-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WdhBtN3mn2X/ljk3/JWmkBCyMZoCpF/mZIv/pT/IUZN8gwi3n4Fzs43cWFBQm1Q8 moue1R4KR/gkCFIMyW4u2Q== 0000912057-00-015155.txt : 20000331 0000912057-00-015155.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-015155 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL RESOURCES INC /DE/ CENTRAL INDEX KEY: 0000725151 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 133584552 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12461 FILM NUMBER: 588485 BUSINESS ADDRESS: STREET 1: 15 STATE ST CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 8132810202 MAIL ADDRESS: STREET 1: 15 STATE STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 ------------------------ MEDICAL RESOURCES, INC. (Exact Name of Registrant as Specified in its Charter) ------------------------ 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)
------------------------ 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 ------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. 1 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. 2 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. 3
IMAGING CENTER OPERATED LOCATION NAME(1) SINCE (2) OWNERSHIP(3) MODALITIES(4) - -------- -------------------- -------------- ------------ ------------------------ 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
4
IMAGING CENTER OPERATED LOCATION NAME(1) SINCE (2) OWNERSHIP(3) MODALITIES(4) - -------- -------------------- -------------- ------------ ------------------------ 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
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IMAGING CENTER OPERATED LOCATION NAME(1) SINCE (2) OWNERSHIP(3) MODALITIES(4) - -------- -------------------- -------------- ------------ ------------------------ 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
- -------------------------- (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. 6 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. 7 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. 8 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 9 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 10 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 11 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 12 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. 13 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. 14 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. 15 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. 16 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. 17 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:
HIGH LOW -------- -------- 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
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 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.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (IN THOUSANDS EXCEPT SUPPLEMENTAL AND PER SHARE DATA) 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
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (IN THOUSANDS EXCEPT SUPPLEMENTAL AND PER SHARE DATA) 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
- -------------------------- (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 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 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 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 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 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 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 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 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 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 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 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 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 EXHIBIT INDEX 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.*********
32 21.1 List of Subsidiaries.************* 23.1 Consent of Independent Auditors--Ernst & Young LLP.# 27.1 Financial Data Schedule.#
- ------------------------ * 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.
33 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. 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
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.
SIGNATURE CAPACITY IN WHICH SIGNED --------- ------------------------ /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
34 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 MEDICAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 -------- -------- 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 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-2 MEDICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 -------- -------- -------- 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) ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 MEDICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 -------- -------- -------- 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 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 MEDICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 -------- -------- -------- 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 -- --
The accompanying notes are an integral part of the consolidated financial statements. F-5 MEDICAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
COMMON ADDITIONAL RETAINED TREASURY COMMON STOCK TO PREFERRED PAID-IN EARNINGS SHARES TOTAL STOCK BE ISSUED STOCK CAPITAL (DEFICIT) AT COST -------- -------- --------- --------- ---------- --------- -------- 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) $ -- ======== === ======= ======= ======== ========= =======
The accompanying notes are an integral part of the consolidated financial statements. F-6 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 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 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 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):
DECEMBER 31, ------------------- 1999 1998 -------- -------- 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 ======== ========
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 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:
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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) ======== ======== ========
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 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 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 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):
DECEMBER 31, ------------------- 1999 1998 -------- -------- 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 ======= =======
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 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):
DECEMBER 31, ------------------- 1999 1998 -------- -------- 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 ======= =======
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):
DECEMBER 31, ------------------- 1999 1998 -------- -------- 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 ======= =======
F-15 MEDICAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT Outstanding debt consists of the following (in thousands):
DECEMBER 31, ------------------- 1999 1998 -------- -------- 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 ======== ========
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 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): 2000........................................................ $ 9,718 2001........................................................ 21,751 2002........................................................ 18,073 2003........................................................ 15,258 2004........................................................ 15,259 Thereafter.................................................. 19,871 ------- $99,930 =======
F-17 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 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 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):
1999 1998 1997 -------- -------- -------- 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)
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:
1999 1998 1997 -------- -------- -------- All Plans: Dividend yield............................................ 0% 0% 0% Expected volatility....................................... 76% 78% 70% Expected life (years)..................................... 5 4 2
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 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:
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE --------- -------------- 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
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:
OUTSTANDING EXERCISABLE ------------------- -------------------- NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE - -------------------- --------- -------- -------- --------- -------- $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 ======= =======
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 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:
WARRANTS NUMBER OF RANGE OF EXPIRING IN SHARES EXERCISE PRICE - ----------- --------- -------------- 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 =========
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 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 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):
DECEMBER 31, 1999 ------------------------------ FEDERAL STATE TOTAL -------- -------- -------- Current provision................................. $ -- $ 470 $ 470 Deferred provision................................ -- -- -- ------- ------ ------- Income tax provision.............................. $ -- $ 470 $ 470 ======= ====== =======
DECEMBER 31, 1998 ------------------------------ FEDERAL STATE TOTAL -------- -------- -------- Current provision (benefit)....................... $(4,845) $ 653 $(4,192) Deferred provision................................ 4,845 -- 4,845 ------- ------ ------- Income tax provision.............................. $ -- $ 653 $ 653 ======= ====== =======
DECEMBER 31, 1997 ------------------------------ FEDERAL STATE TOTAL -------- -------- -------- Current provision................................. $ 993 $ 990 $ 1,983 Deferred benefit.................................. (879) 117 (762) ------- ------ ------- Income tax provision.............................. $ 114 $1,107 $ 1,221 ======= ====== =======
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:
DECEMBER 31 ------------------------------------ 1999 1998 1997 -------- -------- -------- 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% ===== ===== =====
F-24 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):
1999 1998 -------- -------- 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...................................... $ -- $ -- ======== ========
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 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):
DECEMBER 31, ------------------- 1999 1998 -------- -------- Equipment and associated leaseholds...................... $ 20,376 $25,343 Less: Accumulated amortization........................... (10,064) (9,572) -------- ------- $ 10,312 $15,771 ======== =======
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):
YEAR ENDING DECEMBER 31, - ------------------------ 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 =======
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 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):
YEAR ENDED DECEMBER 31, LEASES SUBLEASES NET - ----------------------- -------- --------- -------- 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 ======= ======= =======
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 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 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 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.
DECEMBER 31, 1999 ------------------- CARRYING FAIR AMOUNT VALUE -------- -------- (IN THOUSANDS) 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
DECEMBER 31, 1998 ------------------- CARRYING FAIR AMOUNT VALUE -------- -------- (IN THOUSANDS) 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
F-30 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 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):
1997 ----------- (UNAUDITED) 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)
- ------------------------ (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):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 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)
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 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):
FOR THE YEAR ENDED DECEMBER 31, ------------------- 1998(A) 1997 -------- -------- 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 ======= =======
- ------------------------ (a) 1998 amounts reflect results through August 15, 1998, the date of sale of StarMed. F-33 MEDICAL RESOURCES, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE AT BEGINNING OF CHARGED TO END OF DESCRIPTION PERIOD EXPENSE ADDITIONS/(DEDUCTIONS) PERIOD - ----------- ------------ ---------- ---------------------- ---------- 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
- ------------------------ (1) Represents provision for bad debts of discontinued operations. (2) Uncollectible accounts written off, net of recoveries. EX-10.6 2 EXHIBIT 10.6 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 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 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 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 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. 5 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 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 --------------------------- EX-10.18 3 EXHIBIT 10.18 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 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 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 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 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 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 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 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 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 EX-23.1 4 EXHIBIT 23.1 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 EX-27.1 5 EXHIBIT 27.1
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 9,360 0 65,590 15,413 0 72,354 81,491 47,773 220,056 148,077 0 0 15,321 98 43,471 220,056 0 157,640 0 197,046 906 0 11,074 (51,386) 470 (51,856) 0 0 0 (51,856) (5.45) (5.45)
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