1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1996, or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9444 Farnham St., Suite 100
San Diego, California 92123
(Address of principal executive offices) (Zip Code)
(619) 560-0110
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
2,674,307 shares of Common Stock as of May 7, 1996
Page 1 of 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
- ---------------------------------------
March 31, 1996 December 31, 1995
-------------- -----------------
ASSETS:
Current assets:
Cash and cash equivalents (includes restricted cash of $170 in
1996 and $422 in 1995) $ 6,835 $ 10,732
Trade and notes receivable, net of allowance for doubtful accounts
of $4,379 in 1996 and $4,503 in 1995 8,036 7,711
Prepaid expenses and other current assets
704 725
-------- --------
Total current assets 15,575 19,168
Equipment and leasehold improvements, net of accumulated
depreciation and amortization of $16,372 in 1996 and
$25,168 in 1995 14,844 16,274
Equipment held for sale, net of accumulated depreciation
of $2,277 in 1996 and $4,863 in 1995 700 800
Investment in and advances to unconsolidated entities, net of reserves
of $1,845 in 1996 and $1,788 in 1995 1,375 1,489
Intangible assets, net of accumulated amortization of
$1,606 in 1996 and $1,645 in 1995 950 1,087
Other assets 797 830
-------- --------
$ 34,241 $ 39,648
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion long-term debt and capital lease obligations $ 6,212 $ 11,161
Current portion convertible subordinated debt 2,800 2,800
Accounts payable 1,149 1,107
Accrued compensation 487 697
Other accrued liabilities 2,805 3,066
-------- --------
Total current liabilities 13,453 18,831
Long-term debt and capital lease obligations 9,883 11,182
Minority interest in consolidated partnerships 1,098 1,222
Convertible subordinated debt 5,400 5,400
Commitments
Shareholders' Equity:
Preferred stock, no par value, 5,000,000 shares authorized; Series B
preferred shares, no par value, 300,000 shares
authorized, no shares issued or outstanding -- --
Common stock, no par value, 30,000,000 shares authorized;
2,671,774 and 2,479,460 shares issued and outstanding at
March 31, 1996 and December 31, 1995, respectively 55,906 54,691
Accumulated deficit (51,499) (51,678)
------- --------
Total shareholders' equity 4,407 3,013
-------- --------
$ 34,241 $ 39,648
======== ========
See accompanying notes.
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MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
----------------------------
(in thousands except per share information) 1996 1995
- ------------------------------------------- ---------- ---------
REVENUES:
Medical services $ 9,105 $ 12,139
Equipment and medical suite sales
348 2,036
-------- --------
Total revenues 9,453 14,175
COSTS AND EXPENSES:
Costs of medical services 5,202 7,406
Costs of equipment and medical suite sales 66 1,542
Marketing, general and administrative 697 782
Provision for doubtful accounts 123 268
Depreciation and amortization of equipment
and leasehold improvements 1,676 2,633
Amortization of intangibles and deferred costs 101 122
Equity in net income of unconsolidated entities (180) (183)
Interest expense 560 955
Interest income (128) (154)
Special charge 1,325 --
-------- --------
Total costs and expenses 9,442 13,371
-------- --------
Income before minority interest and extraordinary gain 11 804
Minority interest in net (income) loss of
consolidated partnerships (81) 120
-------- --------
Income (loss) before extraordinary gain (70) 924
Extraordinary gain, net of tax 382 --
-------- --------
Net income $ 312 $ 924
======== ========
PRIMARY EARNINGS PER SHARE:
Income (loss) before extraordinary gain $ (.03) $ .37
Extraordinary gain $ .14 $ --
-------- --------
Net income $ .11 $ .37
======== ========
FULLY DILUTED EARNINGS PER SHARE:
Net income $ .11 $ .35
======== ========
SHARES USED IN PER SHARE AMOUNTS:
Primary 2,752 2,476
======== ========
Fully Diluted 2,752 3,227
======== ========
See accompanying notes.
Page 3 of 13
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MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
(in thousands) 1996 1995
- -------------- ---- ----
OPERATING ACTIVITIES:
Net income $ 312 $ 924
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,777 2,755
Amortization of deferred financing costs 18 36
Provision for doubtful accounts 123 268
Minority interest in net income (loss) of consolidated partnerships 81 (120)
Net value of equipment sold 120 1,555
Extraordinary gain from debt forgiveness (517) --
Change in assets and liabilities:
(Increase) decrease in trade receivables (448) 27
Decrease in prepaid expenses and other current assets 21 142
Decrease in accounts payable and other accrued liabilities (219) (702)
Decrease in accrued compensation (210) (701)
-------- -------
Net cash provided by operating activities 1,058 4,184
INVESTING ACTIVITIES:
Capital expenditures (137) (169)
Decrease in investment in and advances to unconsolidated entities, net 114 337
Cost of acquisitions (205) (50)
Other, net 33 (6)
-------- -------
Net cash (used in) provided by investing activities (195) 112
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations (4,735) (4,506)
Distribution to minority interests -- (151)
Redemption of Shareholder Rights (133) --
Other, net 108 (2)
-------- -------
Net cash used in financing activities (4,760) (4,659)
-------- -------
Net decrease in cash and cash equivalents (3,897) (363)
Cash and cash equivalents at beginning of period 10,732 8,524
-------- -------
Cash and cash equivalents at end of period $ 6,835 $ 8,161
======== =======
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 419 $ 754
======== =======
Income taxes paid $ 47 $ 6
======== =======
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additions to capital lease and long-term debt obligations $ 131 $ 280
======== =======
Retirement of debt and termination of capital lease obligations $ 1,649 $ 389
======== =======
See accompanying notes.
Page 4 of 13
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MEDICAL IMAGING CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Common Shares
----------------------
Issued and Outstanding
---------------------- Accumulated
(in thousands except share information) Shares Amount Deficit
- --------------------------------------- ------ ------ -------
Balance at December 31, 1995 2,479,460 $54,691 $(51,678)
Proceeds from issuance of common stock
purchase warrants (see Note 4) 160,000 912 --
Fair value assigned to warrants issued in
connection with debt forgiveness (see Note 4) -- 200 --
Stock options exercised 32,314 103 --
Redemption of Shareholder Rights (see Note 3) -- -- (133)
Net income -- -- 312
-----------------------------------------
Balance at March 31, 1996 2,671,774 $55,906 $(51,499)
==========================================
See accompanying notes.
Page 5 of 13
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MEDICAL IMAGING CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The financial statements included herein have been prepared by Medical
Imaging Centers of America, Inc. ("MICA" or the "Company"), without audit,
according to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures that are made are
adequate to make the information presented not misleading. Further, in the
opinion of the Company, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations of the Company as of and for the periods indicated, have been
included.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and the notes thereto for the year ended December
31, 1995, which are included in the Company's Form 10-K. The results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of results to be expected for the full fiscal year ending December
31, 1996.
2. 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.
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.
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 $425,000 reimbursed to Steel, will
approximate $1,325,000, and such amount has been recorded as a Special Charge to
operations in the first quarter of 1996.
Page 6 of 13
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3. The Board of Directors 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
paid $133,000 in the aggregate to holders of Rights issued pursuant to the
Rights Plan to effect the redemption of all outstanding Rights. Such amount has
been reflected in the financial statements as of March 31, 1996.
4. In January 1996, the Company repaid a $3.1 million promissory note. The
Company paid $1,425,000 in 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 assigned a $200,000 value to the
warrant and recorded an extraordinary gain of $382,000, net of tax, from the
settlement of this obligation in January 1996.
5. Primary and fully diluted net income per share is computed on the basis of
weighted average number of common shares outstanding and includes common stock
equivalents when their effect is dilutive. For the quarter ended March 31, 1996,
common stock equivalents and additional shares from the conversion of debentures
were excluded from the fully diluted net income computation as their effect was
antidilutive. 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.
6. No income tax provisions have been recorded for the three months ended March
31, 1996 and 1995, respectively, due to net operating loss carryforwards
available for income tax purposes.
7. Certain 1995 amounts have been reclassified to conform with the March 31,
1996 presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
BUSINESS 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.
OPERATING TRENDS
Medical services revenues declined during the first quarter of 1996 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. As such,
the Company believes that revenues from its fee-for-service business, which
accounted for 39% of medical services revenues reported in 1995 and 30% of
medical services revenues reported in the first quarter of 1996, will continue
to decline. In view of the historical unprofitability and uncertainty regarding
its fee-for-service business, the Company's strategy is to sell equipment used
in its fee-for-service business as related hospital contracts expire.
Revenues earned by the Company's DMCs in the first quarter of 1996 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 its
cash on hand and cashflow from future operations will be sufficient to meet the
Company's obligations as they come due.
Page 7 of 13
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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.
RESULTS OF OPERATIONS
REVENUES FROM MEDICAL SERVICES Revenues from its DMCs for the first quarter
declined $400,000 from $6.8 million in 1995 to $6.4 million in 1996 primarily
due to declining trends in both reimbursement and utilization. Revenues from its
fee-for-service business for the first quarter declined $2.6 million from $5.3
million in 1995 to $2.7 million in 1996, 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. The Company's sale of its
Chicago-based Ultrasound and Nuclear Medicine Division (the "Division") in July
of 1995 accounted for $1.4 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 for the first quarter decreased from $2 million in 1995 to
$350,000 in 1996. 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.
COSTS OF MEDICAL SERVICES Costs of medical services from its DMCs for the first
quarter decreased from $4.2 million (35% of medical services revenues) in 1995
to $3.9 million (43% of medical services revenues) in 1996 primarily due to the
renegotiation of certain DMC lease obligations. Costs of medical services from
its fee-for-service business for the first quarter decreased from $3.2 million
(26% of medical services revenues) in 1995 to $1.3 million (14% of medical
services revenues) in 1996, primarily due to the Company's sale of Division
assets in July 1995 which accounted for $950,000 of the decrease in costs,
termination of leases and contracts, sales of fee-for-service equipment, and
various actions taken by the Company to reduce spending.
COSTS OF EQUIPMENT AND MEDICAL SUITE SALES Costs of equipment and medical suite
sales for the first quarter decreased from $1.5 million in 1995 to $65,000 in
1996. The difference 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 $780,000 (6% of medical services
revenues) in 1995 to $695,000 (8% of medical services revenues) in 1996. The
decrease in costs resulted from reductions in administrative personnel,
expiration of certain leases, and other spending reductions.
PROVISION FOR DOUBTFUL ACCOUNTS Provision for doubtful accounts for the first
quarter decreased from $270,000 (2% of medical services revenues) in 1995 to
$125,000 (1% of medical services revenues) in 1996. The provision for doubtful
accounts is based upon management's evaluation of the collectability of accounts
receivable and varies accordingly.
DEPRECIATION AND AMORTIZATION Depreciation and amortization of equipment and
leasehold improvements for the first quarter decreased from $2.6 million in 1995
to $1.7 million in 1996. This decrease is primarily due to the sale of
underperforming assets and termination of certain unprofitable leases used in
the fee-for-service business and the Company's sale of Division assets in July
of 1995 which accounted for $235,000 of the decline.
INTEREST EXPENSE Interest expense for the first quarter decreased from $955,000
in 1995 to $560,000 in 1996. This decrease primarily resulted from the sale of
underperforming assets and termination of certain unprofitable leases used in
the fee-for-service business. In addition, interest expense decreased $60,000
due to the declining balance of its convertible subordinated debt.
MINORITY INTEREST IN NET INCOME/LOSS OF CONSOLIDATED PARTNERSHIPS The minority
interest in the consolidated partnerships increased from a net loss of $120,000
in the first quarter of 1995 to net income of $80,000 in the first quarter of
1996 due to improved performance of certain of its DMCs with minority
ownership.
Page 8 of 13
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EXTRAORDINARY GAIN 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 in
cash and applied $912,000 in proceeds received 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 an extraordinary gain of
$382,000, net of tax, from the settlement of this obligation in the quarter
ended March 31, 1996.
SPECIAL CHARGE 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
$425,000 reimbursed to Steel, approximated $1,325,000, and were recorded as a
Special Charge to operations in the first quarter of 1996 (see Note 2).
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company's cash and cash equivalents totaled $6.8 million
which is a decrease of $3.9 million since December 31, 1995. This decrease
primarily reflects principal payments of $4.7 million offset by net cash
provided by operations of $1 million. Included in the first quarter's principal
payments is $1.4 million paid to retire a promissory note (see Note 4) and $1.1
million in payments related to a negotiation to settle certain equipment lease
debt. The Company had working capital of $2.1 million at March 31, 1996, which,
when combined with its cash on hand was adequate to meet the Company's mandatory
sinking fund payment of $2.8 million on April 30, 1996 to holders of its
convertible subordinated debt.
The Company's ability to meet its current obligations is dependent on its
ability to maintain revenues from existing contracts while reducing related
costs. In addition, a number of factors exist that could have an impact on the
Company's future revenues. Such factors in some cases have affected the
Company's results, and in the future could cause the Company's actual results
for the second quarter of 1996, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These factors are discussed under the caption "Risk Factors and Certain
Cautionary Statements" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and include, among others, the following: (i) declining
prices and an oversupply in the diagnostic equipment market; (ii) changes in
healthcare legislation which have limited reimbursement and prohibited referrals
from physician investors; (iii) healthcare initiatives which could reduce
reimbursement to the Company; and (iv) competition in the healthcare industry.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 2, 1996, Steel Partners II, L.P. ("Steel"), who at that time had
acquired 19.9% of the Company's outstanding common stock, commenced a proxy
solicitation against the Company by filing preliminary proxy materials with the
SEC demanding that a Special Meeting of Shareholders be called on February 26,
1996 to remove the Company's current Board and elect Steel's nominees in their
place. On January 10, 1996, the Company commenced litigation in the United
States District Court for the Southern District of California (the "Court")
against 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 February 26, 1996, the
Company held a Special Meeting of Shareholders as scheduled.
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.
Page 10 of 13
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Pursuant to the Settlement Agreement, the Company is required to initiate a
process to sell or merge the Company. 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 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 sale or merger process.
The Settlement Agreement also requires the Company to redeem all outstanding
Rights issued pursuant to the Company's 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 initiate a process to sell
or merge the Company and shall redeem all outstanding Rights granted pursuant to
the 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 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. 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 $425,000 reimbursed to Steel,
approximated $1,325,000, and were recorded as a Special Charge to operations in
the first quarter of 1996.
Item 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of Shareholders was held on February 26, 1996. The matters
voted on were the removal of all present directors without cause; and if
approved, the election of new directors. Pursuant to the March 19, 1996
Settlement Agreement, the February 26, 1996 Special Meeting of Shareholders was
adjourned without any final report from the Inspector of Elections, leaving the
current Board of Directors in place (see Note 2).
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 11 - Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule
(b) Reports:
A Form 8-K was filed on January 16, 1996 reporting the
resignation of a director of the Company's Board of Directors. A Form 8-K was
filed on January 25, 1996 amending the Company's Shareholder Rights Plan.
Page 11 of 13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICAL IMAGING CENTERS OF AMERICA, INC.
Date : May 13, 1996 /s/ Robert S. Muehlberg
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Robert S. Muehlberg
Chairman of the Board of Directors,
President and Chief Executive Officer
Date : May 13, 1996 /s/ Denise L. Sunseri
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Denise L. Sunseri
Vice President, Chief Financial
Officer and Secretary
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