-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QYAwjgCLHuYAcG8glQhHLD83R0oVfQWhOPgaSRoXZrOLzqhPblTiPCtK1EYKaS98 Wee9I/iQ4SSC5Bw0HJB4WA== 0000936392-96-001013.txt : 19961115 0000936392-96-001013.hdr.sgml : 19961115 ACCESSION NUMBER: 0000936392-96-001013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL IMAGING CENTERS OF AMERICA INC CENTRAL INDEX KEY: 0000746712 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 953643045 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12787 FILM NUMBER: 96661784 BUSINESS ADDRESS: STREET 1: 9444 FARNHAM ST STE 100 CITY: SAN DIEGO STATE: CA ZIP: 92123 BUSINESS PHONE: 6195600110 MAIL ADDRESS: STREET 2: 9444 FARNHAM STREET SUITE 100 CITY: SAN DIEGO STATE: CA ZIP: 92123 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPT. 30, 1996 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 September 30, 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: 2,695,251 shares of Common Stock as of November 11, 1996. Page 1 of 13 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MEDICAL IMAGING CENTERS OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share information)
September 30, 1996 December 31, 1995 ASSETS: Current assets: Cash and cash equivalents (includes restricted cash of $451 in 1996 and $422 in 1995) $ 5,224 $ 10,732 Trade and notes receivable, net of allowance for doubtful accounts of $4,053 in 1996 and $4,503 in 1995 7,473 7,711 Prepaid expenses and other current assets 775 725 -------- -------- Total current assets 13,472 19,168 Equipment and leasehold improvements, net of accumulated depreciation and amortization of $18,927 in 1996 and $25,168 in 1995 12,460 16,274 Equipment held for sale, net of accumulated depreciation of $1,548 in 1996 and $4,863 in 1995 200 800 Investment in and advances to unconsolidated entities, net of reserves of $1,845 in 1996 and $1,788 in 1995 1,494 1,489 Intangible assets, net of accumulated amortization of $1,845 in 1996 and $1,645 in 1995 710 1,087 Other assets 790 830 -------- -------- $ 29,126 $39,648 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Current portion long-term debt and capital lease obligations $ 5,123 $ 11,161 Current portion convertible subordinated debt 2,600 2,800 Accounts payable 969 1,107 Accrued compensation 510 697 Other accrued liabilities 1,950 3,066 -------- -------- Total current liabilities 11,152 18,831 Long-term debt and capital lease obligations 7,253 11,182 Minority interest in consolidated partnerships 1,090 1,222 Convertible subordinated debt 2,800 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; 2,695,251 and 2,479,460 shares issued and outstanding at September 30, 1996 and December 31, 1995, respectively 55,996 54,691 Accumulated deficit (49,165) (51,678) -------- -------- Total shareholders' equity 6,831 3,013 -------- -------- 29,126 $ 39,648 ======== ========
See accompanying notes. Page 2 of 13 3 MEDICAL IMAGING CENTERS OF AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, Nine Months Ended September 30, (in thousands except per share information) 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES: Medical services $ 8,752 $ 10,031 $ 26,818 $ 33,804 Equipment and medical suite sales 10 1,006 393 3,278 -------- -------- -------- -------- Total revenues 8,762 11,037 27,211 37,082 COSTS AND EXPENSES: Costs of medical services 4,990 5,814 15,533 20,306 Costs of equipment and medical suite sales -- 1,006 99 2,779 Marketing, general and administrative 1,035 790 2,508 2,259 Provision for doubtful accounts 160 200 432 688 Depreciation and amortization of equipment and leasehold improvements 1,231 2,185 4,461 7,316 Amortization of intangibles 102 119 305 364 Equity in net income of unconsolidated entities (194) (223) (614) (578) Gain on disposal of equipment -- -- (382) -- Gain on sale of assets -- (3,460) -- (3,460) Interest expense 393 1,145 1,411 2,939 Interest income (57) (121) (267) (381) Special charge -- -- 1,325 -- -------- -------- -------- -------- Total costs and expenses 7,660 7,455 24,811 32,232 -------- -------- -------- -------- Income before minority interest and extraordinary gain 1,102 3,582 2,400 4,850 Minority interest in net (income) loss of consolidated partnerships (37) 39 (73) 246 -------- -------- -------- -------- Income before income taxes and extraordinary gain 1,065 3,621 2,327 5,096 Income tax provision 18 -- 63 -- -------- -------- -------- -------- Income before extraordinary gain 1,047 3,621 2,264 5,096 Extraordinary gain, net of tax -- -- 382 -- -------- -------- -------- -------- Net income $ 1,047 $ 3,621 $ 2,646 $ 5,096 ======== ======== ======== ======== PRIMARY EARNINGS PER SHARE: Income before extraordinary gain $ 0.36 $ 1.37 $ 0.80 $ 1.94 ======== ======== ======== ======== Extraordinary gain $ --- $ --- $ 0.13 $ --- ======== ======== ======== ======== Net income $ 0.36 $ 1.37 $ 0.93 $ 1.94 ======== ======== ======== ======== FULLY DILUTED EARNINGS PER SHARE: Net income $ 0.35 $ 1.18 $ 0.91 $ 1.72 ======== ======== ======== ======== SHARES USED IN PER SHARE AMOUNTS: Primary 2,870 2,646 2,842 2,625 ======== ======== ======== ======== Fully diluted 3,244 3,193 3,298 3,254 ======== ======== ======== ========
See accompanying notes. Page 3 of 13 4 MEDICAL IMAGING CENTERS OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, (in thousands) 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 2,646 $ 5,096 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,766 7,680 Amortization of deferred financing costs 54 79 Provision for doubtful accounts 432 688 Equity in net income of unconsolidated partnerships (240) --- Minority interest in net income (loss) of consolidated partnerships 73 (246) Net value of equipment sold 158 4,093 Extraordinary gain from debt forgiveness (517) -- Gain on disposal of equipment (382) -- Change in assets and liabilities: (Increase) decrease in trade receivables (194) 1,222 (Increase) decrease in prepaid expenses and other current assets (50) 675 Decrease in accounts payable and other accrued liabilities (1,254) (132) Decrease in accrued compensation (187) (964) -------- -------- Net cash provided by operating activities 5,305 18,191 INVESTING ACTIVITIES: Capital expenditures (324) (640) Decrease in investment in and advances to unconsolidated entities, net 235 255 Cost of acquisitions (205) (60) Other, net 40 (3) -------- -------- Net cash used in investing activities (254) (448) FINANCING ACTIVITIES: Principal payments on long-term debt and capital lease obligations (10,619) (15,785) Distribution to minority interests -- (151) Redemption of Shareholder Rights (133) -- Other, net 193 189 -------- -------- Net cash used in financing activities (10,559) (15,747) -------- -------- Net (decrease) increase in cash and cash equivalents (5,508) 1,996 Cash and cash equivalents at beginning of period 10,732 8,524 -------- -------- Cash and cash equivalents at end of period $ 5,224 $ 10,520 ======== ======== SUPPLEMENTAL CASH FLOW DATA: Interest paid $ 1,304 $ 2,764 ======== ======== Income taxes paid $ 230 $ 161 ======== ======== SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: Additions to capital lease and long-term debt obligations $ 252 $ 1,112 ======== ======== Retirement of debt and termination of capital lease obligations $ 2,400 $ 771 ======== ======== Net value of equipment and intangible assets disposed $ 389 $ --- ======== ========
See accompanying notes. Page 4 of 13 5 MEDICAL IMAGING CENTERS OF AMERICA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Shares Issued and Outstanding Accumulated (in thousands except share information) Shares Amount Deficit - ----------------------------------------------------------------------------------------- Balance at December 31, 1995 2,479,460 $ 54,691 $ (51,678) Proceeds from issuance of common stock purchase warrants 160,000 912 -- Fair value assigned to warrants issued in connection with debt forgiveness -- 200 -- Stock options exercised 55,791 193 -- Redemption of Shareholder Rights -- -- (133) Net income -- -- 2,646 ----------------------------------------- Balance at September 30, 1996 2,695,251 $ 55,996 $ (49,165) =========================================
See accompanying notes. Page 5 of 13 6 MEDICAL IMAGING CENTERS OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The financial statements included herein have been prepared by Medical Imaging Centers of America, Inc. ("MICA" or the "Company"), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, in the opinion of the Company, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations of the Company as of and for the periods indicated, have been included. It is suggested that these financial statements be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 1995, which are included in the Company's Form 10-K. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 1996. 2. Steel Settlement Agreement. On January 2, 1996, Steel Partners II, L.P. ("Steel"), which as of March 19, 1996 owned 19.8% of the Company's outstanding common stock, filed proxy materials with the Securities and Exchange Commission to replace the current Board of Directors with its own representatives. As requested by Steel, the Company held a special meeting of shareholders on February 26, 1996. On March 19, 1996, the Company and Steel entered into an Agreement of Compromise and Settlement (the "Settlement Agreement"). The Settlement Agreement called for the dismissal of all pending litigation and provided for mutual releases. The Settlement Agreement also provided that the February 26, 1996 Special Meeting of Shareholders would be adjourned without any final report from the Inspector of Elections, leaving the current Board of Directors in place. Pursuant to the Settlement Agreement, the Company initiated a process to sell or merge the Company (the "Auction Process"). The current members of the Company's Board of Directors agreed that if the process did not result in an announcement of a sale or merger transaction by June 19, 1996, a definitive agreement for a sale or merger transaction by July 19, 1996, and the consummation of a sale or merger transaction by November 19, 1996, they would resign from their positions and be replaced by designees of Steel. In addition, the Settlement Agreement also required the Company to redeem all outstanding Rights issued pursuant to the Company's shareholder rights plan and prohibited the Company from enacting a new shareholder rights plan without the prior written consent of Steel. During the Auction Process, Steel agreed that it would not acquire beneficial ownership of any of the Company's securities. Total expenditures for the proxy solicitation, including the fees and expenses of the Company's attorneys, financial advisors, public relations firm and proxy solicitors, excluding salaries and wages of its officers and employees and including the amounts reimbursed to Steel, totaled $1,325,000, and a charge was recorded to operations in the first quarter of 1996. On July 17, 1996, Steel agreed to an amendment of the Settlement Agreement extending the date a definitive agreement for a sale or merger transaction was required to be entered into from prior to July 19, 1996 to prior to August 2, 1996. Merger Agreement. On August 1, 1996, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with U.S. Diagnostic Labs, Inc., a Delaware corporation ("USDL"), and its wholly owned subsidiary MICA Acquiring Corporation, a California corporation ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will be merged with and into MICA whereupon the separate existence of Merger Sub will cease and MICA will become a wholly owned subsidiary of USDL (the "Merger"). Pursuant to the Merger, each outstanding share of MICA's common stock, no par value ("MICA Common Stock"), would be converted into a right to receive $11.75 in cash (the "Merger Consideration"). Each option to purchase MICA Common Stock (each a "MICA Option") would be canceled and each holder of a MICA Option would be entitled to a cash payment equal to the product of the total number of shares subject to the MICA Option and the excess of $11.75 over the exercise price per share of the MICA Common Stock subject to the MICA Option. USDL currently does not beneficially own, directly or indirectly, any of MICA's voting securities apart from any beneficial ownership interest it may have as a result of entering into the Merger Agreement. Following the Merger, MICA's Board of Directors will be filled with USDL's designees. Page 6 of 13 7 The Board of Directors has received a written opinion dated as of August 1, 1996 from Batchelder & Partners, Inc. ("Batchelder"), its financial advisor, stating that the Merger Consideration is fair to the MICA shareholders from a financial point of view. The amount paid to Batchelder for its written opinion was $200,000 and such a charge was recorded in the third quarter of 1996 as a marketing, general and administrative expense. The Merger is subject to the approval of the shareholders of MICA, certain regulatory approvals and filings, including expiration of the waiting period under the Hart-Scott-Rodino Improvements Act of 1976, as amended, and other customary conditions. If the Merger is not consummated either because (i) USDL terminates the Merger Agreement by reason of the Company's material breach of the Merger Agreement and failure to cure such breach within ten (10) days' notice from USDL, or (ii) the Board of Directors of MICA withdraws, modifies or changes its approval of the Merger Agreement or the Merger in any manner adverse to USDL or Merger Sub, or determines in good faith with the advice of outside legal counsel that, in the exercise of its fiduciary obligations, termination of the Merger Agreement is required by reason of an agreement with a third party with respect to a business combination or similar transaction, MICA is obligated to pay USDL a fee of 3% of the total Merger Consideration. If the Merger is not consummated because USDL terminates the Merger Agreement because of MICA's material breach of any representations or warranties in the Merger Agreement (with such breach not cured either prior to the closing of the Merger or within thirty (30) days after written notice from USDL), MICA is obligated to pay USDL reasonable out-of-pocket expenses and fees up to $200,000. The Merger Agreement can be terminated by either party if the Merger is not consummated by November 19, 1996. A copy of the Merger Agreement has been filed on Form 8-K by the Company on August 9, 1996. A detailed description of the terms of the Merger is set forth in the proxy materials filed with the SEC on September 25, 1996. On September 25, 1996, the Company filed proxy materials with the Securities and Exchange Commission to approve the Merger at a special meeting of shareholders to be held on November 6, 1996. The shareholders of the Company approved the Merger on November 6, 1996 with an affirmative vote of 82% of the outstanding shares of the Company's common stock. Raytel Litigation. On September 18, 1996, Raytel Imaging Mid-Atlantic, Inc. ("Raytel") commenced litigation in the California Superior Court for the County of San Diego (the "Court") against MICA, MICA FLO I, Inc., a wholly-owned subsidiary of MICA ("MICA FLO") and USDL. Raytel's complaint alleges, among other matters, that MICA and MICA FLO breached a joint venture agreement dated December 31, 1986 among (i) Raytel's predecessor, Medical Imaging Partners, L.P., a Delaware limited partnership ("MIP"), (ii) MICA and (iii) Orlando Diagnostic Center, Inc., a Florida corporation, an unrelated third party (the "Joint Venture Agreement"). The Joint Venture Agreement was entered into for purposes of owning and operating a diagnostic medical imaging center in Orlando, Florida. Pursuant to the Joint Venture Agreement, the parties formed a California limited partnership called Orlando Diagnostic Center, L.P. ("ODC"). The complaint also asserts claims against MICA, MICA FLO and USDL for intentional interference with economic relations and conspiracy to interfere with economic relations. The complaint seeks unspecified compensatory damages, punitive damages in an amount of at least $5,000,000, declaratory relief, and injunctive relief enjoining MICA and USDL from consummating the Merger and requiring MICA either to sell its interest in ODC to Raytel for its fair market value or to purchase Raytel's interest in ODC, at Raytel's election. On October 9, 1996, Raytel filed a motion for a preliminary injunction seeking to enjoin the Merger. On November 7, 1996, Raytel's request for an order enjoining MICA and USDL from completing the Merger until after Raytel's contractual dispute with MICA is resolved was denied by the Court. In connection with the ruling the Court ordered that both MICA and Raytel maintain the status quo regarding ODC, which was the subject of the parties' contractual dispute. The Court ordered the appointment of a receiver to manage the affairs of ODC until the matter is finally resolved. 3. Primary and fully diluted net income per share is computed on the basis of weighted average number of common shares outstanding and includes common stock equivalents when their effect is dilutive. All per share data has been restated for all periods presented to give effect to a one-for-five reverse stock split for shareholders of record on October 16, 1995. 4. Income tax provisions of $18,000 and $63,000 were recorded for the three and nine months ended September 30, 1996, respectively, primarily reflecting alternative minimum and state taxes due. 5. Certain 1995 amounts have been reclassified to conform with the September 30, 1996 presentation. Page 7 of 13 8 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 nine months ended September 30, 1996 primarily due to the Company's termination of unprofitable fee-for-service contracts and sales of assets used in the fee-for-service business. As such, the Company believes that revenues from its fee-for-service business, which accounted for 41% of medical services revenues reported in the nine months ended September 30, 1995 and 29% of medical services revenues reported in the nine months ended September 30, 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 nine months ended September 30, 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. 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 third quarter declined $300,000 from $6.5 million in 1995 to $6.2 million in 1996. Revenues for the nine months ended September 30 declined $700,000 from $19.8 million in 1995 to $19.1 million in 1996. The decline was primarily due to declining trends in reimbursement. Revenues from its fee-for-service business for the third quarter declined $1 million from $3.5 million in 1995 to $2.5 million in 1996. Revenues for the nine months ended September 30 declined $6.3 million from $14 million in 1995 to $7.7 million in 1996. The decline was 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 $413,000 of the decline for the third quarter and $3.1 million for the nine months ended September 30. In addition to declining trends in reimbursement 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 and competition in the healthcare industry. REVENUES FROM EQUIPMENT AND MEDICAL SUITE SALES Revenues from equipment and medical suite sales for the third quarter decreased from $1 million in 1995 to $10,000 in 1996. Revenues from equipment and medical suite sales for the nine months ended September 30 decreased from $3.3 million in 1995 to $393,000 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. Page 8 of 13 9 COSTS OF MEDICAL SERVICES Costs of medical services from its DMCs for the third quarter decreased from $4 million (40% of medical services revenues) in 1995 to $3.8 million (43% of medical services revenues) in 1996. Costs of medical services for the nine months ended September 30 decreased from $12.6 million (37% of medical services revenues) in 1995 to $11.7 million (44% of medical services revenues) in 1996. The decrease was primarily due to the renegotiation of certain DMC lease obligations. Costs of medical services from its fee-for-service business for the third quarter decreased from $1.8 million (18% of medical services revenues) in 1995 to $1.2 million (14% of medical services revenues) in 1996. Costs of medical services for the nine months ended September 30 decreased from $7.7 million (23% of medical services revenues) in 1995 to $3.8 million (14% of medical services revenues) in 1996. The decrease was primarily due to the Company's sale of Division assets in July 1995 which accounted for $331,000 of the decrease in costs for the third quarter and $2.1 million for the nine months ended September 30, termination of unprofitable leases, 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 third quarter decreased from $1 million in 1995 to $1,000 in 1996. Costs of equipment and medical suite sales for the nine months ended September 30 decreased from $2.8 million in 1995 to $100,000 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 for the third quarter increased from $790,000 (8% of medical services revenues) in 1995 to $1 million (12% of medical services revenues) in 1996. The increase primarily relates to fees and expenses of the Company's attorneys and financial advisors related to its Merger Agreement (see Note 2). PROVISION FOR DOUBTFUL ACCOUNTS Provision for doubtful accounts for the third quarter decreased from $200,000 (2% of medical services revenues) in 1995 to $160,000 (2% of medical services revenues) in 1996. Provision for doubtful accounts for the nine months ended September 30 decreased from $688,000 (2% of medical services revenues) in 1995 to $432,000 (2% 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 third quarter decreased from $2.3 million in 1995 to $1.3 million in 1996. Depreciation and amortization for the nine months ended September 30 decreased from $7.7 million in 1995 to $4.8 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 $67,000 of the decline for the third quarter and $522,000 for the nine months ended September 30. GAIN ON DISPOSAL OF EQUIPMENT During the second quarter of 1996, the Company assigned its obligation under certain capital equipment lease debt to its hospital customer. A gain from the disposal of equipment of $382,000 was recorded during the second quarter related to this transaction. INTEREST EXPENSE Interest expense for the third quarter decreased from $1.1 million in 1995 to $393,000 in 1996. Interest expense for the nine months ended September 30 decreased from $2.9 million in 1995 to $1.4 million 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 and a $450,000 charge to interest expense for the buyback in the third quarter of 1995 of a warrant to purchase 300,000 shares of the Company's common stock. In addition, interest expense decreased $126,000 in the nine months ended September 30, 1996 as compared to the same period in 1995 due to the declining balance outstanding of its convertible subordinated debt. SPECIAL CHARGE Total expenditures of $1,325,000 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, were recorded as a Special Charge to operations in the first quarter of 1996 (see Note 2). Page 9 of 13 10 MINORITY INTEREST IN NET INCOME/LOSS OF CONSOLIDATED PARTNERSHIPS The minority interest in consolidated partnerships increased from a net loss of $39,000 in the third quarter of 1995 to net income of $37,000 in the third quarter of 1996. The minority interest in consolidated partnerships for the nine months ended September 30 increased from a net loss of $246,000 in 1995 to net income of $73,000 in 1996. This increase is primarily due to improved performance of certain of its DMCs with minority ownership. 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 first quarter of 1996. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company's cash and cash equivalents totaled $5.2 million which is a decrease of $5.5 million since December 31, 1995. This decrease primarily reflects principal payments of $10.6 million offset by net cash provided by operations of $5.3 million. Included in the Company's principal payments for the nine months ended September 30, 1996 is a $2.8 million mandatory redemption payment on its subordinated convertible debentures, $1.4 million paid to retire a promissory note (see Management's Discussion and Analysis of Financial Condition and Results of Operations - Extraordinary Gain) and $1.1 million in payments towards a negotiated settlement of equipment lease debt. The Company had working capital of $2.3 million at September 30, 1996. 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 fourth 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 has 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. Page 10 of 13 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings On September 18, 1996, Raytel Imaging Mid-Atlantic, Inc. ("Raytel") commenced litigation in the California Superior Court for the County of San Diego (the "Court") against MICA, MICA FLO I, Inc., a wholly-owned subsidiary of MICA ("MICA FLO") and USDL. Raytel's complaint alleges, among other matters, that MICA and MICA FLO breached a joint venture agreement dated December 31, 1986 among (i) Raytel's predecessor, Medical Imaging Partners, L.P., a Delaware limited partnership ("MIP"), (ii) MICA and (iii) Orlando Diagnostic Center, Inc., a Florida corporation, an unrelated third party (the "Joint Venture Agreement"). The Joint Venture Agreement was entered into for purposes of owning and operating a diagnostic medical imaging center in Orlando, Florida. Pursuant to the Joint Venture Agreement, the parties formed a California limited partnership called Orlando Diagnostic Center, L.P. The complaint also asserts claims against MICA, MICA FLO and USDL for intentional interference with economic relations and conspiracy to interfere with economic relations. The complaint alleges, among other things, that (i) if any proposal exists under which MICA is to be merged or consolidated with any entity unaffiliated with MICA, the Joint Venture Agreement gives Raytel (as MIP's successor) the right either to purchase MICA's interest in ODC or to require MICA to purchase Raytel's interest in ODC (the "Buyout Rights"), and (ii) the Merger triggers the Buyout Rights. The complaint claims that MICA and MICA FLO have breached the Joint Venture Agreement by refusing to honor Raytel's claimed Buyout Rights under the Joint Venture Agreement, and that USDL has caused MICA and MICA FLO to breach the Joint Venture Agreement by entering into the Merger Agreement. The complaint seeks unspecified compensatory damages, punitive damages in an amount of at least $5,000,000, declaratory relief, and injunctive relief enjoining MICA and USDL from consummating the Merger and requiring MICA either to sell its interest in ODC to Raytel for its fair market value or to purchase Raytel's interest in ODC, at Raytel's election. On October 9, 1996, Raytel filed a motion for a preliminary injunction seeking to enjoin the Merger. On November 7, 1996, Raytel's request for an order enjoining MICA and USDL from completing the Merger until after Raytel's contractual dispute with MICA is resolved was denied by the Court. In connection with the ruling the Court ordered that both MICA and Raytel maintain the status quo regarding ODC, which was the subject of the parties' contractual dispute. The Court ordered the appointment of a receiver to manage the affairs of ODC until the matter is finally resolved. MICA is also a party to certain other 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 consolidated financial position. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: Exhibit 11.1 - Computation of Earnings per Share Exhibit 27 - Financial Data Schedule (b) Reports: A Form 8-K was filed on August 9, 1996 reporting under Item 5 (Other Events) and Item 6 (Exhibits) the Agreement and Plan of Merger, dated as of August 1, 1996, among U.S. Diagnostic Labs, Inc., a Delaware corporation, MICA Acquiring Corporation, a California corporation, and Medical Imaging Centers of America, Inc., a California corporation. No financial statements were filed with the report. Page 11 of 13 12 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: November 12, 1996 /s/ Robert S. Muehlberg -------------------------------------- Robert S. Muehlberg Chairman of the Board of Directors, President and Chief Executive Officer Date: November 12, 1996 /s/ Denise L. Sunseri -------------------------------------- Denise L. Sunseri Vice President, Chief Financial Officer and Secretary Page 12 of 13 EX-11.1 2 EXHIBIT 11.1 1 MEDICAL IMAGING CENTERS OF AMERICA, INC. Exhibit 11.1 COMPUTATION OF EARNINGS PER SHARE
Three Months Ended September 30, Nine Months Ended September 30, (in thousands except per share information) 1996 1995 1996 1995 ---- ---- ---- ---- Net income for computation of primary earnings per share $1,047 $3,621 $2,646 $5,096 Fully diluted: Adjustment for interest and amortization for the conversion of debentures 99 141 353 505 ------ ------ ------ ------ Net income for computation of fully diluted earnings per share $1,146 $3,762 $2,999 $5,601 ====== ====== ====== ====== Average shares: Common shares 2,695 2,463 2,667 2,442 Stock option and warrant equivalent shares (A) 175 183 175 183 ------ ------ ------ ------ Average shares for computation of primary earnings per share 2,870 2,646 2,842 2,625 Fully diluted: Stock option and warrant equivalent shares - difference from primary (A) 14 -- 14 -- Average shares for the conversion of debentures 360 547 442 629 ------ ------ ------ ------ Average shares for computation of fully diluted earnings per share 3,244 3,193 3,298 3,254 ====== ====== ====== ====== Net income per share: Primary $ 0.36 $ 1.37 $ 0.93 $ 1.94 ====== ====== ====== ====== Fully diluted $ 0.35 $ 1.18 $ 0.91 $ 1.72 ====== ====== ====== ======
(A) The treasury stock method was used to calculate the common stock equivalent number of shares from options and warrants. Page 13 of 13 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 5,224 0 11,526 4,053 0 13,472 33,135 20,475 29,126 11,152 10,053 0 0 55,996 (49,165) 29,126 393 27,211 99 15,632 4,766 432 1,411 2,327 63 2,264 0 382 0 2,646 $0.93 $0.91
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