1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required) For the fiscal year ended December
31, 1995, or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) - For the transition period
from ________ to ________
Commission File Number 0-12787
MEDICAL IMAGING CENTERS OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
California 95-3643045
(State of Incorporation) (I.R.S. Employer Identification No.)
9444 Farnham Street, Suite 100, San Diego, California 92123
(Address of principal executive offices) (Zip Code)
(619) 560-0110
(Registrant s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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. / /
The approximate aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of March 19, 1996 (based on the closing
price as reported on the OTC Bulletin Board on that date): $24,366,123.
As of March 19, 1996 the Registrant had outstanding 2,671,724 shares
of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
1
2
MEDICAL IMAGING CENTERS OF AMERICA, INC.
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
FORM 10-K ANNUAL REPORT
INDEX
PART I Page
- ------ ----
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Shareholders 9
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting 14
and Financial Disclosure
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 21
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K 22
2
3
PART I
Item 1. Business
Medical Imaging Centers of America, Inc. ("MICA" or the "Company") is
a California corporation organized in July 1981 which provides outpatient
services and medical equipment rentals to physicians, managed care providers
and hospitals. These services include magnetic resonance imaging ("MRI"),
computed tomography ("CT"), nuclear medicine and ultrasound. The Company's
operations include diagnostic medical centers ("DMCs"), diagnostic equipment
rentals, fee-for-service agreements (fixed and mobile), and management,
marketing and related support services.
MICA's strategy is to expand the range and extent of the diagnostic
imaging services provided to its customers.
MEDICAL DIAGNOSTIC IMAGING INDUSTRY
Medical diagnostic imaging systems facilitate the diagnosis of disease
and disorders at an early stage, often minimizing the amount and cost of care
needed to stabilize or cure the patient and frequently obviating the need for
invasive diagnostic procedures, such as exploratory surgery. Diagnostic imaging
systems are 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-ray to the advanced
technologies of MRI, CT, nuclear medicine and ultrasound. The use of these
technologies has grown significantly in the United States during the last
several years due to increasing acceptance by physicians of the value of
diagnostic imaging technologies in the early diagnosis of disease, the
expanding applications of MRI and ultrasound (partially because they do not
involve X-ray radiation) and the growing patient base attributable to an aging
population.
Due to capital restrictions, hospitals utilize third parties, such as
MICA, to provide these technologies and related services. To remain viable in a
highly competitive industry, hospitals seek to offer diagnostic imaging
equipment and services to retain and expand their referring physician base.
RANGE OF SERVICES
The needs of a particular hospital or physician group ("Customer")
determine the extent of the following services, which MICA can deliver either
through a full service DMC or on a fee-for-service basis.
MANAGEMENT. Each DMC is staffed by administrative and technical
personnel who provide day-to-day management of operations including staffing,
billing and collection, purchasing of medical supplies and film and supervision
of maintenance and quality control.
EQUIPMENT AND RELATED SERVICES. Drawing upon its operating experience
and relationships with leading equipment manufacturers, MICA consults with each
Customer to identify the equipment best suited to meet the Customer s needs on
a cost-effective basis. The appropriate equipment is acquired through purchase
or lease by MICA. In addition, MICA assists the Customer in complying with
licensing and other regulatory requirements related to the siting of the
equipment. In conjunction with the installation of the equipment, MICA
typically enters into maintenance agreements with equipment manufacturers or
other third parties to service the newly installed equipment.
TECHNICAL AND SUPPORT STAFFING. MICA provides training and educational
programs for its own technologists as well as the Customer s technologists. At
a DMC, support personnel (receptionist, transcriptionists, couriers and
technical aids) are also provided by MICA.
MARKETING. MICA provides its Customers with marketing services,
including the design of a marketing program to educate the referral base as to
the diagnostic imaging services available at the facility. MICA provides
expanded marketing services to patient referral sources, including HMOs and
other health plans.
DIAGNOSTIC MEDICAL CENTERS. DMCs provide diagnostic imaging services
in an outpatient environment. In addition to the equipment, MICA also provides
the management of all technical and support staff; marketing services; patient
scheduling, billing and collection services; and management information
systems. Staffing for a DMC typically requires six to twenty non-physician
personnel.
3
4
The typical arrangement for a DMC is a limited partnership (with MICA
as the managing general partner) which provides for a sharing of earnings
between MICA and its partners. In addition, MICA receives management fees of
4-10% of collected revenues. The Company carefully selects its DMC partners
and generally requires exclusive contracts. MICA funds net operating losses of
the DMCs.
Set forth below is a table of MICA's DMCs with a listing of respective
opening dates and services provided at each location. In 1992, the Company also
established a freestanding radiation therapy center as a joint venture with a
Florida Columbia/HCA hospital.
Services by Technology
---------------------------------------------------------
Opening Nuclear
DMC Location Date MRI CT Ultrasound Medicine Other(1)
-------------------------------------------------------------------------------------------------
Long Beach, CA 12/84 x x x x x
Bakersfield, CA 5/85 x x x -- x
Kansas City, MO 5/85 x -- -- -- --
Portland, OR 12/85 x x x -- x
Huntington Beach, CA 12/85 x x x x x
Orlando, FL 6/87 x x x x x
Newport Beach, CA 9/87 x x x x x
Gainesville, FL 3/90 x x -- -- --
Renton, WA 3/90 x -- -- -- --
Bradenton, FL 5/90 x x -- -- --
Phoenix, AZ(3) 8/91 x x x -- --
Westlake Village, CA 10/91 x -- -- -- --
Ft. Myers, FL 3/92 x -- -- -- --
Milford, DE 3/92 x -- -- -- --
Laguna Niguel, CA 6/92 x -- -- -- --
Chalmette, LA 6/92 x -- -- -- --
Santa Maria, CA 8/92 x -- -- -- --
Downey, CA 7/94 x -- -- -- --
Deltona, FL(2) 4/95 x -- -- -- x
-------------------------------------------------------------------------------------------------
(1) Other services consist principally of mammography and X-ray.
(2) DMC sold or closed in 1995.
(3) MICA provides only management services to this DMC.
FEE-FOR-SERVICE. Under a typical fee-for-service arrangement, MICA
furnishes the Customer with appropriate equipment and bills the Customer for
the number of patient procedures performed each month. Under certain
fee-for-service arrangements, the Customer agrees to a monthly guaranteed
minimum payment. The Company contracts to provide services for a term ranging
from one month to three years. Based upon the Customer s service
requirements, MICA installs or makes equipment available. A mobile unit is
totally self-contained and typically provides services to a number of
Customers. During 1995, the Company provided diagnostic imaging services to
approximately 120 Customers in 20 states under fee-for-service arrangements.
In July of 1995, the Company'sold its ultrasound/nuclear medicine business
which accounted for 72 Customers in 11 states under fee-for-service
arrangements. Of the 120 customers serviced in 1995, 51 Customers received
service on site and the remaining Customers received service by one of the
Company's mobile units.
4
5
MEDICAL SERVICES REVENUE MIX
The following table summarizes the Company's medical services revenues on a
percentage basis by type of arrangement for each of the three years in the
period ended December 31, 1995.
Years ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
DMC 61% 51% 45%
Fee-for-Service
Fixed 27% 34% 31%
Mobile 12% 15% 24%
TECHNOLOGY SOURCES
MICA obtains its diagnostic imaging equipment from various
manufacturers including The General Electric Company and Hitachi Medical
Systems America, Inc. Costs to acquire various new equipment are as follows:
Equipment Price Range
---------------------------------------------------------------------
MRI $ 700,000 to $ 1,500,000
CT $ 150,000 to $ 650,000
Nuclear Medicine $ 125,000 to $ 350,000
Ultrasound $ 80,000 to $ 250,000
Installation and maintenance costs on the equipment can be
substantial, particularly with respect to MRI units. Installation costs can
range from $75,000 to $200,000 for an MRI unit depending on the particular
installation. Maintenance costs for an MRI unit can be as high as $150,000 per
year. MICA typically enters into agreements with equipment manufacturers or
other third party service organizations for equipment maintenance.
Equipment is financed by MICA (with terms ranging from five to seven
years) with lenders and lessors, with the equipment pledged as security for the
debt.
RISK FACTORS AND CERTAIN CAUTIONARY STATEMENTS
The Company's business is subject to a number of risks, some of which
are beyond the Company's control. Such risks in some cases have affected the
Company's results, and in the future could cause the Company's actual results
for the first quarter of 1996, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. The following discussion highlights some of these risks:
OBSOLESCENCE. MICA attempts to select equipment that will remain
commercially viable for the duration of its financing term. Technology,
however, as it relates to MRI and CT has advanced rapidly over the past several
years and all of the Company's equipment is subject to the risk of obsolescence
and deterioration of fair market value. The Company routinely reviews its
equipment portfolio to determine that its carrying value is the lower of cost
or net realizable value.
CREDIT RISK. MICA typically bills the patient for both the charges of
the radiologist and the charges for the technical services of the DMC. By
undertaking the responsibility for patient billing and collection activities,
MICA assumes the credit risk presented by the patient base, as well as the risk
of payment delays attendant to reimbursement through governmental programs or
third party payors. The Company estimates that 63% of the DMC's payors are
insurance companies, HMO/PPOs or self-paying patients.
EQUIPMENT UTILIZATION. Under fee-for-service contracts that do not
require minimum payments, MICA assumes the risk that revenues generated through
utilization of its equipment will be sufficient to meet MICA's financial
obligations to lenders and lessors. The Company attempts to finance its
acquisition of equipment and match the amortization period of such financial
obligation to the term of the Customer s contract. However, the amortization
period for specific equipment may extend beyond the term of the related
contract, requiring MICA to fund any resulting negative cash flow in the event
that it cannot redeploy the equipment.
5
6
GOVERNMENT REGULATION. The Omnibus Budget Reconciliation Act of 1993
("OBRA 93"), sometimes referred to as "Stark II," includes federal legislation
on physician self-referrals regarding Medicare/Medicaid patients. The new
legislation, which became effective January 1, 1995, prohibits physician
referrals to non-hospital health facilities in which the referring physician
has a "financial interest."
On January 1, 1995, the Physician Ownership and Referral Act of 1993
("PORA") became effective in the state of California. PORA prohibits a
physician from referring patients for covered services including diagnostic
imaging if the physician (or his or her immediate family) has a "financial
interest" in an entity that receives the referral in the state of California.
MICA currently is in the process of acquiring the partnership units owned by a
limited number of physicians who refer patients to MICA's DMCs. It is not
anticipated that such acquisitions will require significant capital. MICA is
unable to predict at this time what impact PORA will have upon the demand for
its equipment and services.
Florida's Patient Self-Referral Act of 1992 might also affect MICA's business.
Part of the Act imposes a fee schedule on all providers of diagnostic imaging
services and radiation therapy services which limits fees to no more than 115%
of the Medicare limiting charge for non-participating physicians for such
services (the "Fee Cap"), including technical and professional components. The
statute specifically excludes hospitals and physician group practices from the
Fee Cap. The Company's four imaging centers in Florida, as currently operated,
would be subject to the Fee Cap and would be severely impacted if the Fee Cap
ever became effective. In July 1992, however, the United States District Court
for the Northern District of Florida granted a permanent injunction, finding
the statute violative of the equal protection clause of the United States
Constitution and the Florida Constitution. The state filed a notice of appeal
from this judgment. On February 15, 1994, the United States Court of Appeals
for the Eleventh Circuit reversed the decision of the lower court. The Company
has filed a petition for rehearing with the Eleventh Circuit. In a later
proceeding, the Company joined with other plaintiffs and plaintiff-intervenors
in a separate effort to defeat the Fee Cap provision. In February 1995, a
Florida court issued an order granting final summary judgment that the Fee Caps
were unconstitutional for providers of diagnostic imaging services. The state
court's ruling was upheld on appeal. As a result of the state court's decision,
MICA is not subject to the Fee Caps. Although MICA and two Florida courts have
held that the Fee Caps violate the Florida Constitution, there can be no
assurances that their decisions will not be reversed, that the Fee Caps will
ultimately be found to be unconstitutional or that the Fee Caps will not be
reinstated retroactively to the initial effective date.
MICA's business also is affected by Certificate-of-Need ("CON")
programs implemented in a number of states and by existing governmental
regulations regarding expenditures for medical technology by hospitals. CON
programs vary considerably from state to state. CON agencies primarily control
the distribution and physical allocation of technological equipment among
healthcare institutions, frequently determining which institutions may acquire
new technologies. Such determinations are based on broad concepts of "need,"
using various criteria and weighing the relative need demonstrated by competing
CON applicants to ensure the equitable allocation of new technology among
hospitals. To date, the CON laws and regulations and state rate commissions
have not had a material effect on MICA's business, although there is no
assurance that the laws and regulations will not change or that rate
commissions will not take actions that may adversely affect MICA's business.
MICA's operations are subject to a variety of governmental and
regulatory requirements. For example, the storage, use and disposal of
radioactive materials in nuclear medicine is subject to regulation by Federal
and State governmental authorities, including the United States Food and Drug
Administration, the Department of Health and Human Services, the Health Care
Finance Administration ("HCFA"), and the Nuclear Regulatory Commission ("NRC").
Additionally, MICA personnel must be licensed to operate certain equipment, and
the physicians practicing at its DMCs must have a Medicare/Medicaid provider
number to receive government reimbursement. MICA believes it is in compliance
with applicable laws and regulations.
MEDICAL REIMBURSEMENT PROGRAMS. A substantial portion of the Company's
revenue is attributable to payments made by government-sponsored healthcare
programs and other third party payors. From time to time the Federal government
has proposed limiting reimbursement for imaging services. Any change in
reimbursement regulations, or the enactment of legislation that would have the
effect of placing material limitations on the amount of reimbursement for
imaging services, could adversely affect the operations of MICA.
In November 1991, HCFA issued regulations which implemented a
resource-based relative value scale ("RBRVS") payment system effective for
services furnished by physicians or incident to physician services on or after
January 1, 1992. The RBRVS fee schedule was fully effective in January 1995.
For radiology, the change in fee schedules has resulted in substantially lower
reimbursement for services provided to Medicare-eligible patients. Because
MICA's
6
7
fees for services to Medicare-eligible patients are subject to the fee schedule
for radiology procedures, this change has resulted in lower reimbursement for
services provided by MICA to Medicare-eligible patients. MICA is unable to
predict at this time what impact these regulations will have upon demand for
its equipment and services.
The Medicare/Medicaid Anti-Fraud and Abuse Statute (the "Anti-Kickback
Statute") prohibits certain actions or practices deemed by Congress to be
fraudulent or abusive in nature. Provisions of the Anti-Kickback Statute,
known generally as the "Safe Harbor Regulations," provide that compliance with
an applicable Safe Harbor would immunize that arrangement from criminal
prosecution or exclusion from the Medicare and Medicaid programs. To the extent
that a particular MICA arrangement complies with an applicable Safe Harbor,
MICA is guaranteed immunity from criminal prosecution or exclusion from the
Medicare and Medicaid programs based upon its participation in the arrangement.
Although some of MICA's arrangements may not comply with all criteria contained
in an applicable Safe Harbor, and therefore such arrangements would not be
entitled to Safe Harbor immunity, MICA believes that its business structure and
practices do not violate the Anti-Kickback Statute.
Healthcare reimbursement programs are not uniformly prompt in making
required payments. Extensive payment delays are not uncommon, and MICA's future
cash flows could be adversely impacted while awaiting payment. MICA has limited
ability to cause more timely reimbursement practices by governmental agencies
and programs. Additionally, there can be no assurance that subsequent laws,
subsequent changes in present laws or interpretations of laws will not
adversely affect the Company's operations.
HEALTHCARE REFORM. The public has recently focused significant
attention on reforming the healthcare system in the United States. Within the
past two years, a broad range of healthcare reform measures have been
introduced in Congress and in certain state legislatures. Legislative interest
recently has also focused on the role of HMOs in the provision of healthcare
and the effect of managed care reimbursement mechanisms on healthcare service
utilization and quality of service. It is not clear at this time what
proposals, if any, will be adopted or, if adopted what effect, if any, such
proposals would have on the Company's business. There can be no assurance that
any proposals adopted would be coordinated at the federal or state level, and
therefore the Company, as a national participant in the healthcare industry, is
subject to varying state regulatory environments. Certain proposals, such as
cutbacks in the Medicare and Medicaid programs, containment of healthcare costs
that could include a freeze on prices charged by physicians, hospitals or other
healthcare providers, and greater state flexibility in the administration of
Medicaid, could adversely affect the Company. There can be no assurance that
currently proposed or future healthcare programs, laws, regulations or policies
will not have a material adverse effect on the Company's operating results.
COMPETITION. The healthcare industry in general, and the market for
medical diagnostic imaging services in particular, are highly competitive. MICA
s DMCs and its fee-for-service operations compete for patients with hospitals,
managed care groups and other DMCs. The Company also competes with equipment
manufacturers, leasing companies, physician groups and other providers of
medical diagnostic imaging services. Many of these competitors have
substantially greater resources than MICA. MICA competes based on its
reputation for the dependability and quality of its services.
INSURANCE. MICA carries workers compensation insurance, comprehensive
and general liability coverage, fire and allied perils coverage. MICA maintains
professional liability and general liability insurance for all owned facilities
in the single limit amount of $10 million. There can be no assurance that
potential claims will not exceed this amount. MICA also requires that physicians
practicing at the DMCs carry medical malpractice insurance to cover their
individual practices. The physicians are personally responsible for the costs of
the insurance.
EMPLOYEES
At December 31, 1995, MICA had 248 full-time employees including 224
employees at DMC and fee-for-service locations and 24 employees at the
corporate office. Under Section 401(k) of the Internal Revenue Code the
Company instituted a tax deferred retirement plan, whereby the Company will
match 50% of an employee's deferred salary up to a maximum of 6% of gross pay,
for a maximum matching contribution of 3%. MICA has stock option plans for
officers, directors, key employees and consultants of the Company. Grants of
options under such plans are subject to approval of the Compensation/Stock
Option Committee of the Board of Directors.
7
8
Item 2. Properties
The Company's executive offices are located at 9444 Farnham Street,
Suite 100, San Diego, California 92123. The Company occupies approximately
11,900 square feet of space pursuant to a two year lease extension which
expires March 31, 1996.
Item 3. Legal Proceedings
On January 10, 1996, the Company commenced litigation in the United
States District Court for the Southern District of California (the "Court")
against Steel Partners II, L.P., ("Steel") and certain of its affiliates
(together with Steel, the "Steel Defendants") alleging that the Steel
Defendants violated certain federal securities laws and state tort laws in
connection with their acquisition of Common Stock and their proxy solicitation.
The Company's complaint alleged, among other matters, that the Steel Defendants
violated Section 13(d) of the Securities Exchange Act of 1934 by, among other
things, filing false and misleading Schedules 13D that failed to disclose the
Steel Defendants' true ownership of Common Stock and their true intent to
attempt to take control of the Company. The complaint also alleged that the
Steel Defendants tortiously interfered with the Company's economic relations
with a lender of the Company by, among other things, claiming to have enough
control of the Company to have instructed the Company to stop making payments
to its lenders.
The complaint sought, among other things, to have the Court
preliminarily and permanently enjoin the Steel Defendants' proxy solicitation
and their acquisition and voting of shares of Common Stock, and damages for the
Steel Defendants' tortious interference with the Company's economic relations.
The complaint further sought to have the Court require the Steel Defendants to
publicly disclose their beneficial ownership of 20% or more of the Common Stock
and declare that the Steel Defendants have thereby become an "Acquiring Person"
for purposes of the Company's Shareholder Rights Plan (the "Rights Plan"),
enabling all of the Company's shareholders other than the Steel Defendants to
purchase shares of Common Stock at bargain prices, under certain circumstances.
On January 19, 1996, a federal magistrate denied the Company's
application for expedited discovery and granted the Steel Defendants'
application for a stay of discovery. On February 7, 1996, the Court upheld the
federal magistrate's ruling, scheduled a hearing on the Steel Defendants'
motion to dismiss the Company's complaint, which was filed on January 17, 1996,
for February 14, 1996 and scheduled a hearing on the Company's motion for a
preliminary injunction for February 23, 1996. On February 14, 1996, the Court
denied the Steel Defendants' motion to dismiss, thereby lifting the stay on
discovery. Also on February 14, 1996, a federal magistrate granted the
Company's application for expedited discovery.
On February 15, 1996, Steel commenced litigation in the United States
District Court for the Southern District of California against the Company
alleging that the Rights Plan violates California law because, among other
things, it discriminates among the Company's shareholders under certain
circumstances. Steel's complaint sought, among other things, to have the Court
enjoin the Company from permitting the separation or distribution of any rights
pursuant to the Rights Plan and declare the Rights Plan invalid.
On February 23, 1996, Judge Rudi Brewster of the United States
District Court for the Southern District of California issued a preliminary
injunction based on his finding that the Company had demonstrated that there
was sufficient evidence to show probable success on the merits of the Company's
claim that Steel had violated the requirements of Section 13(d) of the
Securities Exchange Act of 1934 by failing to disclose its unidentified foreign
investor. Judge Brewster also found sufficient evidence to show probable
success on the merits of the Company's claim that brokerage customers of Jack
Howard, an affiliate of Steel, were members of a "group" which included Steel.
On March 19, 1996, the Company and certain of its affiliates, on the
one hand, and Steel and certain of its affiliates, on the other hand, entered
into an Agreement of Compromise and Settlement (the "Settlement Agreement").
The Settlement Agreement calls for the dismissal of all pending litigation
between Steel and the Company and provides for mutual releases between the
Company and its affiliates and Steel and its affiliates. The Settlement
Agreement also provides that the February 26, 1996 Special Meeting of
Shareholders will be adjourned without any final report from the Inspector of
Elections, leaving the current Board of Directors in place.
Pursuant to the Settlement Agreement, the Company is required to
initiate a process to sell or merge the Company (the "Auction Process"). The
Company's financial advisor, Batchelder & Partners, Inc., will advise the
Company in connection with the sale or merger process. If the process does not
result in an announcement by the Company of a sale or merger transaction by
June 19, 1996, a definitive agreement for a sale or merger transaction by
8
9
July 19, 1996, or the consummation of a sale or merger transaction by November
19, 1996, the current members of the Company's Board of Directors will resign
from their positions and be replaced by designees of Steel.
The Settlement Agreement calls for the company to amend the severance
agreement of the Company's chief executive officer and chief financial officer
to provide that the Company's failure to meet such deadlines shall constitute
an "involuntary termination" for purposes of their respective severance
packages. In the meantime, Steel has agreed that it will not, and will cause
its affiliates not to, acquire or offer to acquire, directly or indirectly, by
purchase or otherwise, beneficial ownership of any of the Company's securities
during the Auction Process.
The Settlement Agreement also requires the Company to redeem all
outstanding Rights issued pursuant to the Company's shareholder rights plan and
prohibits the Company from enacting a new shareholder rights plan without the
prior written consent of Steel.
Simultaneous with its entering into the settlement, the Company
entered into a Standstill Agreement with Arrowhead Holdings Corporation, a
Delaware corporation ("Arrowhead"), containing substantially the same terms as
the Settlement Agreement (the "Arrowhead Agreement"). The Arrowhead Agreement,
like the Settlement Agreement, provides that the Company'shall begin an auction
process for the sale or merger of the Company and shall redeem all outstanding
Rights granted pursuant to the shareholder rights plan. The Arrowhead
Agreement also contains mutual release provisions and prohibits Arrowhead from
acquiring beneficial ownership of the Company's securities.
Pursuant to the Settlement Agreement, the Company has agreed to
reimburse Steel for expenses up to $425,000 incurred by Steel in connection
with its solicitation of proxies for the February 26, 1996 Special Meeting of
Shareholders. No amounts have been reflected in the financial statements as of
December 31, 1995 with regard to expenses reimbursed to Steel.
MICA is also a party to litigation arising in the normal course of its
business. MICA does not believe the results of such litigation, even if
determined adversely to MICA, would have a material effect on its financial
position.
Item 4. Submission of Matters to a Vote of Shareholders
None.
9
10
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
MICA has not paid and does not presently intend to pay cash dividends
on its Common Stock. Future dividends on the Common Stock will depend on
business and financial conditions, earnings and other factors and are subject
to declaration by MICA's Board of Directors at its discretion. Payment of
dividends is also restricted by the terms of the Company's 1989 convertible
subordinated debentures (see Note 9 to the consolidated financial statements).
At March 19, 1996, MICA had approximately 3,000 beneficial owners of
the Common Stock. Effective June 23, 1994, MICA's Common Stock was delisted
for non-compliance with the capital requirements of the National Association of
Securities Dealers, Inc. and is no longer included for quotation on the Nasdaq
Stock Market's National Market (the "Nasdaq National Market"). The Common
Stock is traded on the OTC Bulletin Board under the symbol "MIGA".
The following table sets forth, for the periods indicated, the high
and low bid prices of the Common Stock, as reported by the Nasdaq National
Market and the OTC Bulletin Board, respectively, for the last two years.
Information in this table has been adjusted to reflect the one-for-five reverse
stock split effected in October 1995. These quotations represent prices
between dealers and do not include retail markups, markdowns, commissions or
other adjustments, and may not represent actual transactions.
1995 1994
Common Stock Common Stock
---------------------- ----------------------
Quarter High Low High Low
- -------------------------------------------------------------------------------
1st $5.00 $3.13 $4.38 $2.19
2nd 8.13 4.22 3.75 1.88
3rd 9.06 6.25 5.00 1.85
4th 8.25 5.94 5.00 3.44
Item 6. Selected Financial Data
Year ended December 31,
-----------------------------------------------------------
(In thousands, except per share information) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Total revenues $ 46,537 $ 57,306 $ 68,797 $ 84,558 $ 88,079
Medical services revenues $ 43,192 $ 55,440 $ 65,786 $ 74,258 $ 73,926
Income (loss) before extraordinary gain $ 5,656 $ (1,810) $(29,613) $ (20,342) $(10,449)
Extraordinary gain $ -- $ 1,316 $ -- $ -- $ --
Net income (loss) $ 5,656 $ (494) $(29,613) $ (20,342) $(10,449)
Net income (loss) per share(1)
Primary
Income (loss) before extraordinary gain $ 2.19 $ (.75) $ (12.54) $ (8.62) $ (4.51)
Extraordinary gain $ -- $ .55 $ -- $ -- $ --
Net income (loss) $ 2.19 $ (.20) $ (12.54) $ (8.62) $ (4.51)
Fully diluted earnings per share $ 1.96 $ (.20) $ (12.54) $ (8.62) $ (4.51)
Weighted average primary shares outstanding 2,585 2,426 2,361 2,360 2,316
Weighted average fully diluted shares outstanding 3,219 2,426 2,361 2,360 2,316
SELECTED BALANCE SHEET DATA:
Cash $ 10,732 $ 8,524 $ 8,182 $ 4,862 $ 7,328
Working capital (deficit) $ 337 $ (1,728) $ 3,421 $ (673) $ 9,046
Total assets $ 39,648 $ 53,469 $ 65,697 $ 108,928 $125,567
Convertible debentures $ 5,400 $ 8,200 $ 11,000 $ 11,000 $ 11,000
Long-term debt and capital lease obligations $ 11,182 $ 25,206 $ 35,509 $ 45,120 $ 43,706
Shareholders' equity (net capital deficiency) $ 3,013 $ (2,861) $ (2,370) $ 27,243 $ 46,715
(1) The Company effected a one-for-five reverse stock split for shareholders of
record on October 16, 1995. All per share data has been restated for all
periods presented to give effect to the reverse stock split.
10
11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL OPERATING TRENDS AND OUTLOOK
Medical services revenues declined during 1995 primarily due to the
Company's termination of unprofitable fee-for-service contracts and sales of
underperforming assets used in the fee-for-service business. In view of the
historical unprofitability and uncertainty regarding its fee-for-service
business, the Company plans to sell equipment as related hospital contracts
expire. As such, the Company believes that revenues from its fee-for-service
business, which accounted for 39% of 1995 medical services revenues, will
continue to decline. Revenues earned by the Company's DMCs in 1995 were
negatively affected by declining reimbursement which is the direct result of
cost containment efforts at the state and federal level as well as efforts by
insurer and payor groups to reduce healthcare costs. MICA expects the decline
in reimbursement trends to continue in the future. The Company's strategy is
to offset the decline in reimbursement by securing managed care contracts and
developing strategic alliances with hospitals and other healthcare providers to
increase the utilization of its diagnostic imaging services. By positioning
itself to take greater advantage of managed care contracts, thereby increasing
the utilization of its services, management believes that it can maintain its
DMC revenues. Although there can be no assurances, the Company believes that
declining reimbursement trends can be offset with increased utilization so that
such trends will not have a significant negative impact on the Company's
operating results or its liquidity in the future.
Management believes that the actions taken in 1995 to terminate
unprofitable contracts, sell underperforming assets and renegotiate various
maintenance and lease agreements have positioned the Company to continue to
operate given the current reimbursement dynamics of the diagnostic imaging
industry. Management believes that its cash on hand at yearend and cashflow
from future operations will be sufficient to meet the Company's obligations as
they come due.
Although the Company cannot accurately anticipate the effect of
inflation on its operations, it does not believe that inflation has had, or is
likely in the foreseeable future to have, a material impact on its net sales or
results of operations.
The foregoing statements include forward looking statements that
involve a number of risks and uncertainties. Among the factors that could
cause actual results to differ materially are those discussed in Item 1 above
under the caption "Risk Factors and Certain Cautionary Statements."
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
REVENUES FROM MEDICAL SERVICES. Revenues from its DMCs declined $2 million
from $28.3 million in 1994 to $26.3 million in 1995 primarily due to declining
trends in both reimbursement and utilization. Revenues from its
fee-for-service business declined $10.2 million from $27.1 million in 1994 to
$16.9 million in 1995 primarily due to the Company's sale of underperforming
assets and termination of certain unprofitable leases and contracts used in its
fee-for-service business and the Company's sale of its Chicago- based
ultrasound and nuclear medicine division (the "Division") in July 1995 which
accounted for $2.5 million of the decline. As noted above, a number of factors
exist that could have an impact on the Company's future revenues, including
declining prices and an oversupply in the diagnostic equipment market,
declining trends in reimbursement and competition in the healthcare industry.
REVENUES FROM EQUIPMENT AND MEDICAL SUITE SALES. Revenues from equipment and
medical suite sales increased from $1.9 million in 1994 to $3.3 million in
1995. The increase in sales is due to the quantity and type of equipment and
medical suites sold and will vary accordingly. The Company intends to sell
equipment and its remaining inventory of medical suites in the future, but such
sales are subject to market conditions and there can be no assurances that such
sales will or will not occur.
COSTS OF MEDICAL SERVICES. Costs of medical services from its DMCs decreased
from $18.2 million (33% of medical services revenues) in 1994 to $16.7 million
(39% of medical services revenues) in 1995. Costs of medical services from its
fee-for-service business decreased from $15.5 million (28% of medical services
revenues) in 1994 to $8.7 million (20% of medical services revenues) in 1995
due to termination of leases and contracts, sales of fee-for-service equipment,
the Company's sale of a Division in July 1995 which accounted for $1.5 million
of the decrease in costs and actions taken by the Company to reduce spending.
11
12
COSTS OF EQUIPMENT AND MEDICAL SUITE SALES. Costs of equipment and medical
suite sales increased from $1.7 million in 1994 to $2.8 million in 1995. The
increase in costs is directly related to the quantity and type of equipment and
medical suites sold and will vary accordingly.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses decreased from $5.6 million (10% of medical services
revenues) in 1994 to $2.8 million (6% of medical services revenues) in 1995.
The decrease in costs resulted from reductions in administrative and other
consulting personnel and other spending reductions, including severance paid in
the fourth quarter of 1994.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts decreased
from $1.3 million (2% of medical services revenues) in 1994 to $1.1 million (2%
of medical services revenues) in 1995 primarily due to a decrease in revenues
and management's evaluation of accounts receivable.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased from
$12.6 million in 1994 to $10 million in 1995. This decrease was primarily due
to the sale of underperforming assets and termination of certain unprofitable
leases used in the fee-for-service business. The Company's sale of its
Division in July 1995 accounted for $500,000 of the decrease in expense.
INTEREST EXPENSE AND INCOME. Interest expense decreased from $5.3 million in
1994 to $3.6 million in 1995. The decrease in interest expense resulted from
the sale of underperforming assets and termination of certain unprofitable
leases used in the fee-for-service business, offset by a $450,000 charge to
interest expense for the forfeiture of a warrant issued by the Company to a
third party to purchase 300,000 shares of the Company's common stock. Interest
income increased from $400,000 in 1994 to $500,000 in 1995.
GAIN OF SALE OF ASSETS. On July 31, 1995, the Company'sold the assets
(exclusive of accounts receivable) of its ultrasound and nuclear medicine
division based in Chicago, Illinois to Diagnostic Health Services, Inc. for
cash of $3.7 million and the assumption of certain liabilities for a total sale
price of $5 million. The sale of assets consisted primarily of equipment and
resulted in a net gain of $3.5 million to the Company.
MINORITY INTEREST IN NET INCOME/LOSS OF CONSOLIDATED PARTNERSHIPS. Minority
interest in the consolidated partnerships decreased from a $100,000 minority
interest in net income in 1994 to a $200,000 minority interest in net loss in
1995. This decrease was primarily due to lower volume at two of the
consolidated DMCs.
INCOME TAXES. At December 31, 1995, the Company had net operating loss
carryforwards of approximately $21.8 million for Federal income tax purposes.
The Company provided Federal and state taxes of $180,000 in 1995.
1994 COMPARED TO 1993
REVENUES FROM MEDICAL SERVICES. Revenues from its DMCs declined $1.5 million
from $29.8 million in 1993 to $28.3 million in 1994 primarily due to declining
trends in both reimbursement and utilization. Revenues from its
fee-for-service business declined $8.9 million from $36 million in 1993 to
$27.1 million in 1994 primarily due to the Company's sale of underperforming
assets and termination of certain unprofitable leases and contracts. As noted
above, a number of factors exist that could have an impact on the Company's
future revenues, including declining prices and an oversupply in the diagnostic
equipment market, declining trends in reimbursement and competition in the
healthcare industry.
REVENUES FROM EQUIPMENT AND MEDICAL SUITE SALES. Revenues from equipment and
medical suite sales decreased from $3 million in 1993 to $1.9 million in 1994.
The decrease in sales is due to the quantity and type of equipment and medical
suites sold and will vary accordingly. The Company intends to sell equipment
and its remaining inventory of medical suites in the future, but such sales are
subject to market conditions and there can be no assurances that such sales
will or will not occur.
12
13
COSTS OF MEDICAL SERVICES. Costs of medical services from its DMCs decreased
from $21.1 million (32% of medical services revenues) in 1993 to $18.2 million
(33% of medical services revenues) in 1994. Costs of medical services from its
fee-for-service business decreased from $21.7 million (33% of medical services
revenues) in 1993 to $15.5 million (28% of medical services revenues) in 1994
due to termination of leases and contracts, sales of fee-for-service equipment
and actions taken by the Company to reduce spending.
COSTS OF EQUIPMENT AND MEDICAL SUITE SALES. Costs of equipment and medical
suite sales decreased from $2.7 million in 1993 to $1.7 million in 1994. The
decrease in costs is directly related to the quantity and type of equipment and
medical suites sold and will vary accordingly.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses decreased from $7.9 million (12% of medical services
revenues) in 1993 to $5.6 million (10% of medical services revenues) in 1994.
The decrease in costs resulted from reductions in administrative and marketing
personnel and other spending reductions, offset by severance incurred in the
fourth quarter of 1994 of $894,000 relating to the resignation of the Company's
former Chief Executive Officer.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts decreased
from $2.6 million (4% of medical services revenues) in 1993 to $1.3 million (2%
of medical services revenues) in 1994 due to a decrease in revenues and
management's evaluation of accounts receivable.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased from
$13.9 million in 1993 to $12.6 million in 1994. This decrease was primarily
due to the 1993 fourth quarter non-cash charge to write off goodwill related to
prior years acquisitions and the sale of underperforming assets and
termination of certain unprofitable leases used in the fee-for-service
business.
INTEREST EXPENSE AND INCOME. Interest expense decreased from $6.5 million in
1993 to $5.3 million in 1994. The decrease in interest expense resulted from
the sale of underperforming assets and termination of certain unprofitable
leases used in the fee-for-service business. Interest income decreased from
$700,000 in 1993 to $400,000 in 1994.
SPECIAL CHARGE. Operating results in 1993 included a non-cash charge of
approximately $21.5 million to write off goodwill associated with prior years
acquisitions and a non-cash charge of $2 million to increase reserves
established to reflect uncertainty regarding the realization of certain other
assets. There were no special charges recorded in 1994.
MINORITY INTEREST IN NET INCOME/LOSS OF CONSOLIDATED PARTNERSHIPS. Minority
interest in the consolidated partnerships increased from a $200,000 minority
interest in net loss in 1993 to a $100,000 minority interest in net income in
1994 due to improved performance of certain DMCs with significant minority
ownership.
INCOME TAXES. At December 31, 1994, the Company had net operating loss
carryforwards of approximately $30.9 million for Federal income tax purposes.
The Company provided no income tax expense in 1994.
EXTRAORDINARY GAIN. The Company financed an equipment acquisition for one of
its managed DMCs. The operations of the DMC were unsuccessful and foreclosure
proceedings were initiated by the lender. In mitigation of damages, the
underlying lender arranged for the sale of the unit which resulted in the
forgiveness of MICA's indebtedness. In the third quarter of 1994, the Company
recorded a non-cash gain of $1.3 million resulting from the forgiveness of debt
related to certain MRI equipment.
13
14
LIQUIDITY AND CAPITAL RESOURCES
At year end, the Company's cash and cash equivalents totaled $10.7
million, which is an increase of $2.2 million over 1994. In addition, the
Company's working capital improved to $337,000 as compared to a working capital
deficit of $1.7 million in 1994. Cash flows from operations of $15.4 million
and proceeds from the sale of Division assets of $3.7 million were offset by
payments against long-term debt of $15.9 million and capital expenditures of
$1.3 million.
In January 1996 the Company repaid a $3.1 million promissory note. The
Company paid $1,425,000 cash and applied $912,000 in proceeds received from the
exercise of a warrant attached to the note to purchase 160,000 shares of MICA's
Common Stock as payment in full to retire the note. In connection with this
transaction the Company issued an additional warrant to purchase 60,000 shares
of the Company's Common Stock at an exercise price of $8.50 per share which
expires on December 31, 1998. The Company recorded a gain of $517,000 from the
settlement of this obligation in January 1996 which was net of the $200,000
value assigned to the warrant.
Management believes that the actions taken in 1995 to terminate
unprofitable contracts, sell underperforming assets and renegotiate various
maintenance and lease agreements have positioned the Company to continue to
operate given the current reimbursement dynamics of the diagnostic imaging
industry. Management believes that its cash on hand at yearend and cashflow
from future operations will be sufficient to meet the Company's obligations as
they come due.
Under the terms of the Company's convertible debenture agreement, the
Company must offer to prepay all of the outstanding debentures ($8.2 million
at December 31, 1995) in the event of a change in control. In the event of a
"change in control," in which the Company were required to prepay all of the
debentures, the Company could be required to use all of its current cash
balances to repay the obligation (see Note 2 to the consolidated financial
statements).
On March 19, 1996, the Company and Steel Partners II, L.P. ("Steel")
entered into an Agreement of Compromise and Settlement (the "Settlement
Agreement") (see Note 2 to the consolidated financial statements). Total
expenditures related to the Settlement Agreement and related proxy
solicitation, including the fees and expenses of the Company's attorneys,
financial advisors, public relations firm and proxy solicitors, excluding
salaries and wages of its officers and employees and including the amounts
reimbursed to Steel, will be approximately $1,325,000, and will be recorded as
a charge to operations in the first quarter of 1996. No amounts have been
reflected in the financial statements as of December 31, 1995 with regard to
the Company's Settlement Agreement and proxy solicitation.
The Company's ability to meet its current obligations is dependent on
its ability to maintain revenues from existing contracts while reducing costs.
In addition, a number of factors exist that could have an impact on the Company
s future revenues: (i) changes in healthcare legislation which has limited
reimbursement and prohibited referrals from physician investors; (ii)
healthcare initiatives which could reduce reimbursement to the Company; (iii)
competition in the healthcare industry; and (iv) declining prices and an
oversupply in the diagnostic equipment market.
During 1993, the Company recognized significant special charges
related to its write-off of goodwill and the establishment of reserves for
uncollectible accounts and certain assets carried on the books at greater than
their net realizable value. These charges were substantially non-cash and
therefore did not have a significant impact on the Company's liquidity (see
Note 14 to the consolidated financial statements).
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and supplementary data of the
Company required by this item are set forth at the pages indicated in Item 14
(a) (1).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
14
15
PART III
Item 10. Directors and Executive Officers of the Registrant
The Board of Directors. Directors serve for a term of one year and
until their successors are duly elected and qualified. The Company's Bylaws
currently provide for a Board of not less than five members nor more than nine
members, with the exact number of directors fixed from time to time by the
Board. The Board has fixed the number of directors at five with one Board
position currently vacant. During the fiscal year ended December 31, 1995, the
Company's Board of Directors held eight meetings. Each director attended at
least 75% of all Board meetings during such periods as he was a Board member.
Set forth below are the directors of the Company.
Year First
Elected
Name Age Position To Serve
- ---------------------- --- ---------------------------- ----------
Robert S. Muehlberg 41 Chairman of the Board, 1994
President, Chief Executive
Officer and Director
Denise L. Sunseri 37 Vice President, Chief 1995
Financial Officer, Secretary
and Director
Keith R. Burnett, M.D. 43 Director 1993
Robert G. Ricci, D.O. 61 Director 1995
Robert S. Muehlberg, 41, a Director since 1994, has been Chief
Executive Officer and Chairman of the Board of Directors of the Company'since
February 1995, and also holds the position of President/Chief Operating
Officer. Mr. Muehlberg has also held the positions of Executive Vice
President, Senior Vice President and Vice President, Operations since joining
the Company in February 1985. Prior to joining the Company, Mr. Muehlberg was
Operations Manager at International Imaging, Inc., a provider of mobile and
free-standing diagnostic imaging centers, from 1983 to 1985, and Area Manager
for AMI/DSI, a provider of mobile diagnostic imaging services, from 1980 to
1983. Mr. Muehlberg holds a Bachelor s degree in Health Science from the
University of Missouri and a Master s degree in Business Administration from
Nova Southeastern University. Mr. Muehlberg is currently a member of the
International Forum for Corporate Directors, an organization dedicated to
responsible corporate governance.
Denise L. Sunseri, 37, a Director since 1995, has been Chief Financial
Officer and Secretary of the Company'since June 1993. She served as Vice
President and Corporate Controller from December 1991 to June 1993 and joined
the Company as Director of Financial Reporting in 1989. Prior to joining the
Company, Ms. Sunseri held various positions between 1981 and 1989 in the
Auditing and Financial Services division of the accounting firm of Arthur
Andersen & Co. Ms. Sunseri is a CPA and holds a Bachelor s degree in Business
Administration from the University of Portland. Ms. Sunseri is currently a
member of the International Forum for Corporate Directors, an organization
dedicated to responsible corporate governance.
Keith R. Burnett, M.D., 43, a Director since 1993, has been the
Medical Director of four of the Company's medical centers: Long Beach Medical
Imaging Clinic since 1985; Medical Imaging Center of Huntington Beach since
1988; Laguna Niguel MRI Center since 1992; and Downey MRI Center since 1994.
He also has been Medical Director
15
16
of Medical Imaging Services, a California network of imaging services, since
1992. Dr. Burnett has been an Assistant Clinical Professor of Radiology at the
University of California at Irvine since 1985 and a consultant in Nuclear
Medicine, Veterans Medical Center since 1988. He is Chairman of the Examination
Committee of the Registry of Magnetic Resonance Technologists (RMRIT) and a
member of the Advisory Council on MRI and Chiropractic Research at the Los
Angeles College of Chiropractic. Dr. Burnett received his Bachelor of Arts
degree in Human Biology from Stanford University in 1974 and his Doctor of
Medicine degree from Creighton University in 1978. Dr. Burnett is board
certified in Radiology and Nuclear Medicine and a Diplomate of the American
Board of Radiology.
Robert G. Ricci, D.O., 61, a Director since 1995, has been Director of
Medical Affairs and Education at Park Lane Medical Center, Kansas City,
Missouri, since 1992. He was President of Medical Imaging, Inc., Kansas City,
Missouri, a radiology practice, from 1974 through November 1, 1995. Dr. Ricci
currently serves on the Board of Directors for the following private companies:
Park Lane Medical Center, Preferred Health Professionals and Health Midwest.
He served as Program Chairman of the Missouri Association of Osteopathic
Physicians, as well as Program Chairman of the American Osteopathic College of
Radiology, in 1995. Dr. Ricci attended Temple University in Philadelphia and
received his Doctor of Osteopathy from the University of Health Sciences of
Osteopathic Medicine in 1968. Dr. Ricci is board certified in Radiology and is
a Fellow of the American Osteopathic College of Radiology.
Resignation of Director. On January 11, 1996, E. Keene Wolcott
resigned from the Board of Directors of the Company citing his opposition to
recently filed litigation against Steel and the timing of the commencement of
such litigation, as well as Mr. Wolcott's opposition to poison pills. See
"Legal Proceedings" for a description of the litigation against Steel. On
January 12, 1996, the Company responded to Mr. Wolcott's resignation citing the
unanimous support among each of the Company's other directors, financial
advisors and legal counsel regarding the commencement of such litigation. Both
letters were subsequently filed by the Company with the SEC on January 16, 1996
as attachments to a Report on Form 8-K.
Executive Officers. The executive officers of the Company, together
with the year in which they were appointed to their current positions, are set
forth below.
Name Age Position Year
- -------------------- --- -------------------------------- ----
Robert S. Muehlberg 41 Chairman of the Board, President 1995
and Chief Executive Officer
Denise L. Sunseri 37 Vice President, Chief Financial 1993
Officer and Secretary
Information concerning Mr. Muehlberg and Ms. Sunseri is set forth
above under "The Board of Directors."
Director and Officer Security Reports. Section 16(a) of the
Securities Exchange Act of 1934 requires the Company's directors and officers
and persons who own more than ten percent of the Company's Common Stock to file
reports of ownership and changes in ownership with the SEC. These reporting
persons are also required to furnish the Company with copies of all reports they
file. Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during its 1995 fiscal
year all filing requirements applicable to its officers, directors and greater
than ten percent shareholders were complied with.
16
17
Item 11. Executive Compensation
Summary Compensation Table. The following table provides information
on compensation paid by the Company to the Company's Chief Executive Officer
and the Company's only other executive officer who served the Company during
1995 for services provided for the three fiscal years ended December 31, 1995.
Long-Term
Annual Compensation All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
- --------------------------- ---- ---------- --------- ------------ ----------------
Robert S. Muehlberg 1995 167,200 50,000 45,000 5,207(1)
Chairman of the Board, 1994 148,450 25,000 40,000 5,612(1)
President and Chief 1993 148,628 20,000 12,000 6,255(1)
Executive Officer
Denise L. Sunseri 1995 142,200 50,000 45,000 4,271(2)
Vice President, Chief 1994 142,200 25,000 20,000 5,882(2)
Financial Officer and Secretary 1993 135,385 15,000 12,000 5,498(2)
- ------------------
(1) The amounts disclosed in this column include payments under the
Company's medical reimbursement policy of $483 for 1995, $1,036 for
1994 and $2,474 for 1993; the Company's matching 401(k) employer
contribution of $3,527 for 1995, $3,469 for 1994 and $2,752 for 1993;
and $1,197 for 1995, $1,107 for 1994 and $1,029 for 1993 in premiums
for a personal long-term disability policy.
(2) The amounts disclosed in this column include payments under the
Company's medical reimbursement policy of $520 for 1995, $1,699 for
1994 and $1,706 for 1993; the Company's matching 401(k) employer
contribution of $2,849 for 1995, $3,344 for 1994 and $3,008 for 1993;
and $902 for 1995, $839 for 1994 and $784 for 1993 in premiums for a
personal long-term disability policy.
Option Grants in Last Fiscal Year.
The following table provides information on option grants in fiscal
1995 to the executive officers named in the Summary Compensation Table:
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of
Securities Options Stock Price
Underlying Granted to Appreciation for
Options Employees Exercise Option Term(1)
Granted in Fiscal Price Expiration --------------------
Name (#) Year(%) ($) Date 5% ($) 10% ($)
- ------------------- ---------- ---------- -------- ---------- ------ --------
Robert S. Muehlberg 25,000(2) 21 7.81 12/13/00 53,975 119,225
20,000(3) 16 7.81 12/13/00 43,180 95,380
Denise L. Sunseri 25,000(2) 21 7.81 12/13/00 53,975 119,225
20,000(3) 16 7.81 12/13/00 43,180 95,380
- ------------------
(1) Potential realizable value is based on an assumption that the price of
the Common Stock appreciates above the exercise price at the annual
rate shown (compounded annually) from the date of grant until the end
of the five-year option term. These numbers are calculated based on
the requirements promulgated by the Securities and Exchange Commission
and do not reflect the Company's estimate of future stock price
growth.
(2) Options were granted December 15, 1995 and are immediately
exercisable.
(3) Options were granted December 15, 1995 and were exercisable upon the
Company meeting certain 1996 performance goals. On March 15, 1996 the
Compensation Committee determined that in order to provide incentive
during the Auction Process these options would be excerciseable
immediately (see Note 2 to the consolidated financial statements).
17
18
Option Exercises and Fiscal Yearend Values. None of the named
executive officers exercised any stock options during fiscal 1995. The
following table provides information on the value of such executive officers'
unexercised options at December 31, 1995.
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at Fiscal Year-End at Fiscal Year-End
Acquired Value ------------------------------- ----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- -------- ----------- -------------- ----------- -------------
Robert S. Muehlberg - - 61,333 45,667 $145,592 $149,848
Denise L. Sunseri - - 52,333 30,667 $116,092 $ 61,348
EXECUTIVE OFFICER AGREEMENTS. As an incentive for their continued
efforts on behalf of the Company, the Company has entered into employment
contracts with the Company's chief executive officer and chief financial
officer which provide that they will be paid the equivalent of one year's
salary and employee benefits in the event that their employment by the Company
is involuntarily terminated or if there is a change in control of the Company
and they should elect not to remain employed after such change in control. A
change in control, as defined in such employment contracts, means (i) the
entering into by the Company or its shareholders of an agreement to dispose of,
by sale, exchange, merger, reorganization, dissolution or liquidation, either
80% or more of the assets of the Company or a portion of the outstanding
Common Stock such that one person or group beneficially owns 25% or more of
the outstanding Common Stock, (ii) the issuance by the Company to one person
or group sufficient shares of Common Stock to increase such person's or group's
ownership to 25% or more of the outstanding Common Stock, or (iii) a change in
the composition of the Board of Directors such that the individuals who
constituted the Board as of the date of the employment contracts (the
"Incumbent Board") or individuals who become members of the Board of Directors
subsequent to the date of the employment contracts and whose nominations to
the Board are approved by a vote of at least a majority of those members of
the Board of Directors who were members of the Incumbent Board (or whose
nominations were approved by the Incumbent Board) cease to constitute at least
a majority of the Board. The Company and the Company's chief executive officer
and chief financial officer amended and restated the employment contracts in
January 1996 to include clause (iii) above in the definition of "change in
control." Pursuant to the terms of the Settlement Agreement, the Company and
the Company's chief executive officer and chief financial officer amended the
employment contracts on March 19, 1996 to provide that the Company's inability
to meet the deadlines set forth in the Settlement Agreement with respect to a
sale or merger transaction shall constitute an "involuntary termination" under
the employment contracts. For a more detailed description of the Settlement
Agreement, see "Legal Proceedings."
TAX DEFERRED RETIREMENT PLAN. The Company instituted a tax deferred
retirement plan (the "TDRP") under Section 401(k) of the Internal Revenue Code
for the benefit of all domestic employees in October 1989. Under the TDRP, an
employee may defer up to 10% of pre-tax earnings, subject to a maximum deferral
established each year, and contribute it to a trusteed plan. The Company will
match 50% of an employee's contribution to a maximum of 6% of gross pay. All
regular employees working over 1,000 hours per year who have completed six
months employment are eligible to enroll during the months of March, June,
September and December. The Company's matching benefits vest over a five year
period. Benefits under the TDRP are payable on retirement, hardship, death of
the employee or termination of employment. Approximately 245 employees,
including officers, are eligible to participate in the TDRP, and 179 are
presently enrolled. During 1995, the Company contributed $118,339 to match
employee contributions, including $6,376 for all named executive officers as a
group.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During
fiscal 1995, the Compensation/Stock Option Committee of the Company's Board of
Directors initially consisted of Messrs. Burnett (Chairman), Wolcott and Robert
A. Prosek, who did not stand for reelection at the Annual Meeting of
Shareholders in August 1995. In July 1995 and for the remainder of the fiscal
year, the Committee was changed to consist of Messrs. Burnett (Chairman),
Wolcott and Ricci.
18
19
Dr. Keith R. Burnett, a director of the Company, is a principal and
officer of Magnetic Imaging Medical Group ("MIMG"), which provides radiology
and other medical services for the Company's Diagnostic Medical Centers located
in Long Beach, Huntington Beach, Laguna Niguel and Downey, California. MIMG is
a Co-General Partner of the center in Long Beach. Dr. Burnett serves as the
Medical Director for the facilities in Huntington Beach and Laguna Niguel. The
Management, Licensing and Facilities Agreements between the respective Centers
and MIMG ("Agreements") provide that MICA will receive for services rendered:
77.5% of the revenues collected at Long Beach Medical Imaging Clinic, 80% of
the revenues collected at Medical Imaging Center of Huntington Beach and Laguna
Niguel MRI Center, and 82% at Downey MRI Center. Pursuant to the Agreements,
the balance of the amounts collected is retained by MIMG as their fee. In
1995, the Company's share of revenues collected from the four centers was
$1,669,000, $1,748,000, $783,000 and $834,000, respectively; MIMG's share of
the revenues collected was $452,000, $413,000, $169,000 and $208,000,
respectively (see "Certain Relationships and Related Transactions" and Note 16
to the consolidated financial statements).
DIRECTORS COMPENSATION. Directors, except those who are also officers
of the Company, are granted warrants at the discretion of the Company's
Compensation/Stock Option Committee for their services as directors, are paid
$3,000 for each meeting attended and are reimbursed for out-of-pocket expenses
of attending meetings. Messrs. Burnett and Ricci received 37,000 and 32,000
warrants, respectively, for such services over the course of their tenures as
directors. The Chairpersons of the Compensation/Stock Option Committee and
Audit Committee receive an additional $2,000 and $4,000 per year, respectively.
19
20
Item 12. Security Ownership of Certain Beneficial Owners and
Management
As of March 19, 1996, the following shareholders are the only
shareholders who are known by the Company to be beneficial owners of more than
five percent (5%) of the Company's voting securities.
Amount and
Nature of
Name and Address Beneficial Percentage of
of Beneficial Owner Ownership(1) Common Stock
------------------- ------------ -------------
Steel Partners 527,682(2) 19.8%
750 Lexington Avenue, 27th Floor
New York, NY 10022
Metropolitan Life Insurance Co. 372,727(3) 12.2%(3)
One Madison Avenue
New York, NY 10010
General Electric Company 220,000(4) 8.1%(4)
20825 Swenson, Suite 100
Waukesha, WI 53186
- --------------------
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any security that such person has the right to acquire
within 60 days after March 19, 1996.
(2) The information in the table is taken from a joint filing with the SEC
on Schedule 13D (Amendment No. 15) made by Steel, Steel Partners
Services, Ltd., a New York corporation ("Steel Services"), Warren G.
Lichtenstein and Lawrence Butler as of March 19, 1996 reporting
beneficial ownership. The amount includes 422,658 shares of Common
Stock beneficially owned by Steel and 105,024 shares of Common Stock
beneficially owned by Steel Services. Steel Services acquired the
105,024 shares beneficially owned by it for the account of Quota Fund
N.V., a Netherlands Antilles investment corporation ("Quota"). Quota
granted investment discretion to Soros Fund Management ("SFM"), which
in turn granted investment discretion to Steel Services. SFM is a
sole proprietorship of which George Soros is the sole proprietor. In
Amendment 15, both Mr. Lichtenstein and Mr. Butler state that they
beneficially own 527,682 shares of the Company's Common Stock, the
total number of shares held by Steel and Steel Services combined.
(3) Metropolitan Life Insurance Company holds $5.6 million in principal
amount of the Company's Convertible Debentures due April 1999. Such
Debentures bear interest at the rate of 6% per annum and are
convertible at any time into one share of Common Stock for each $15.00
of principal amount of Debenture. The amount and percentage of Common
Stock in the table represents beneficial ownership as if the
Debentures had been converted to Common Stock.
(4) On January 16, 1996, General Electric Company exercised previously
outstanding warrants to purchase 160,000 shares of Common Stock at
$5.70 per share in connection with the repayment by the Company of
certain outstanding loans. The amount and percentage in the table
includes presently exercisable warrants to purchase 60,000 shares of
Common Stock at $8.50 per share (see Note 3 to the consolidated
financial statements).
20
21
Set forth below are names and beneficial shareholdings, as of March
19, 1996 of (i) the Directors of the Company, (ii) each executive officer named
in the Summary Compensation Table appearing herein, and (iii) all executive
officers and directors as a group.
Amount and
Nature of Percent of
Beneficial Common
Name Ownership (1) Stock
---- ------------- ----------
Robert S. Muehlberg 108,333(2) 4%
Denise L. Sunseri 97,333(3) 4%
Keith R. Burnett, M.D. 37,654(4) 1%
Robert G. Ricci, D.O. 32,000(5) 1%
All Executive Officers and Directors as a Group (4 persons) 275,320(6) 10%
--------------------
(1) For purposes of this table, a person is deemed to have
"beneficial ownership" of any security that such person has
the right to acquire within 60 days after March 19, 1996.
(2) Includes presently exercisable options to purchase 101,333
shares of Common Stock at $2.35 to $21.90 per share, issued
for service as an officer and employee.
(3) Includes presently exercisable options to purchase 76,000
shares of Common Stock at $3.13 to $21.90 per share, issued
for service as an officer and employee.
(4) Includes presently exercisable warrants to purchase 37,000
shares of Common Stock at $4.05 to $7.81 per share, issued for
service as a director.
(5) Includes presently exercisable warrants to purchase 32,000
shares of Common Stock at $7.50 to $7.81 per share, issued for
service as a director.
(6) Includes presently exercisable options and warrants to
purchase 246,333 shares of Common Stock at various prices, as
described in the footnotes above.
CHANGE IN CONTROL. The Settlement Agreement provides that if the
Company is unable to meet certain deadlines in connection with a sale or merger
transaction, the individuals who are members of the Board of Directors will
resign and will cause such members to be replaced with designees of Steel, or,
if requested by Steel, the Company will promptly call the annual meeting of
shareholders for the purpose of electing the Board of Directors of the Company.
See "Legal Proceedings" for a more detailed description of the Settlement
Agreement.
Item 13. Certain Relationships and Related Transactions
Dr. Keith R. Burnett, a director of the Company, is a principal and
officer of Magnetic Imaging Medical Group ("MIMG"), which provides radiology
and other medical services for the Company's Diagnostic Medical Centers located
in Long Beach, Huntington Beach, Laguna Niguel and Downey, California. MIMG is
a Co-General Partner of the center in Long Beach. Dr. Burnett serves as the
Medical Director for the facilities in Huntington Beach and Laguna Niguel. The
Management, Licensing and Facilities Agreements between the respective Centers
and MIMG ("Agreements") provide that MICA will receive for services rendered:
77.5% of the revenues collected at Long Beach Medical Imaging Clinic, 80% of
the revenues collected at Medical Imaging Center of Huntington Beach and Laguna
Niguel MRI Center, and 82% at Downey MRI Center. Pursuant to the Agreements,
the balance of the amounts collected is retained by MIMG as their fee. In
1995, the Company's share of revenues collected from the four centers was
$1,669,000, $1,748,000, $783,000 and $834,000, respectively; MIMG's share of
the revenues collected was $452,000, $413,000, $169,000 and $208,000,
respectively.
21
22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) (1) Financial Statements.
The consolidated financial statements required by this item are
submitted as part of this Annual Report in a separate section beginning on
Page F-1 of this report.
Consolidated Financial Statements of Medical Imaging Centers of America, Inc. Page
------------------------------------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1995 and 1994 F-2
Consolidated Statements of Operations for the three years ended December 31, 1995 F-3
Consolidated Statements of Shareholders Equity (Net Capital Deficiency)
for the three years ended December 31, 1995 F-4
Consolidated Statements of Cash Flows for the three years ended December 31, 1995 F-5
Notes to Consolidated Financial Statements F-7
(a) (2) Financial Statement Schedules.
The following financial statement schedules of Registrant are filed
with this report:
Schedule VIII - Valuation and Qualifying Accounts
F-16
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1995.
(c) Exhibits.
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Annual Report.
22
23
INDEX TO EXHIBITS
Sequentially
Numbered
Number Description Page
- ----------------------------------------------------------------------------------------------------------
3.1 I Restated Articles of Incorporation
3.2 Bylaws as Amended
4.1 II Trust Indenture, Debenture due April 1999
4.2 II Debenture due April 1999
4.3 IV Rights Agreement dated October 2, 1991
4.4 First Amendment to Rights Agreement dated January 23, 1996
4.5 Second Amendment to Rights Agreement dated March 1, 1996
4.6 Third Amendment to Rights Agreement dated March 7, 1996
4.7 Fourth Amendment to Rights Agreement dated March 11, 1996
4.8 V Amendments to Trust Indenture dated April 1993 and February 1994
10.1 III 1985 Employee Incentive Stock Option Plan
10.2 1994 Incentive Stock Option Plan
10.3 V General Electric Loan Restructuring Agreement dated May 14, 1993
10.4 General Electric Agreement and Amendment dated January 16, 1996
10.5 VI Severance Agreement with Antone J. Lazos dated February 9, 1995
10.6 Employment Agreement with Robert S. Muehlberg dated January 30, 1996 as Amended
10.7 Employment Agreement with Denise L. Sunseri dated January 30, 1996 as Amended
10.8 Management, Licensing and Facilities Agreement
for Company's Huntington Beach Medical Imaging Center as Amended
10.9 Management, Licensing and Facilities Agreement
for Company's Laguna Niguel Medical Center as Amended
10.10 Management, Licensing and Facilities Agreement
for Company's Long Beach Medical Imaging Center as Amended
10.11 Management, Licensing and Facilities Agreement
for Company's Downey MRI Center as Amended
10.12 Agreement of Compromise and Settlement dated March 19, 1996
10.13 Standstill Agreement dated March 19, 1996
11.1 Earnings Per Share Computation
17.1 VII Letter from E. Keene Wolcott to the Company dated January 11, 1996
17.2 VII Letter from the Company to E. Keene Wolcott dated January 12, 1996
21 Subsidiaries List
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
23
24
INDEX TO EXHIBITS, continued
I Indicates the exhibit is incorporated by reference
from Registrant's Form S-1 Registration
Statement (Reg. No. 33-15160) filed June 18,
1987.
II Indicates the exhibit is incorporated by reference
from Registrant's Form 8-K Report dated May
10, 1989.
III Indicates the exhibit is incorporated by reference
from Registrant's Form S-8 Registration
Statement (Reg. No. 33-29917) filed on July
12, 1989.
IV Indicates the exhibit is incorporated by reference
from Registrant's Form 8-A Registration
Statement dated October 15, 1991.
V Indicates the exhibit is incorporated by reference
from Registrant's Form 10-K Report for the
year ended December 31, 1993.
VI Indicates the exhibit is incorporated by reference
from Registrant's Form 10-K Report for the
year ended December 31, 1994.
VII Indicates the exhibit is incorporated by reference
from Registrant's current Report on Form 8-K
filed January 16, 1996.
The financial statements listed in the accompanying Index to Financial
Statements are filed as a part of this Form 10-K.
24
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1996
MEDICAL IMAGING CENTERS OF AMERICA, INC.
By: /s/ Robert S. Muehlberg
-------------------------------------------
Robert S. Muehlberg, Chairman of the Board,
President and Chief Executive Officer
25
26
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 the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/ Robert S. Muehlberg Chairman of the Board of Directors, March 27, 1996
----------------------- President and Chief Executive
Robert S. Muehlberg Officer (Principal Executive
Officer)
By: /s/ Denise L. Sunseri Vice President, Chief March 27, 1996
--------------------- Financial Officer,
Denise L. Sunseri Secretary (Principal
Financial and Accounting
Officer) and Director
By: /s/ Keith R. Burnett, M.D. Director March 27, 1996
--------------------------
Keith R. Burnett, M.D.
By: /s/ Robert G. Ricci, D.O. Director March 27, 1996
---------------------------
Robert G. Ricci, D.O.
26
27
Report of Ernst and Young LLP, Independent Auditors
The Board of Directors and Shareholders
Medical Imaging Centers of America, Inc.
We have audited the accompanying consolidated balance sheets of Medical Imaging
Centers of America, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity (net capital
deficiency) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medical Imaging
Centers of America, Inc. at December 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
February 2, 1996, except for Note 2
as to which the date is March 19, 1996
F-1
28
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
(in thousands except share information) 1995 1994
- ----------------------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents (includes restricted cash of
$422 in 1995 and $655 in 1994) $ 10,732 $ 8,524
Trade and notes receivable, net 7,711 9,524
Prepaid expenses and other current assets 725 1,550
--------------------------
Total current assets 19,168 19,598
Equipment and leasehold improvements, net 16,274 29,216
Equipment held for sale, net 800 400
Investment in and advances to unconsolidated entities, net 1,489 2,069
Intangible assets, net 1,087 1,269
Other assets 830 917
--------------------------
$ 39,648 $ 53,469
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Current liabilities:
Current portion long-term debt and capital lease obligations $ 11,161 $ 11,541
Current portion convertible subordinated debt 2,800 2,800
Accounts payable 1,107 2,062
Accrued compensation 697 1,493
Other accrued liabilities 3,066 3,430
--------------------------
Total current liabilities 18,831 21,326
Long-term debt and capital lease obligations 11,182 25,206
Minority interest in consolidated partnerships 1,222 1,598
Convertible subordinated debt 5,400 8,200
Commitments
Shareholders' equity (net capital deficiency):
Preferred stock, no par value, 5,000,000 shares authorized;
Series B preferred shares, no par value, 300,000 shares
authorized, no shares issued or outstanding --- ---
Common stock, no par value, 30,000,000 shares authorized;
2,479,460 and 2,426,645 shares issued and outstanding
at December 31, 1995 and 1994, respectively 54,691 54,473
Accumulated deficit (51,678) (57,334)
--------------------------
Total Shareholders' equity (net capital deficiency) 3,013 (2,861)
--------------------------
$ 39,648 $ 53,469
==========================
See accompanying notes.
F-2
29
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------
(in thousands except per share information) 1995 1994 1993
- -----------------------------------------------------------------------------------------
REVENUES:
Medical services $43,192 $55,440 $ 65,786
Equipment and medical suite sales 3,345 1,866 3,011
------- ------- --------
Total revenues 46,537 57,306 68,797
COSTS AND EXPENSES:
Costs of medical services 25,387 33,693 42,786
Costs of equipment and medical suite sales 2,846 1,749 2,664
Marketing, general and administrative 2,773 5,550 7,872
Provision for doubtful accounts 1,059 1,343 2,643
Depreciation and amortization of equipment
and leasehold improvements 9,471 12,221 12,672
Amortization of intangibles and deferred costs 490 366 1,190
Equity in net income of unconsolidated entities (674) (708) (531)
Interest expense 3,557 5,258 6,459
Interest income (534) (454) (657)
Special charge -- -- 23,490
Gain on sale of assets (3,460) -- --
------- ------- --------
Total costs and expenses 40,915 59,018 98,588
------- ------- --------
Income (loss) before minority interest,
income taxes and extraordinary gain 5,622 (1,712) (29,791)
Minority interest in net (income) loss of
consolidated partnerships 214 (98) 178
------- ------- --------
Income (loss) before income taxes and extraordinary gain 5,836 (1,810) (29,613)
Income tax provision 180 -- --
------- ------- --------
Income (loss) before extraordinary gain 5,656 (1,810) (29,613)
Extraordinary gain -- 1,316 --
------- ------- --------
Net income (loss) $ 5,656 $ (494) $(29,613)
======= ======= ========
PRIMARY EARNINGS PER SHARE:
Income (loss) before extraordinary gain $ 2.19 $ (.75) $ (12.54)
Extraordinary gain $ -- $ .55 $ --
------- ------- --------
Net income (loss) $ 2.19 $ (.20) $ (12.54)
======= ======= ========
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) $ 1.96 $ (.20) $ (12.54)
======= ======= ========
SHARES USED IN PER SHARE AMOUNTS:
Primary 2,585 2,426 2,361
======= ======= ========
Fully Diluted 3,219 2,426 2,361
======= ======= ========
See accompanying notes.
F-3
30
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Common Shares
------------------------------------------
Issued and Outstanding Issuable
---------------------- ----------------- Accumulated
(in thousands except per share information) Shares Amount Shares Amount Deficit
--------- -------- ------ ------ -----------
Balance at December 31, 1992 2,361,085 $ 53,670 64,894 $ 800 $(27,227)
1993
Net loss -- -- -- -- (29,613)
--------- -------- ------ ----- --------
Balance at December 31, 1993 2,361,085 53,670 64,894 800 (56,840)
1994
Stock options exercised 666 3 -- -- --
Litigation settlement -
common shares issued 64,894 800 (64,894) (800) --
Net loss -- -- -- -- (494)
--------- -------- ------ ----- --------
Balance at December 31, 1994 2,426,645 54,473 -- -- $(57,334)
1995
Stock options exercised 53,000 219 -- -- --
Cash paid for fractional shares resulting
from one-for-five reverse stock split (185) (1) -- -- --
Net income -- -- -- -- 5,656
--------- -------- ------ ----- --------
Balance at December 31, 1995 2,479,460 $ 54,691 -- $ -- $(51,678)
========= ======== ====== ===== ========
See accompanying notes.
F-4
31
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------
(in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 5,656 $ (494) $(29,613)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 9,961 12,587 13,862
Amortization of deferred financing costs 97 135 135
Provision for doubtful accounts 1,059 1,343 2,643
Equity in net income of unconsolidated entities, net of distributions -- (430) (260)
Minority interest in net income (loss) of consolidated partnerships (214) 98 (178)
Net value of equipment sold 2,826 1,404 4,700
Gain on sale of Division assets (3,460) -- --
Extraordinary gain -- (1,316) --
Special charge -- -- 23,490
Change in assets and liabilities:
Decrease (increase) in trade receivables 1,081 1,937 (1,210)
Decrease in prepaid expenses and other current assets 823 346 1,125
Decrease in accounts payable and other accrued liabilities (1,623) (634) (2,180)
Decrease in accrued compensation (796) (61) (913)
Decrease in other -- -- 494
-------- -------- --------
Net cash provided by operating activities 15,410 14,915 12,095
INVESTING ACTIVITIES:
Proceeds from sale of Division assets 3,746 -- --
Capital expenditures (1,282) (3,065) (3,286)
Decrease in notes receivable -- 200 114
Decrease in investment in and advances to
unconsolidated entities, net 475 368 197
Acquisitions, net of cash (312) (657) --
Proceeds from the sale of long-term investments -- -- 2,750
Other, net (1) 80 387
-------- -------- --------
Net cash provided by (used in) investing activities 2,626 (3,074) 162
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations (15,901) (11,904) (15,510)
Proceeds from the issuance of long-term debt -- 1,123 7,089
Distribution to minority interests (151) (590) (459)
Other, net 224 (128) (57)
-------- -------- --------
Net cash used in financing activities (15,828) (11,499) (8,937)
-------- -------- --------
Net increase in cash and cash equivalents 2,208 342 3,320
Cash and cash equivalents at beginning of year 8,524 8,182 4,862
-------- -------- --------
Cash and cash equivalents at end of year $ 10,732 $ 8,524 $ 8,182
======== ======== ========
See accompanying notes.
F-5
32
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31,
----------------------------------------
(in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $3,488 $5,123 $5,918
====== ====== ======
Income taxes paid $ 180 $ 67 $ 88
====== ====== ======
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Additions to capital lease obligations $1,274 $8,545 $7,481
====== ====== ======
Retirement of debt and termination of capital lease
obligations in exchange for equipment $1,570 $7,075 $7,655
====== ====== ======
Assignment of debt related to sale of Division assets $1,047 $ -- $ --
====== ====== ======
Acquisitions:
Fair value of assets acquired, other than cash $ 11 $ 266 $ --
Excess of purchase price over fair value 301 875 --
Notes assumed -- (484) --
------ ------ ------
Acquisitions, net of cash $ 312 $ 657 $ --
====== ====== ======
See accompanying notes.
F-6
33
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Medical Imaging Centers of America, Inc.
("MICA" or the "Company") is a California corporation which provides medical
diagnostic imaging services to physicians, managed care providers and hospitals
nationwide. These services are provided to patients under DMC arrangements and
to hospitals primarily under fee-for-service arrangements which account for
approximately 61% and 39%, respectively, of medical services revenues.
PRINCIPLES OF CONSOLIDATION - The accompanying financial statements
consolidate the accounts of the Company, its wholly-owned subsidiaries, and
certain majority controlled Diagnostic Medical Centers ("DMCs"). Investments in
DMCs for which the Company does not have a controlling majority ownership are
accounted for using the equity method. All significant intercompany accounts
and transactions have been eliminated in consolidation.
REVENUES - Revenue is recognized when services are provided through
DMCs, fee-for-service arrangements with hospitals and management agreements
with unconsolidated and managed DMCs.
CASH AND CASH EQUIVALENTS - The Company considers cash equivalents to
be those instruments with original maturities of three months or less. At
December 31, 1995 and 1994, cash restricted for use in DMC operations was
$422,000 and $655,000, respectively.
NET INCOME (LOSS) PER SHARE - Net income (loss) per common share is
computed on the basis of the weighted average number of common shares
outstanding and common share equivalents and convertible debentures if
dilutive. The Company effected a one-for-five reverse stock split for
shareholders of record on October 16, 1995. All per share data has been
restated for all periods presented to give effect to the reverse stock split.
The Company's Common Stock trades on the OTC Bulletin Board under the new
symbol "MIGA".
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform with the 1995 presentation.
OTHER - See Notes 6, 7 and 11 for accounting policies related to
depreciation, amortization and income taxes.
2. SETTLEMENT AGREEMENT
On January 2, 1996, Steel Partners II, L.P. ("Steel"), which as of
March 19, 1996 owned 19.8% of the Company's outstanding common stock, filed
proxy materials with the Securities and Exchange Commission to replace the
current Board of Directors with its own representatives. The Company held a
special meeting of shareholders on February 26, 1996. On March 19, 1996, the
Company and Steel entered into an Agreement of Compromise and Settlement (the
"Settlement Agreement"). The Settlement Agreement calls for the dismissal of
all pending litigation and provides for mutual releases. The Settlement
Agreement also provides that the February 26, 1996 Special Meeting of
Shareholders will be adjourned without any final report from the Inspector of
Elections, leaving the current Board of Directors in place.
Pursuant to the Settlement Agreement, the Company is required to
initiate a process to sell or merge the Company ("Auction Process"). If the
process does not result in an announcement of a sale or merger transaction by
June 19, 1996, a definitive agreement for a sale or merger transaction by July
19, 1996, or the consummation of a sale or merger transaction by November 19,
1996, the current members of the Company's Board of Directors will resign from
their positions and be replaced by designees of Steel.
The Settlement Agreement calls for the company to amend the severance
agreements of the Company's chief executive officer and chief financial officer
to provide that the Company's failure to meet such deadlines shall constitute
an "involuntary termination" for purposes of their respective severance
packages.
F-7
34
Steel has agreed that it will not acquire beneficial ownership of any
of the Company's securities during the Auction Process.
The Settlement Agreement also requires the Company to redeem all
outstanding Rights issued pursuant to the Company's shareholder rights plan and
prohibits the Company from enacting a new shareholder rights plan without the
prior written consent of Steel (see Note 12).
Simultaneous with its entering into the settlement, the Company
entered into a Standstill Agreement with Arrowhead Holdings Corporation, a
Delaware corporation ("Arrowhead"), containing substantially the same terms as
the Settlement Agreement with Steel.
The Company estimates that the total expenditures for such
solicitation, including the fees and expenses of the Company's attorneys,
financial advisors, public relations firm and proxy solicitors, excluding
salaries and wages of its officers and employees and including the amounts
reimbursed to Steel, will be approximately $1,325,000, and will be recorded as
a charge to operations in the first quarter of 1996. No amounts have been
reflected in the financial statements as of December 31, 1995 with regard to
the Company's Settlement Agreement and proxy solicitation.
3. OPERATIONS
The Company had cash and cash equivalents of $10.7 million and working
capital of $337,000 as of December 31, 1995. Although there can be no
assurances, management believes that its cash on hand at year end and cashflow
from future operations will be sufficient to meet its obligations as they come
due.
The successful operation of the Company is dependent on the effects of
certain trends and legislation affecting the healthcare industry. The Omnibus
Budget Reconciliation Act of 1993 ("Stark II") limits referrals by physicians
of Medicare/Medicaid patients to other providers in which the physician has an
ownership interest. The Company has a limited number of limited partnership
units of consolidated partnerships owned by referring physicians. The Company
is in the process of acquiring these units and does not anticipate such
acquisitions will require a material amount of the Company's capital. Certain
states have also enacted legislation which similarly limits patient referrals,
limits the fees which a patient can be charged or requires state approval for
the expansion of healthcare facilities. The Company believes that the effects
on its operations as a result of these legislative actions will not be
material. In addition to state and federal governments, the public has
recently focused significant attention on reforming the healthcare system in
the United States. Within the past two years, a broad range of healthcare
reform measures have been introduced in Congress and in certain state
legislatures. Certain proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of healthcare costs that could include a freeze on prices
charged by physicians, hospitals or other healthcare providers, and greater
state flexibility in the administration of Medicaid, could adversely affect the
Company. There can be no assurance that currently proposed or future
healthcare programs, regulations or policies will not have a material adverse
effect on the Company's operating results.
On January 16, 1996 the Company entered into an agreement with a
creditor to pay off a promissory note. The Company paid $1,425,000 cash and
applied $912,000 in proceeds due from the exercise of a warrant to purchase
160,000 shares of MICA's Common Stock as payment in full to retire the note.
In connection with this transaction the Company issued an additional warrant to
purchase 60,000 shares of the Company's Common Stock at an exercise price of
$8.50 per share which expires on December 31, 1998. At the date of grant, the
Company allocated $200,000 to the cost of the warrant which was determined to
be its fair value. The Company recorded a gain of $517,000 from the settlement
of this obligation in January 1996.
F-8
35
4. RECEIVABLES
Long-term receivables, which include DMC trade receivables which are
not expected to be collected within one year, are included in Other assets on
the accompanying consolidated balance sheets. The Company's trade receivables
are primarily from hospitals and third party payor groups operating throughout
the United States.
December 31,
--------------------
(in thousands) 1995 1994
----------------------------------------------------------------------
Trade accounts receivable less allowance of
$4,503 in 1995 and $6,046 in 1994 $ 8,431 $10,284
Less current trade and receivables (7,711) (9,524)
------- -------
Long-term receivables $ 720 $ 760
======= =======
5. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company has investments in certain DMCs which are accounted for
using the equity method. Unaudited summarized combined financial information
for the unconsolidated DMCs is as follows:
BALANCE SHEETS
December 31,
--------------------
(in thousands) 1995 1994
----------------------------------------------------------------------
Current assets $4,387 $ 5,288
Equipment and leasehold improvements, net 3,909 5,432
Other assets 118 126
------ -------
$8,414 $10,846
====== =======
Current liabilities $2,879 $ 2,388
Advances from MICA 2,008 2,285
Long-term debt and capital lease obligations 2,198 4,020
Partners' equity 1,329 2,153
------ -------
$8,414 $10,846
====== =======
The Company's share of partners equity in unconsolidated DMCs is
$903,000 and $1,393,000 at December 31, 1995 and 1994, respectively. The Company
has recorded valuation allowances at December 31, 1995 and 1994 of $1,788,000
against its advances to unconsolidated entities of $2,375,000 and $2,464,000,
respectively.
STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------
(in thousands) 1995 1994 1993
-----------------------------------------------------------------------
Revenues $10,431 $11,279 $10,986
Costs and expenses 7,550 8,587 8,657
------- ------- -------
Net income $ 2,881 $ 2,692 $ 2,329
======= ======= =======
The Company's revenues include $629,000, $744,000 and $737,000 for the
years ended 1995, 1994 and 1993 respectively from management fees from the
unconsolidated DMCs.
The Company has guaranteed $3,899,000 in capital lease and debt
obligations of its unconsolidated DMCs with terms through 2000.
F-9
36
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at the lower of cost
or net realizable value and are summarized as follows:
December 31,
--------------------
(in thousands) 1995 1994
-----------------------------------------------------------------------
Equipment and furniture, net of valuation reserve
of $5,206 in 1995 and $6,684 in 1994 $ 38,865 $59,683
Leasehold improvements 2,577 3,207
-------- -------
$ 41,442 $62,890
Accumulated depreciation and amortization (25,168) (33,674)
-------- -------
$ 16,274 $29,216
======== =======
Depreciation and amortization are calculated on a straight-line basis
over the estimated useful life of the asset or over the lease term, if shorter.
Lease terms are generally five to seven years for equipment and furniture and
fifteen years for leasehold improvements. Equipment includes assets financed
through capital leases of $19,040,000 and $27,965,000 with accumulated
amortization of $7,949,000 and $10,825,000 at December 31, 1995 and 1994,
respectively. The Company periodically reviews its equipment portfolio to
determine that its carrying value is the lower of cost or net realizable value.
Management intends to sell certain equipment used during the year in
the Company's on-going business operations. Accordingly, this equipment has
been classified as equipment held for sale at its estimated realizable value at
December 31, 1995 and 1994.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
--------------
(in thousands) 1995 1994
-----------------------------------------------------------------------------
Excess of purchase price over net assets acquired, less
accumulated amortization of $466 in 1995 and $142 in 1994 $ 824 $ 742
Deferred costs, less accumulated amortization
of $1,179 in 1995 and $1,464 in 1994 263 527
------ ------
$1,087 $1,269
====== ======
During 1995, the Company acquired certain assets of one imaging center
and additional limited partner units in certain of its DMCs for $312,000 in
cash. Of the total purchase price, $301,000 was allocated to goodwill and is
being amortized using the straight-line method over the estimated useful life
of the assets which is five years. The Company's results of operations were
not materially affected as a result of these acquisitions.
During 1994, the Company acquired certain assets of two imaging
centers and additional limited partner units in certain of its DMCs for
$657,000 in cash and $484,000 in promissory notes. Of the total purchase
price, $875,000 was allocated to goodwill and is being amortized using the
straight-line method over the estimated useful life of the assets which is
three years. The Company's results of operations were not materially affected
as a result of these acquisitions.
The Company periodically reviews goodwill to assess recoverability
based upon projected undiscounted cash flows to be received from operating
income. If such cash flows are less than the carrying value of goodwill the
difference is charged to expense.
Deferred costs primarily include debt financing costs incurred in
connection with the issuance of debentures which have been deferred and are
being amortized on a weighted average basis over the term of the indebtedness.
F-10
37
8. DEBT
Long-term debt for equipment financing consists of the following:
December 31,
---------------
(in thousands) 1995 1994
---------------------------------------------------------------------------------------------
Capital lease obligations - weighted average interest rate of
approximately 9%; due at various dates through 2000 $11,937 $18,580
Equipment installment loans payable - weighted average interest rate of
approximately 7%; due at various dates through 2000 10,406 17,567
Note payable to a bank - effective interest rate of 10.5%;
final payment made on October 23, 1995 -- 600
------- -------
22,343 36,747
Less current maturities (11,161) (11,541)
------- -------
$11,182 $25,206
======= =======
Maturities on notes payable and long-term debt over the next five
years are as follows:
(in thousands)
Years Ending December 31,
-----------------------------------------------------------------------
1996 $ 7,210
1997 1,774
1998 886
1999 481
2000 55
-------
$10,406
=======
The Company finances certain equipment under capital leases. These
capital leases generally have terms of five to seven years. Future minimum
payments under capital leases are as follows:
(in thousands)
Years Ending December 31,
-----------------------------------------------------------------------
1996 $ 4,787
1997 3,767
1998 3,059
1999 1,925
2000 78
-------
Total minimum lease payments 13,616
Amounts representing interest (1,679)
-------
Present value of future minimum lease payments 11,937
Less amounts due in one year (3,951)
-------
Long-term capital lease obligations $ 7,986
=======
F-11
38
9. CONVERTIBLE SUBORDINATED DEBT
Convertible subordinated debentures are due in 1999 with interest
payable semi-annually at 6%. The debentures are convertible into MICA Common
Stock at $15 per share and may be redeemed by the Company if the closing bid
price of the Company's Common Stock on any 20 consecutive trading days has been
at least $22.50 per share. The Company is required to redeem the debentures on
April 30 as follows: 1996 - $2,800,000; and 1997 - $2,600,000. The final
payment of $2,800,000 is due April 30, 1999. The indenture relating to this
financing contains restrictions on the payment of cash dividends based upon an
accumulative net income test with certain adjustments. The indenture also has
limitations on the reacquisition of shares and requires a Minimum Consolidated
Shareholders Equity. In addition, the Company is obligated to offer to prepay
the Debentures in the event of a "change in control" of the Company. "Change
in control" is defined to include the acquisition by any person or group of
persons of the power to elect, appoint or cause the election of at least a
majority of the members of the Board of Directors. In light of the favorable
interest rate the Company currently is paying on the Debentures and the fact
that the conversion price is significantly above the current market price of
the Company's Common Stock, management believes that most, if not all, of the
holders of the Debentures would elect prepayment of their Debentures in the
event of a change in control (see Note 2). At December 31, 1995, the Company
is in compliance with all debt covenants. In February of 1994, the convertible
subordinated debenture holders agreed to exclude the 1993 non-cash charge of
approximately $21,500,000 related to goodwill from the definition of Minimum
Shareholders Equity. In return, the Company agreed to an increase in the
Minimum Shareholders Equity covenant from $5,190,000 to $10,000,000.
10. COMMITMENTS
The Company leases its facilities and certain equipment under
operating lease agreements with terms ranging from three to twenty years.
Certain facility lease agreements provide for rent increases based on the
increases in the Consumer Price Index and operating costs. Also, the Company
has the option to renew certain facility leases for additional terms varying
from five to ten years.
The Company's consolidated DMCs have entered into multi-year equipment
maintenance agreements. Future minimum payments under operating leases and
equipment maintenance agreements are as follows:
(in thousands)
Years Ending December 31,
-----------------------------------------------------------------------
1996 $ 5,031
1997 3,750
1998 3,166
1999 2,392
2000 1,340
Later years 574
-------
Total minimum payments $16,253
=======
Rent expense under operating leases totaled $5,362,000, $8,263,000 and
$11,509,000 for the years ended December 31, 1995, 1994 and 1993, respectively,
and is included in Costs of medical services in the Company's consolidated
statements of operations.
F-12
39
11. INCOME TAXES
The Company accounts for income taxes using FAS Statement No. 109,
Accounting for Income Taxes. Statement 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, Statement 109 generally considers all expected future events
other than enactments of changes in the tax law or rates.
At December 31, 1995, the Company had Federal net operating loss
carryforwards of approximately $21,837,000 for income tax purposes that expire
in 2008. The Company has investment tax credit carryforwards of approximately
$418,000 which begin to expire in 1999. In addition, the Company has a Federal
alternative minimum tax credit carryforward of approximately $166,000 which has
no expiration date. In accordance with the Internal Revenue Code, the Company
s use of its net operating loss carryforwards could be limited in the event of
certain cumulative changes in the Company's stock ownership. For financial
reporting purposes, a valuation allowance of approximately $11,761,000 has been
recognized to offset the deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
December 31,
---------------------
(in thousands) 1995 1994
-----------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 7,643 $ 10,655
Valuation reserves 4,386 5,160
Other 3,830 4,308
-------- --------
Total deferred tax assets 15,859 20,123
Valuation allowance for deferred tax assets (11,761) (14,156)
-------- --------
Net deferred tax assets 4,098 5,967
-------- --------
Deferred tax liabilities:
Tax over financial reporting depreciation 4,098 5,967
-------- --------
Total deferred tax liabilities 4,098 5,967
-------- --------
Net deferred tax liabilities $ -- $ --
======== ========
For the year ended 1995, MICA provided $120,000 in Federal tax related
to alternative minimum tax and $60,000 related to state income tax. No income
taxes were provided in 1994 or 1993.
The reconciliation of income tax computed at the U.S. federal
statutory tax rates to the income tax provision is as follows:
Year Ended December 31, 1995 1994 1993
----------------------------------------------------------------------
Federal statutory tax (benefit) rate 34.0% (34.0%) (34.0%)
Limitation of benefit on net operating loss -- 32.3 16.6
Benefit of loss carryforwards (32.1) -- --
Non-deductible amortization expense -- -- 17.4
State tax, net of federal income taxes 1.0 -- --
Other .2 1.7 --
----- ----- -----
Effective tax rate 3.1% --% --%
===== ===== =====
F-13
40
12. SHAREHOLDERS EQUITY
COMMON STOCK - At December 31, 1995, the Company had reserved
1,113,001 shares of Common Stock for issuance in connection with the exercise
of outstanding stock options and warrants and the conversion of debentures.
In March 1993, the United States District Court for the Southern
District of California approved a settlement of a class action lawsuit brought
in 1991 against the Company and certain former officers. The settlement
provided for the Company to issue 64,894 shares (after giving effect to the
one-for-five reverse stock split which occurred in 1995) of its Common Stock at
an agreed upon value of $800,000 and for the insurers of the individual
defendants to pay $2,650,000. On January 3, 1994, the Company issued 64,894
shares related to the litigation settlement.
PREFERRED STOCK-SERIES B - In October 1991, the Company's Board of
Directors authorized 300,000 shares of Series B Preferred Stock without par
value in connection with the Company's entering into a Rights Agreement. Each
share of Series B Preferred Stock entitled the holder thereof to 100 votes on
all matters submitted to a vote of the shareholders. Such shares of Series B
Preferred Stock were to be issued pursuant to the Rights Agreement at a ratio
of one one-hundredths of a share per Right upon the occurrence of certain event
and upon the Right holder's payment of an exercise price.
On March 19, 1996, the Board of Directors ordered the redemption of
all outstanding Rights so that no holder of Rights could exercise such Rights
and no shares of Series B Preferred Stock could be issued in connection with
the Rights Agreement. For a more detailed description of the Rights Agreement
and the Board of Directors' actions in connection therewith, see "Preferred
Stock Purchase Rights."
WARRANTS - The Company issues warrants primarily to directors,
underwriters and consultants for various services. Warrants are generally
granted at prices equal to the fair market value of the shares on the date of
grant. At year end 315,500 warrants were exercisable. In August 1995 a third
party forfeited a warrant to purchase 300,000 shares of the Company's Common
Stock pursuant to an agreement by the Company to pay $450,000. Warrant
activity during 1995 and 1994 is summarized as follows:
Number Price
of Shares Per Share
---------------------------------------------------------------------------------------
Outstanding at December 31, 1992 78,200 $13.75 - $68.15
Granted 487,500 2.50 - 5.70
Forfeited (16,200) 48.75 - 68.15
------- ----------------
Outstanding at December 31, 1993 549,500 2.50 - 21.90
Granted 7,000 2.81
Forfeited (41,000) 13.75 - 21.90
------- ----------------
Outstanding at December 31, 1994 515,500 2.50 - 18.75
Granted 107,000 4.05 - 7.81
Forfeited (307,000) 5.70 - 18.75
------- ----------------
Outstanding at December 31, 1995 315,500 $2.50 - $18.75
======= ================
PREFERRED STOCK PURCHASE RIGHTS
In October 1991, the Company's Board of Directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each share of
Company Common Stock ("Common Share") outstanding at the close of business on
October 18, 1991 (the "Record Date"). Each Right entitled the registered holder
to purchase from the Company one one-hundredth of a share of Series B Preferred
Stock, no par value, at a purchase price of thirty-five dollars ($35.00) per one
one-hundredth of a Preferred Share, subject to adjustment. The Board of
Directors also authorized and directed the issuance of one Right with respect to
each Common Share that should become outstanding between the Record Date and the
earliest of the Distribution Date (as defined below), the date the Rights are
redeemed and the date the Rights expire.
F-14
41
The Rights Agreement pursuant to which Rights were issued provided
that Rights would not be exercisable until such time as the Company issued
separate Right Certificates to the holders of Rights on a "Distribution Date,"
a date ten days after a public announcement that the dilutive provisions of the
Rights Agreement had been triggered. The Rights Agreement further provided
that the Board of Directors could redeem the Rights in whole, but not in part,
at a price of $.01 per Right and that the holder of Rights would have no rights
as a shareholder of the Company until he exercised such Rights.
On January 10, 1996, the Company's Board of Directors approved certain
amendments to the Rights Plan to provide greater flexibility for the Company
and to take into consideration a one-for-five reverse stock split effected by
the Company in October 1995. The Rights Agreement, as amended by the First
Amendment to Rights Agreement, made the determination of whether the dilutive
provisions of the Rights Agreement had been triggered dependent on a public
announcement by the Company or by a shareholder that the shareholder's
beneficial ownership of Common Stock has risen above 20% of the total issued
and outstanding shares of Common Stock. In contrast, the original Rights
Agreement made such determination automatic upon a shareholder reaching the 20%
threshold. By making the triggering of the rights dependent on a public
announcement, the Company eliminated the possibility that it might face a
situation in which the rights would be activated and the Board would not have
an opportunity to redeem the rights. The amendments approved by the Board of
Directors also changed the redemption price from $.01 to $.05 to reflect the
one-for-five reverse stock split in October of 1995.
On March 1, 1996, the Company announced, based on a report from a
Special Committee of the Board of Directors, that a group of shareholders which
included Steel Partners II, L.P. and Steel Partners Associates had acquired in
excess of 20% of the outstanding Common Stock of the Company and that the
dilutive provisions of Rights Agreement had been triggered. The Company also
announced that it had approved a Second Amendment to the Rights Agreement which
shortened from ten days to seven days the period during which the Board of
Directors could redeem the Rights following the public announcement that a
shareholder or a group of shareholders had triggered the dilutive provisions of
the Rights Agreement. The Company also reduced from ten days to seven days the
period between the public announcement of the triggering of the dilution
provisions and the Distribution Date.
On March 7, 1996, the Board of Directors approved a Third Amendment to
the Rights Agreement which extended until March 12, 1996 at 11:59 p.m. Pacific
Standard Time the period during which the Company could redeem the Rights and
following which the Company could distribute separate Right Certificates. The
Company extended the Distribution Date and the time for redemption of the
Rights once again to March 19, 1996 at 11:59 p.m. PST by way of a Fourth
Amendment to the Rights Agreement dated as of March 11, 1996.
On March 19, 1996, the Company announced that its Board of Directors
had ordered the redemption of all outstanding Rights as part of the Agreement
of Compromise and Settlement between the Company and certain of its affiliates,
on the one hand, and Steel Partners II, L.P. and certain of its affiliates, on
the other hand (the "Settlement Agreement") (see Note 2 for a description of
the Settlement Agreement). The Company set March 29, 1996 as the record date
for determining the holders of rights entitled to payment of the $.05 per share
Redemption Price and April 8, 1996 as the date for payment of the Redemption
Price. The Company anticipates that it will be required to pay $134,000 in the
aggregate to holders of Rights in order to effect the redemption of all
outstanding Rights.
13. RETIREMENT PLAN AND STOCK OPTIONS
RETIREMENT PLAN - Under Section 401(k) of the Internal Revenue Code
the Company instituted a tax deferred retirement plan (the "TDRP") for the
benefit of all employees meeting certain minimum eligibility requirements.
Under the TDRP, an employee may defer up to 10% of pre-tax earnings, subject to
certain limitations, and contribute it to a trusteed plan. The Company will
match 50% of an employee s deferred salary up to a maximum of 6% of gross pay.
The Company's matching contributions vest over a five-year period. For the
years ended December 31, 1995, 1994 and 1993, the Company contributed $118,000,
$101,000 and $135,000, respectively, to match employee contributions.
F-15
42
STOCK OPTIONS - The Company has been authorized to issue 489,000
shares of Common Stock to certain key employees under its Stock Option Plan
adopted in 1985 and 1994. Options are granted at prices equal to the fair
market value of the shares at the date of grant and are usually exercisable in
cumulative annual increments each year, commencing one year after the date of
grant. Activity under the Company's stock option plans during 1995 and 1994
are summarized as follows:
Number Price
of Shares Per Share
---------------------------------------------------------------------------------------
Outstanding at December 31, 1992 137,867 $13.75 - $21.90
Granted 122,800 3.13 - 4.40
Forfeited (105,967) 3.13 - 21.90
------- ----------------
Outstanding at December 31, 1993 154,700 3.13 - 21.90
Granted 160,800 2.35 - 3.60
Exercised (666) 3.13
Forfeited (98,134) 2.35 - 21.90
------- ----------------
Outstanding at December 31, 1994 216,700 2.35 - 21.90
Granted 121,800 7.81
Exercised (53,000) 2.35 - 3.44
Forfeited (34,666) 2.35 - 21.90
------- ----------------
Outstanding at December 31, 1995 250,834 $2.35 - $21.90
======= ================
Options exercisable at December 31, 1995 totaled 146,694 and shares
available for future grant at year end totaled 71,052.
14. SPECIAL CHARGES
Operating results in 1993 include a non-cash charge of approximately
$21,500,000 to write off goodwill associated with prior years acquisitions and
a non-cash charge of $2,000,000 to increase reserves established to reflect
uncertainty regarding the realization of certain other assets.
15. EXTRAORDINARY GAIN
The Company financed an equipment acquisition for one of its managed
DMCs. The operations of the DMC were unsuccessful and foreclosure proceedings
were initiated by the lender. In mitigation of damages, the underlying lender
arranged for the sale of the unit which resulted in the forgiveness of MICA's
indebtedness. In 1994, the Company recorded a non-cash extraordinary gain of
$1.3 million resulting from the forgiveness of debt related to certain MRI
equipment.
16. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Keith R. Burnett, a director of the Company, is a principal and
officer of Magnetic Imaging Medical Group ("MIMG"), which provides radiology
and other medical services for the Company's Diagnostic Medical Centers located
in Long Beach, Huntington Beach, Laguna Niguel and Downey, California. MIMG is
a Co-General Partner of the center in Long Beach. Dr. Burnett serves as the
Medical Director for the facilities in Huntington Beach and Laguna Niguel. The
Management, Licensing and Facilities Agreements between the respective Centers
and MIMG ("Agreements") provide that MICA will receive for services rendered:
77.5% of the revenues collected at Long Beach Medical Imaging
F-16
43
Clinic, 80% of the revenues collected at Medical Imaging Center of Huntington
Beach and Laguna Niguel MRI Center, and 82% at Downey MRI Center. Pursuant to
the Agreements, the balance of the amounts collected is retained by MIMG as its
fee. In 1995, the Company's share of revenues collected from the four centers
was $1,669,000, $1,748,000, $783,000 and $834,000, respectively; MIMG's share
of the revenues collected was $452,000, $413,000, $169,000 and $208,000,
respectively.
17. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. ("SFAS") 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", effective for fiscal years beginning after December 15, 1995. SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company does not believe, based on
current circumstances, the effect of adoption of SFAS 121 will be material.
In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation", effective for fiscal years
beginning after December 15, 1995. SFAS 123 establishes the fair value based
method of accounting for stock-based compensation arrangements, under which
compensation cost is determined using the fair value of the stock option at the
grant date and the number of options vested, and is recognized over the periods
in which the related services are rendered. If the Company were to retain its
current intrinsic value based method, as allowed by SFAS 123, it will be
required to disclose the pro forma effect of adopting the fair value based
method. To date, the Company has not made a decision to adopt the fair value
based method.
F-17
44
MEDICAL IMAGING CENTERS OF AMERICA, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
-------ADDITIONS-------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
(in thousands) OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- --------------------------------------------------------------------------------------------
YEAR ENDED 12/31/95:
Reserve for bad debts $6,046 $1,059 $ -- $2,602 $4,503
====== ====== ==== ====== ======
Reserve for advances
to unconsolidated centers $1,788 $ -- $ -- $ -- $1,788
====== ====== ==== ====== ======
Amortization of intangibles:
Excess of purchase price over
net assets acquired $ 142 $ 324 $ -- $ -- $ 466
====== ====== ==== ====== ======
Amortization of deferred costs:
Debt financing costs $ 858 $ -- $ 97 $ -- $ 955
Pre-opening and
organization costs 382 152 -- 534 --
Indirect lease origination
costs 224 14 -- 14 224
------ ------ ---- ------ ------
Total $1,464 $ 166 $ 97 $ 548 $1,179
====== ====== ==== ====== ======
============================================================================================
YEAR ENDED 12/31/94:
Reserve for bad debts $6,883 $1,243 $ -- $2,080 $6,046
====== ====== ==== ====== ======
Reserve for advances to
unconsolidated centers $1,688 $ 100(1) $ -- $ -- $1,788
====== ====== ==== ====== ======
Amortization of intangibles:
Excess of purchase price over
net assets acquired $ 0 $ 142 $ -- $ -- $ 142
====== ====== ==== ====== ======
Amortization of deferred costs:
Debt financing costs $ 723 $ -- $135 $ -- $ 858
Pre-opening and
organization costs 267 192 -- 77 382
Indirect lease origination
costs 197 32 -- 5 224
------ ------ ---- ------ ------
Total $1,187 $ 224 $135 $ 82 $1,464
====== ====== ==== ====== ======
============================================================================================
(1) Represents increase in reserve for advances to unconsolidated centers.
F-18
45
MEDICAL IMAGING CENTERS OF AMERICA, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
-------ADDITIONS-------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
(in thousands) OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------------------------------------------------------------
YEAR ENDED 12/31/93:
Reserve for bad debts $5,465 $2,643 $ 0 $1,225 $6,883
====== ====== ====== ====== ======
Reserve for contract costs in
excess of related revenues $ 735 $ -- $ -- $ 735(1) $ 0
====== ====== ====== ====== ======
Reserve for advances
to unconsolidated centers $ 900 $ -- $ 788 (2) $ -- $1,688
====== ====== ====== ====== ======
Amortization of intangibles:
Excess of purchase price over
net assets acquired $1,756 $ 521 ( $2,267)(3) $ 10 $ 0
Covenants not to compete,
contracts acquired and rights to
provide MRI equipment 574 246 ( 820)(3) -- 0
------ ------ ------ ------ ------
Total $2,330 $ 767 ( $3,087) $ 10 $ 0
====== ====== ====== ====== ======
Amortization of deferred costs:
Debt financing costs $ 588 $ -- $ 135 $ -- $ 723
Pre-opening and
organization costs 203 266 -- 202 267
Indirect lease origination
costs 228 157 -- 188 197
------ ------ ------ ------ ------
Total $1,019 $ 423 $ 135 $ 390 $1,187
====== ====== ====== ====== ======
=================================================================================================
(1) Represents reserves written off due to contracts expiring during 1993.
(2) Represents reclass of general reserve to reserve for advances to
unconsolidated centers.
(3) Represents write-off of goodwill.
F-19