrowhead"), containing substantially the same terms as
the Settlement Agreement with Steel.
The Company estimates that the total expenditures for such
solicitation, including the fees and expenses of the Company's attorneys,
financial advisors, public relations firm and proxy solicitors, excluding
salaries and wages of its officers and employees and including the amounts
reimbursed to Steel, will be approximately $1,325,000, and will be recorded as
a charge to operations in the first quarter of 1996. No amounts have been
reflected in the financial statements as of December 31, 1995 with regard to
the Company's Settlement Agreement and proxy solicitation.
3. OPERATIONS
The Company had cash and cash equivalents of $10.7 million and working
capital of $337,000 as of December 31, 1995. Although there can be no
assurances, management believes that its cash on hand at year end and cashflow
from future operations will be sufficient to meet its obligations as they come
due.
The successful operation of the Company is dependent on the effects of
certain trends and legislation affecting the healthcare industry. The Omnibus
Budget Reconciliation Act of 1993 ("Stark II") limits referrals by physicians
of Medicare/Medicaid patients to other providers in which the physician has an
ownership interest. The Company has a limited number of limited partnership
units of consolidated partnerships owned by referring physicians. The Company
is in the process of acquiring these units and does not anticipate such
acquisitions will require a material amount of the Company's capital. Certain
states have also enacted legislation which similarly limits patient referrals,
limits the fees which a patient can be charged or requires state approval for
the expansion of healthcare facilities. The Company believes that the effects
on its operations as a result of these legislative actions will not be
material. In addition to state and federal governments, the public has
recently focused significant attention on reforming the healthcare system in
the United States. Within the past two years, a broad range of healthcare
reform measures have been introduced in Congress and in certain state
legislatures. Certain proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of healthcare costs that could include a freeze on prices
charged by physicians, hospitals or other healthcare providers, and greater
state flexibility in the administration of Medicaid, could adversely affect the
Company. There can be no assurance that currently proposed or future
healthcare programs, regulations or policies will not have a material adverse
effect on the Company's operating results.
On January 16, 1996 the Company entered into an agreement with a
creditor to pay off a promissory note. The Company paid $1,425,000 cash and
applied $912,000 in proceeds due from the exercise of a warrant to purchase
160,000 shares of MICA's Common Stock as payment in full to retire the note.
In connection with this transaction the Company issued an additional warrant to
purchase 60,000 shares of the Company's Common Stock at an exercise price of
$8.50 per share which expires on December 31, 1998. At the date of grant, the
Company allocated $200,000 to the cost of the warrant which was determined to
be its fair value. The Company recorded a gain of $517,000 from the settlement
of this obligation in January 1996.
<PAGE>
4. RECEIVABLES
Long-term receivables, which include DMC trade receivables which are
not expected to be collected within one year, are included in Other assets on
the accompanying consolidated balance sheets. The Company's trade receivables
are primarily from hospitals and third party payor groups operating throughout
the United States.
DECEMBER 31,
--------------------
(in thousands) 1995 1994
----------------------------------------------------------------------
Trade accounts receivable less allowance of
$4,503 in 1995 and $6,046 in 1994 $ 8,431 $10,284
Less current trade and receivables (7,711) (9,524)
------- -------
Long-term receivables $ 720 $ 760
======= =======
5. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company has investments in certain DMCs which are accounted for
using the equity method. Unaudited summarized combined financial information
for the unconsolidated DMCs is as follows:
BALANCE SHEETS
DECEMBER 31,
--------------------
(in thousands) 1995 1994
----------------------------------------------------------------------
Current assets $4,387 $ 5,288
Equipment and leasehold improvements, net 3,909 5,432
Other assets 118 126
------ -------
$8,414 $10,846
====== =======
Current liabilities $2,879 $ 2,388
Advances from MICA 2,008 2,285
Long-term debt and capital lease obligations 2,198 4,020
Partners' equity 1,329 2,153
------ -------
$8,414 $10,846
====== =======
The Company's share of partners equity in unconsolidated DMCs is
$903,000 and $1,393,000 at December 31, 1995 and 1994, respectively. The Company
has recorded valuation allowances at December 31, 1995 and 1994 of $1,788,000
against its advances to unconsolidated entities of $2,375,000 and $2,464,000,
respectively.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
(in thousands) 1995 1994 1993
-----------------------------------------------------------------------
Revenues $10,431 $11,279 $10,986
Costs and expenses 7,550 8,587 8,657
------- ------- -------
Net income $ 2,881 $ 2,692 $ 2,329
======= ======= =======
The Company's revenues include $629,000, $744,000 and $737,000 for the
years ended 1995, 1994 and 1993 respectively from management fees from the
unconsolidated DMCs.
The Company has guaranteed $3,899,000 in capital lease and debt
obligations of its unconsolidated DMCs with terms through 2000.
<PAGE>
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at the lower of cost
or net realizable value and are summarized as follows:
DECEMBER 31,
--------------------
(in thousands) 1995 1994
-----------------------------------------------------------------------
Equipment and furniture, net of valuation reserve
of $5,206 in 1995 and $6,684 in 1994 $ 38,865 $59,683
Leasehold improvements 2,577 3,207
-------- -------
$ 41,442 $62,890
Accumulated depreciation and amortization (25,168) (33,674)
-------- -------
$ 16,274 $29,216
======== =======
Depreciation and amortization are calculated on a straight-line basis
over the estimated useful life of the asset or over the lease term, if shorter.
Lease terms are generally five to seven years for equipment and furniture and
fifteen years for leasehold improvements. Equipment includes assets financed
through capital leases of $19,040,000 and $27,965,000 with accumulated
amortization of $7,949,000 and $10,825,000 at December 31, 1995 and 1994,
respectively. The Company periodically reviews its equipment portfolio to
determine that its carrying value is the lower of cost or net realizable value.
Management intends to sell certain equipment used during the year in
the Company's on-going business operations. Accordingly, this equipment has
been classified as equipment held for sale at its estimated realizable value at
December 31, 1995 and 1994.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
(in thousands) 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C>
Excess of purchase price over net assets acquired, less
accumulated amortization of $466 in 1995 and $142 in 1994 $ 824 $ 742
Deferred costs, less accumulated amortization
of $1,179 in 1995 and $1,464 in 1994 263 527
------ ------
$1,087 $1,269
====== ======
</TABLE>
During 1995, the Company acquired certain assets of one imaging center
and additional limited partner units in certain of its DMCs for $312,000 in
cash. Of the total purchase price, $301,000 was allocated to goodwill and is
being amortized using the straight-line method over the estimated useful life
of the assets which is five years. The Company's results of operations were
not materially affected as a result of these acquisitions.
During 1994, the Company acquired certain assets of two imaging centers
and additional limited partner units in certain of its DMCs for $657,000 in cash
and $484,000 in promissory notes. Of the total purchase price, $875,000 was
allocated to goodwill and is being amortized using the straight-line method over
the estimated useful life of the assets which is three years. The Company's
results of operations were not materially affected as a result of these
acquisitions.
The Company periodically reviews goodwill to assess recoverability
based upon projected undiscounted cash flows to be received from operating
income. If such cash flows are less than the carrying value of goodwill the
difference is charged to expense.
Deferred costs primarily include debt financing costs incurred in
connection with the issuance of debentures which have been deferred and are
being amortized on a weighted average basis over the term of the indebtedness.
<PAGE>
8. DEBT
Long-term debt for equipment financing consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
(in thousands) 1995 1994
---------------------------------------------------------------------------------------------
<S> <C> <C>
Capital lease obligations - weighted average interest rate of
approximately 9%; due at various dates through 2000 $11,937 $18,580
Equipment installment loans payable - weighted average interest rate of
approximately 7%; due at various dates through 2000 10,406 17,567
Note payable to a bank - effective interest rate of 10.5%;
final payment made on October 23, 1995 -- 600
------- -------
22,343 36,747
Less current maturities (11,161) (11,541)
------- -------
$11,182 $25,206
======= =======
</TABLE>
Maturities on notes payable and long-term debt over the next five
years are as follows:
(in thousands)
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------
1996 $ 7,210
1997 1,774
1998 886
1999 481
2000 55
-------
$10,406
=======
The Company finances certain equipment under capital leases. These
capital leases generally have terms of five to seven years. Future minimum
payments under capital leases are as follows:
(in thousands)
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------
1996 $ 4,787
1997 3,767
1998 3,059
1999 1,925
2000 78
-------
Total minimum lease payments 13,616
Amounts representing interest (1,679)
-------
Present value of future minimum lease payments 11,937
Less amounts due in one year (3,951)
-------
Long-term capital lease obligations $ 7,986
=======
<PAGE>
9. CONVERTIBLE SUBORDINATED DEBT
Convertible subordinated debentures are due in 1999 with interest
payable semi-annually at 6%. The debentures are convertible into MICA Common
Stock at $15 per share and may be redeemed by the Company if the closing bid
price of the Company's Common Stock on any 20 consecutive trading days has been
at least $22.50 per share. The Company is required to redeem the debentures on
April 30 as follows: 1996 - $2,800,000; and 1997 - $2,600,000. The final payment
of $2,800,000 is due April 30, 1999. The indenture relating to this financing
contains restrictions on the payment of cash dividends based upon an
accumulative net income test with certain adjustments. The indenture also has
limitations on the reacquisition of shares and requires a Minimum Consolidated
Shareholders Equity. In addition, the Company is obligated to offer to prepay
the Debentures in the event of a "change in control" of the Company. "Change in
control" is defined to include the acquisition by any person or group of persons
of the power to elect, appoint or cause the election of at least a majority of
the members of the Board of Directors. In light of the favorable interest rate
the Company currently is paying on the Debentures and the fact that the
conversion price is significantly above the current market price of the
Company's Common Stock, management believes that most, if not all, of the
holders of the Debentures would elect prepayment of their Debentures in the
event of a change in control (see Note 2). At December 31, 1995, the Company is
in compliance with all debt covenants. In February of 1994, the convertible
subordinated debenture holders agreed to exclude the 1993 non-cash charge of
approximately $21,500,000 related to goodwill from the definition of Minimum
Shareholders Equity. In return, the Company agreed to an increase in the Minimum
Shareholders Equity covenant from $5,190,000 to $10,000,000.
10. COMMITMENTS
The Company leases its facilities and certain equipment under
operating lease agreements with terms ranging from three to twenty years.
Certain facility lease agreements provide for rent increases based on the
increases in the Consumer Price Index and operating costs. Also, the Company
has the option to renew certain facility leases for additional terms varying
from five to ten years.
The Company's consolidated DMCs have entered into multi-year equipment
maintenance agreements. Future minimum payments under operating leases and
equipment maintenance agreements are as follows:
(in thousands)
-----------------------------------------------------------------------
1996 $ 5,031
1997 3,750
1998 3,166
1999 2,392
2000 1,340
Later years 574
-------
Total minimum payments $16,253
=======
Rent expense under operating leases totaled $5,362,000, $8,263,000 and
$11,509,000 for the years ended December 31, 1995, 1994 and 1993, respectively,
and is included in Costs of medical services in the Company's consolidated
statements of operations.
<PAGE>
11. INCOME TAXES
The Company accounts for income taxes using FAS Statement No. 109,
Accounting for Income Taxes. Statement 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, Statement 109 generally considers all expected future events
other than enactments of changes in the tax law or rates.
At December 31, 1995, the Company had Federal net operating loss
carryforwards of approximately $21,837,000 for income tax purposes that expire
in 2008. The Company has investment tax credit carryforwards of approximately
$418,000 which begin to expire in 1999. In addition, the Company has a Federal
alternative minimum tax credit carryforward of approximately $166,000 which has
no expiration date. In accordance with the Internal Revenue Code, the Company's
use of its net operating loss carryforwards could be limited in the event of
certain cumulative changes in the Company's stock ownership. For financial
reporting purposes, a valuation allowance of approximately $11,761,000 has been
recognized to offset the deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
DECEMBER 31,
---------------------
(in thousands) 1995 1994
-----------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 7,643 $ 10,655
Valuation reserves 4,386 5,160
Other 3,830 4,308
-------- --------
Total deferred tax assets 15,859 20,123
Valuation allowance for deferred tax assets (11,761) (14,156)
-------- --------
Net deferred tax assets 4,098 5,967
-------- --------
Deferred tax liabilities:
Tax over financial reporting depreciation 4,098 5,967
-------- --------
Total deferred tax liabilities 4,098 5,967
-------- --------
Net deferred tax liabilities $ -- $ --
======== ========
For the year ended 1995, MICA provided $120,000 in Federal tax related
to alternative minimum tax and $60,000 related to state income tax. No income
taxes were provided in 1994 or 1993.
The reconciliation of income tax computed at the U.S. federal
statutory tax rates to the income tax provision is as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993
----------------------------------------------------------------------
Federal statutory tax (benefit) rate 34.0% (34.0%) (34.0%)
Limitation of benefit on net operating loss -- 32.3 16.6
Benefit of loss carryforwards (32.1) -- --
Non-deductible amortization expense -- -- 17.4
State tax, net of federal income taxes 1.0 -- --
Other .2 1.7 --
----- ----- -----
Effective tax rate 3.1% --% --%
===== ===== =====
<PAGE>
12. SHAREHOLDERS EQUITY
COMMON STOCK - At December 31, 1995, the Company had reserved
1,113,001 shares of Common Stock for issuance in connection with the exercise
of outstanding stock options and warrants and the conversion of debentures.
In March 1993, the United States District Court for the Southern
District of California approved a settlement of a class action lawsuit brought
in 1991 against the Company and certain former officers. The settlement
provided for the Company to issue 64,894 shares (after giving effect to the
one-for-five reverse stock split which occurred in 1995) of its Common Stock at
an agreed upon value of $800,000 and for the insurers of the individual
defendants to pay $2,650,000. On January 3, 1994, the Company issued 64,894
shares related to the litigation settlement.
PREFERRED STOCK-SERIES B - In October 1991, the Company's Board of
Directors authorized 300,000 shares of Series B Preferred Stock without par
value in connection with the Company's entering into a Rights Agreement. Each
share of Series B Preferred Stock entitled the holder thereof to 100 votes on
all matters submitted to a vote of the shareholders. Such shares of Series B
Preferred Stock were to be issued pursuant to the Rights Agreement at a ratio
of one one-hundredths of a share per Right upon the occurrence of certain event
and upon the Right holder's payment of an exercise price.
On March 19, 1996, the Board of Directors ordered the redemption of
all outstanding Rights so that no holder of Rights could exercise such Rights
and no shares of Series B Preferred Stock could be issued in connection with
the Rights Agreement. For a more detailed description of the Rights Agreement
and the Board of Directors' actions in connection therewith, see "Preferred
Stock Purchase Rights."
WARRANTS - The Company issues warrants primarily to directors,
underwriters and consultants for various services. Warrants are generally
granted at prices equal to the fair market value of the shares on the date of
grant. At year end 315,500 warrants were exercisable. In August 1995 a third
party forfeited a warrant to purchase 300,000 shares of the Company's Common
Stock pursuant to an agreement by the Company to pay $450,000. Warrant
activity during 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
---------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1992 78,200 $13.75 - $68.15
Granted 487,500 2.50 - 5.70
Forfeited (16,200) 48.75 - 68.15
------- ----------------
Outstanding at December 31, 1993 549,500 2.50 - 21.90
Granted 7,000 2.81
Forfeited (41,000) 13.75 - 21.90
------- ----------------
Outstanding at December 31, 1994 515,500 2.50 - 18.75
Granted 107,000 4.05 - 7.81
Forfeited (307,000) 5.70 - 18.75
------- ----------------
Outstanding at December 31, 1995 315,500 $2.50 - $18.75
======= ================
</TABLE>
PREFERRED STOCK PURCHASE RIGHTS
In October 1991, the Company's Board of Directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each share of
Company Common Stock ("Common Share") outstanding at the close of business on
October 18, 1991 (the "Record Date"). Each Right entitled the registered holder
to purchase from the Company one one-hundredth of a share of Series B Preferred
Stock, no par value, at a purchase price of thirty-five dollars ($35.00) per one
one-hundredth of a Preferred Share, subject to adjustment. The Board of
Directors also authorized and directed the issuance of one Right with respect to
each Common Share that should become outstanding between the Record Date and the
earliest of the Distribution Date (as defined below), the date the Rights are
redeemed and the date the Rights expire.
<PAGE>
The Rights Agreement pursuant to which Rights were issued provided
that Rights would not be exercisable until such time as the Company issued
separate Right Certificates to the holders of Rights on a "Distribution Date,"
a date ten days after a public announcement that the dilutive provisions of the
Rights Agreement had been triggered. The Rights Agreement further provided
that the Board of Directors could redeem the Rights in whole, but not in part,
at a price of $.01 per Right and that the holder of Rights would have no rights
as a shareholder of the Company until he exercised such Rights.
On January 10, 1996, the Company's Board of Directors approved certain
amendments to the Rights Plan to provide greater flexibility for the Company
and to take into consideration a one-for-five reverse stock split effected by
the Company in October 1995. The Rights Agreement, as amended by the First
Amendment to Rights Agreement, made the determination of whether the dilutive
provisions of the Rights Agreement had been triggered dependent on a public
announcement by the Company or by a shareholder that the shareholder's
beneficial ownership of Common Stock has risen above 20% of the total issued
and outstanding shares of Common Stock. In contrast, the original Rights
Agreement made such determination automatic upon a shareholder reaching the 20%
threshold. By making the triggering of the rights dependent on a public
announcement, the Company eliminated the possibility that it might face a
situation in which the rights would be activated and the Board would not have
an opportunity to redeem the rights. The amendments approved by the Board of
Directors also changed the redemption price from $.01 to $.05 to reflect the
one-for-five reverse stock split in October of 1995.
On March 1, 1996, the Company announced, based on a report from a
Special Committee of the Board of Directors, that a group of shareholders which
included Steel Partners II, L.P. and Steel Partners Associates had acquired in
excess of 20% of the outstanding Common Stock of the Company and that the
dilutive provisions of Rights Agreement had been triggered. The Company also
announced that it had approved a Second Amendment to the Rights Agreement which
shortened from ten days to seven days the period during which the Board of
Directors could redeem the Rights following the public announcement that a
shareholder or a group of shareholders had triggered the dilutive provisions of
the Rights Agreement. The Company also reduced from ten days to seven days the
period between the public announcement of the triggering of the dilution
provisions and the Distribution Date.
On March 7, 1996, the Board of Directors approved a Third Amendment to
the Rights Agreement which extended until March 12, 1996 at 11:59 p.m. Pacific
Standard Time the period during which the Company could redeem the Rights and
following which the Company could distribute separate Right Certificates. The
Company extended the Distribution Date and the time for redemption of the
Rights once again to March 19, 1996 at 11:59 p.m. PST by way of a Fourth
Amendment to the Rights Agreement dated as of March 11, 1996.
On March 19, 1996, the Company announced that its Board of Directors
had ordered the redemption of all outstanding Rights as part of the Agreement
of Compromise and Settlement between the Company and certain of its affiliates,
on the one hand, and Steel Partners II, L.P. and certain of its affiliates, on
the other hand (the "Settlement Agreement") (see Note 2 for a description of
the Settlement Agreement). The Company set March 29, 1996 as the record date
for determining the holders of rights entitled to payment of the $.05 per share
Redemption Price and April 8, 1996 as the date for payment of the Redemption
Price. The Company anticipates that it will be required to pay $134,000 in the
aggregate to holders of Rights in order to effect the redemption of all
outstanding Rights.
13. RETIREMENT PLAN AND STOCK OPTIONS
RETIREMENT PLAN - Under Section 401(k) of the Internal Revenue Code
the Company instituted a tax deferred retirement plan (the "TDRP") for the
benefit of all employees meeting certain minimum eligibility requirements.
Under the TDRP, an employee may defer up to 10% of pre-tax earnings, subject to
certain limitations, and contribute it to a trusteed plan. The Company will
match 50% of an employee s deferred salary up to a maximum of 6% of gross pay.
The Company's matching contributions vest over a five-year period. For the
years ended December 31, 1995, 1994 and 1993, the Company contributed $118,000,
$101,000 and $135,000, respectively, to match employee contributions.
<PAGE>
STOCK OPTIONS - The Company has been authorized to issue 489,000
shares of Common Stock to certain key employees under its Stock Option Plan
adopted in 1985 and 1994. Options are granted at prices equal to the fair
market value of the shares at the date of grant and are usually exercisable in
cumulative annual increments each year, commencing one year after the date of
grant. Activity under the Company's stock option plans during 1995 and 1994
are summarized as follows:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
---------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1992 137,867 $13.75 - $21.90
Granted 122,800 3.13 - 4.40
Forfeited (105,967) 3.13 - 21.90
------- ----------------
Outstanding at December 31, 1993 154,700 3.13 - 21.90
Granted 160,800 2.35 - 3.60
Exercised (666) 3.13
Forfeited (98,134) 2.35 - 21.90
------- ----------------
Outstanding at December 31, 1994 216,700 2.35 - 21.90
Granted 121,800 7.81
Exercised (53,000) 2.35 - 3.44
Forfeited (34,666) 2.35 - 21.90
------- ----------------
Outstanding at December 31, 1995 250,834 $2.35 - $21.90
======= ================
</TABLE>
Options exercisable at December 31, 1995 totaled 146,694 and shares
available for future grant at year end totaled 71,052.
14. SPECIAL CHARGES
Operating results in 1993 include a non-cash charge of approximately
$21,500,000 to write off goodwill associated with prior years acquisitions and
a non-cash charge of $2,000,000 to increase reserves established to reflect
uncertainty regarding the realization of certain other assets.
15. EXTRAORDINARY GAIN
The Company financed an equipment acquisition for one of its managed
DMCs. The operations of the DMC were unsuccessful and foreclosure proceedings
were initiated by the lender. In mitigation of damages, the underlying lender
arranged for the sale of the unit which resulted in the forgiveness of MICA's
indebtedness. In 1994, the Company recorded a non-cash extraordinary gain of
$1.3 million resulting from the forgiveness of debt related to certain MRI
equipment.
16. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Keith R. Burnett, a director of the Company, is a principal and
officer of Magnetic Imaging Medical Group ("MIMG"), which provides radiology
and other medical services for the Company's Diagnostic Medical Centers located
in Long Beach, Huntington Beach, Laguna Niguel and Downey, California. MIMG is
a Co-General Partner of the center in Long Beach. Dr. Burnett serves as the
Medical Director for the facilities in Huntington Beach and Laguna Niguel. The
Management, Licensing and Facilities Agreements between the respective Centers
and MIMG ("Agreements") provide that MICA will receive for services rendered:
77.5% of the revenues collected at Long Beach Medical Imaging
<PAGE>
Clinic, 80% of the revenues collected at Medical Imaging Center of Huntington
Beach and Laguna Niguel MRI Center, and 82% at Downey MRI Center. Pursuant to
the Agreements, the balance of the amounts collected is retained by MIMG as its
fee. In 1995, the Company's share of revenues collected from the four centers
was $1,669,000, $1,748,000, $783,000 and $834,000, respectively; MIMG's share
of the revenues collected was $452,000, $413,000, $169,000 and $208,000,
respectively.
17. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. ("SFAS") 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", effective for fiscal years beginning after December 15, 1995. SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company does not believe, based on
current circumstances, the effect of adoption of SFAS 121 will be material.
In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation", effective for fiscal years
beginning after December 15, 1995. SFAS 123 establishes the fair value based
method of accounting for stock-based compensation arrangements, under which
compensation cost is determined using the fair value of the stock option at the
grant date and the number of options vested, and is recognized over the periods
in which the related services are rendered. If the Company were to retain its
current intrinsic value based method, as allowed by SFAS 123, it will be
required to disclose the pro forma effect of adopting the fair value based
method. To date, the Company has not made a decision to adopt the fair value
based method.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
SEPTEMBER 30, 1996
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents (includes restricted cash of $451) $ 5,224
Trade and notes receivable, net of allowance for doubtful accounts
of $4,053 7,473
Prepaid expenses and other current assets 775
--------
Total current assets 13,472
Equipment and leasehold improvements, net of accumulated
depreciation and amortization of $18,927 12,460
Equipment held for sale, net of accumulated depreciation
of $1,548 200
Investment in and advances to unconsolidated entities, net of reserves
of $1,845 1,494
Intangible assets, net of accumulated amortization of
$1,845 710
Other assets 790
--------
$ 29,126
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion long-term debt and capital lease obligations $ 5,123
Current portion convertible subordinated debt 2,600
Accounts payable 969
Accrued compensation 510
Other accrued liabilities 1,950
--------
Total current liabilities 11,152
Long-term debt and capital lease obligations 7,253
Minority interest in consolidated partnerships 1,090
Convertible subordinated debt 2,800
Commitments
Shareholders' Equity:
Preferred stock, no par value, 5,000,000 shares authorized; Series B
preferred shares, no par value, 300,000 shares
authorized, no shares issued or outstanding --
Common stock, no par value, 30,000,000 shares authorized;
2,695,251 shares issued and outstanding 55,996
Accumulated deficit (49,165)
--------
Total shareholders' equity 6,831
--------
29,126
========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS EXCEPT PER SHARE INFORMATION) 1996 1995
---- ----
<S> <C> <C>
REVENUES:
Medical services $ 26,818 $ 33,804
Equipment and medical suite sales 393 3,278
-------- --------
Total revenues 27,211 37,082
COSTS AND EXPENSES:
Costs of medical services 15,533 20,306
Costs of equipment and medical suite sales 99 2,779
Marketing, general and administrative 2,508 2,259
Provision for doubtful accounts 432 688
Depreciation and amortization of equipment
and leasehold improvements 4,461 7,316
Amortization of intangibles 305 364
Equity in net income of unconsolidated entities (614) (578)
Gain on disposal of equipment (382) --
Gain on sale of assets -- (3,460)
Interest expense 1,411 2,939
Interest income (267) (381)
Special charge 1,325 --
-------- --------
Total costs and expenses 24,811 32,232
-------- --------
Income before minority interest and extraordinary gain 2,400 4,850
Minority interest in net (income) loss of
consolidated partnerships (73) 246
-------- --------
Income before income taxes and extraordinary gain 2,327 5,096
Income tax provision 63 --
-------- --------
Income before extraordinary gain 2,264 5,096
Extraordinary gain, net of tax 382 --
-------- --------
Net income $ 2,646 $ 5,096
======== ========
PRIMARY EARNINGS PER SHARE:
Income before extraordinary gain $ 0.80 $ 1.94
======== ========
Extraordinary gain $ 0.13 $ ---
======== ========
Net income $ 0.93 $ 1.94
======== ========
FULLY DILUTED EARNINGS PER SHARE:
Net income $ 0.91 $ 1.72
======== ========
SHARES USED IN PER SHARE AMOUNTS:
Primary 2,842 2,625
======== ========
Fully diluted 3,298 3,254
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS) 1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,646 $ 5,096
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,766 7,680
Amortization of deferred financing costs 54 79
Provision for doubtful accounts 432 688
Equity in net income of unconsolidated partnerships (240) ---
Minority interest in net income (loss) of consolidated partnerships 73 (246)
Net value of equipment sold 158 4,093
Extraordinary gain from debt forgiveness (517) --
Gain on disposal of equipment (382) --
Change in assets and liabilities:
(Increase) decrease in trade receivables (194) 1,222
(Increase) decrease in prepaid expenses and other current assets (50) 675
Decrease in accounts payable and other accrued liabilities (1,254) (132)
Decrease in accrued compensation (187) (964)
-------- --------
Net cash provided by operating activities 5,305 18,191
INVESTING ACTIVITIES:
Capital expenditures (324) (640)
Decrease in investment in and advances to unconsolidated entities, net 235 255
Cost of acquisitions (205) (60)
Other, net 40 (3)
-------- --------
Net cash used in investing activities (254) (448)
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations (10,619) (15,785)
Distribution to minority interests -- (151)
Redemption of Shareholder Rights (133) --
Other, net 193 189
-------- --------
Net cash used in financing activities (10,559) (15,747)
-------- --------
Net (decrease) increase in cash and cash equivalents (5,508) 1,996
Cash and cash equivalents at beginning of period 10,732 8,524
-------- --------
Cash and cash equivalents at end of period $ 5,224 $ 10,520
======== ========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 1,304 $ 2,764
======== ========
Income taxes paid $ 230 $ 161
======== ========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additions to capital lease and long-term debt obligations $ 252 $ 1,112
======== ========
Retirement of debt and termination of capital lease obligations $ 2,400 $ 771
======== ========
Net value of equipment and intangible
assets disposed $ 389 $ ---
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON SHARES
ISSUED AND OUTSTANDING ACCUMULATED
(IN THOUSANDS EXCEPT SHARE INFORMATION) SHARES AMOUNT DEFICIT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 2,479,460 $ 54,691 $ (51,678)
Proceeds from issuance of common stock
purchase warrants 160,000 912 --
Fair value assigned to warrants issued in
connection with debt forgiveness -- 200 --
Stock options exercised 55,791 193 --
Redemption of Shareholder Rights -- -- (133)
Net income -- -- 2,646
-----------------------------------------
Balance at September 30, 1996 2,695,251 $ 55,996 $ (49,165)
=========================================
</TABLE>
See accompanying notes.
<PAGE>
MEDICAL IMAGING CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The financial statements included herein have been prepared by Medical
Imaging Centers of America, Inc. ("MICA" or the "Company"), without audit,
according to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures that are made are
adequate to make the information presented not misleading. Further, in the
opinion of the Company, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations of the Company as of and for the periods indicated, have been
included.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and the notes thereto for the year ended December
31, 1995, which are included in the Company's Form 10-K. The results of
operations for the nine months ended September 30, 1996 are not necessarily
indicative of results to be expected for the full fiscal year ending December
31, 1996.
2. Steel Settlement Agreement. On January 2, 1996, Steel Partners II, L.P.
("Steel"), which as of March 19, 1996 owned 19.8% of the Company's outstanding
common stock, filed proxy materials with the Securities and Exchange Commission
to replace the current Board of Directors with its own representatives. As
requested by Steel, the Company held a special meeting of shareholders on
February 26, 1996. On March 19, 1996, the Company and Steel entered into an
Agreement of Compromise and Settlement (the "Settlement Agreement"). The
Settlement Agreement called for the dismissal of all pending litigation and
provided for mutual releases. The Settlement Agreement also provided that the
February 26, 1996 Special Meeting of Shareholders would be adjourned without any
final report from the Inspector of Elections, leaving the current Board of
Directors in place.
Pursuant to the Settlement Agreement, the Company initiated a process to sell or
merge the Company (the "Auction Process"). The current members of the Company's
Board of Directors agreed that if the process did not result in an announcement
of a sale or merger transaction by June 19, 1996, a definitive agreement for a
sale or merger transaction by July 19, 1996, and the consummation of a sale or
merger transaction by November 19, 1996, they would resign from their positions
and be replaced by designees of Steel. In addition, the Settlement Agreement
also required the Company to redeem all outstanding Rights issued pursuant to
the Company's shareholder rights plan and prohibited the Company from enacting a
new shareholder rights plan without the prior written consent of Steel. During
the Auction Process, Steel agreed that it would not acquire beneficial ownership
of any of the Company's securities. Total expenditures for the proxy
solicitation, including the fees and expenses of the Company's attorneys,
financial advisors, public relations firm and proxy solicitors, excluding
salaries and wages of its officers and employees and including the amounts
reimbursed to Steel, totaled $1,325,000, and a charge was recorded to operations
in the first quarter of 1996.
On July 17, 1996, Steel agreed to an amendment of the Settlement Agreement
extending the date a definitive agreement for a sale or merger transaction was
required to be entered into from prior to July 19, 1996 to prior to August 2,
1996.
Merger Agreement. On August 1, 1996, the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement") with U.S. Diagnostic Labs, Inc., a
Delaware corporation ("USDL"), and its wholly owned subsidiary MICA Acquiring
Corporation, a California corporation ("Merger Sub"). Pursuant to the Merger
Agreement, Merger Sub will be merged with and into MICA whereupon the separate
existence of Merger Sub will cease and MICA will become a wholly owned
subsidiary of USDL (the "Merger"). Pursuant to the Merger, each outstanding
share of MICA's common stock, no par value ("MICA Common Stock"), would be
converted into a right to receive $11.75 in cash (the "Merger Consideration").
Each option to purchase MICA Common Stock (each a "MICA Option") would be
canceled and each holder of a MICA Option would be entitled to a cash payment
equal to the product of the total number of shares subject to the MICA Option
and the excess of $11.75 over the exercise price per share of the MICA Common
Stock subject to the MICA Option. USDL currently does not beneficially own,
directly or indirectly, any of MICA's voting securities apart from any
beneficial ownership interest it may have as a result of entering into the
Merger Agreement. Following the Merger, MICA's Board of Directors will be filled
with USDL's designees.
<PAGE>
The Board of Directors has received a written opinion dated as of August 1, 1996
from Batchelder & Partners, Inc. ("Batchelder"), its financial advisor, stating
that the Merger Consideration is fair to the MICA shareholders from a financial
point of view. The amount paid to Batchelder for its written opinion was
$200,000 and such a charge was recorded in the third quarter of 1996 as a
marketing, general and administrative expense.
The Merger is subject to the approval of the shareholders of MICA, certain
regulatory approvals and filings, including expiration of the waiting period
under the Hart-Scott-Rodino Improvements Act of 1976, as amended, and other
customary conditions. If the Merger is not consummated either because (i) USDL
terminates the Merger Agreement by reason of the Company's material breach of
the Merger Agreement and failure to cure such breach within ten (10) days'
notice from USDL, or (ii) the Board of Directors of MICA withdraws, modifies or
changes its approval of the Merger Agreement or the Merger in any manner adverse
to USDL or Merger Sub, or determines in good faith with the advice of outside
legal counsel that, in the exercise of its fiduciary obligations, termination of
the Merger Agreement is required by reason of an agreement with a third party
with respect to a business combination or similar transaction, MICA is obligated
to pay USDL a fee of 3% of the total Merger Consideration. If the Merger is not
consummated because USDL terminates the Merger Agreement because of MICA's
material breach of any representations or warranties in the Merger Agreement
(with such breach not cured either prior to the closing of the Merger or within
thirty (30) days after written notice from USDL), MICA is obligated to pay USDL
reasonable out-of-pocket expenses and fees up to $200,000. The Merger Agreement
can be terminated by either party if the Merger is not consummated by November
19, 1996. A copy of the Merger Agreement has been filed on Form 8-K by the
Company on August 9, 1996. A detailed description of the terms of the Merger is
set forth in the proxy materials filed with the SEC on September 25, 1996.
On September 25, 1996, the Company filed proxy materials with the Securities and
Exchange Commission to approve the Merger at a special meeting of shareholders
to be held on November 6, 1996. The shareholders of the Company approved the
Merger on November 6, 1996 with an affirmative vote of 82% of the outstanding
shares of the Company's common stock.
Raytel Litigation. On September 18, 1996, Raytel Imaging Mid-Atlantic, Inc.
("Raytel") commenced litigation in the California Superior Court for the County
of San Diego (the "Court") against MICA, MICA FLO I, Inc., a wholly-owned
subsidiary of MICA ("MICA FLO") and USDL. Raytel's complaint alleges, among
other matters, that MICA and MICA FLO breached a joint venture agreement dated
December 31, 1986 among (i) Raytel's predecessor, Medical Imaging Partners,
L.P., a Delaware limited partnership ("MIP"), (ii) MICA and (iii) Orlando
Diagnostic Center, Inc., a Florida corporation, an unrelated third party (the
"Joint Venture Agreement"). The Joint Venture Agreement was entered into for
purposes of owning and operating a diagnostic medical imaging center in Orlando,
Florida. Pursuant to the Joint Venture Agreement, the parties formed a
California limited partnership called Orlando Diagnostic Center, L.P. ("ODC").
The complaint also asserts claims against MICA, MICA FLO and USDL for
intentional interference with economic relations and conspiracy to interfere
with economic relations. The complaint seeks unspecified compensatory damages,
punitive damages in an amount of at least $5,000,000, declaratory relief, and
injunctive relief enjoining MICA and USDL from consummating the Merger and
requiring MICA either to sell its interest in ODC to Raytel for its fair market
value or to purchase Raytel's interest in ODC, at Raytel's election. On October
9, 1996, Raytel filed a motion for a preliminary injunction seeking to enjoin
the Merger.
On November 7, 1996, Raytel's request for an order enjoining MICA and USDL from
completing the Merger until after Raytel's contractual dispute with MICA is
resolved was denied by the Court. In connection with the ruling the Court
ordered that both MICA and Raytel maintain the status quo regarding ODC, which
was the subject of the parties' contractual dispute. The Court ordered the
appointment of a receiver to manage the affairs of ODC until the matter is
finally resolved.
3. Primary and fully diluted net income per share is computed on the basis of
weighted average number of common shares outstanding and includes common stock
equivalents when their effect is dilutive. All per share data has been restated
for all periods presented to give effect to a one-for-five reverse stock split
for shareholders of record on October 16, 1995.
4. An income tax provision of $63,000 was recorded for the nine months ended
September 30, 1996, primarily reflecting alternative minimum and state taxes
due.
5. Certain 1995 amounts have been reclassified to conform with the September 30,
1996 presentation.
<PAGE>
EXHIBIT INDEX
EXHIBIT
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23.1 Consent of Certified Public Accountants
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated February 2, 1996, except for Note 2,
as to which the date is March 19, 1996, with respect to the consolidated
financial statements of Medical Imaging Centers of America, Inc., included in
the Report on Form 8-K of U.S. Diagnostic, Inc.
/S/ ERNST & YOUNG LLP
-----------------------
ERNST & YOUNG LLP
San Diego, California
July 16, 1997
