<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14746
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HEALTH IMAGES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
Delaware 58-1485618
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
8601 Dunwoody Place, Suite 200, Atlanta, Georgia 30350
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 404/587-5084
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FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT
Indicate by check X 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date 11,590,234.
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HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1995
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<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1995 1994
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<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 2,268,400 $ 3,804,100
Marketable Securities 48,700 264,500
Investment in Nonmarketable Preferred Stock (At Cost) 11,254,400 11,254,400
Trade Receivables (Less Allowance for Doubtful Accounts
of $5,618,600 in 1995 and $5,435,000 in 1994) 16,498,100 17,654,100
Other Receivables 1,048,800 393,600
Inventories 497,500 599,100
Deferred Income Taxes 2,177,400 2,041,700
Other 1,493,500 1,598,900
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Total Current Assets 35,286,800 37,610,400
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PROPERTY AND EQUIPMENT
Total Property and Equipment 126,270,900 123,747,100
Accumulated Depreciation 52,788,900 50,075,300
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Cost Less Accumulated Depreciation 73,482,000 73,671,800
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OTHER ASSETS
Intangible Assets 14,012,800 14,074,100
Unclassified 633,900 470,600
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Total Other Assets 14,646,700 14,544,700
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TOTAL ASSETS $123,415,500 $125,826,900
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion of Long Term Debt $ 2,033,000 $ 1,977,000
Accounts Payable 3,600,200 4,248,500
Accrued Expenses 6,861,900 5,281,300
Unearned Revenue 101,600 228,800
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Total Current Liabilities 12,596,700 11,735,600
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LONG TERM DEBT 19,663,800 23,071,200
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DEFERRED INCOME TAXES 10,803,300 10,910,300
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OTHER LONG TERM LIABILITIES 229,400 220,600
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MINORITY INTEREST 319,300 311,700
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STOCKHOLDERS' EQUITY
Common Stock - $.01 Par Value - 40,000,000 Shares
Authorized - 13,342,647 Shares issued as of March 31, 1995 and
13,340,856 as of December 31, 1994 133,400 133,400
Additional Paid-In Capital 77,323,200 77,314,400
Retained Earnings 16,389,900 16,537,200
Accumulated Translation Adjustment (391,700) (755,700)
Treasury Stock - 1,752,400 Shares at Cost as of March 31,
1995, and as of December 31, 1994 (13,651,800) (13,651,800)
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Total Stockholders' Equity 79,803,000 79,577,500
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 123,415,500 $ 125,826,900
============= =============
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<PAGE> 4
HEALTH IMAGES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER ENDED MARCH 31, 1995
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<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1995 MARCH 31, 1994
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REVENUE
Net Patient Service Revenue $17,304,600 $17,516,700
Engineering Revenue 729,800 1,005,500
Other Revenue & Income 204,500 240,900
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Total Net Revenue 18,238,900 18,763,100
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COSTS AND EXPENSES
Operating Costs 13,508,300 14,532,900
Provision For Bad Debts 772,700 655,000
General and Administrative Expenses 1,564,800 1,614,700
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Total Operating Expenses 15,845,800 16,802,600
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Operating Income 2,393,100 1,960,500
Interest Income 31,400 50,400
Interest Expense (362,100) (344,900)
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INCOME BEFORE MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 2,062,400 1,666,000
Minority interest in Income of Consolidated
Entities 42,300 30,900
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INCOME BEFORE PROVISION FOR INCOME
TAXES 2,020,100 1,635,100
Provision for Income Taxes 776,600 589,000
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NET INCOME FROM CONTINUING OPERATIONS $ 1,243,500 $ 1,046,400
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EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE
Primary
Net Income from Operations $ 0.11 $ 0.09
Fully Diluted
Net Income from Operations $ 0.11 $ 0.09
DISCONTINUED OPERATIONS
Loss from Operations of Discontinued Subsidiary
(Net of Income Taxes) 415,000 166,200
Loss on Disposal of Discontinued Subsidiary
(Net of Income Taxes) 744,000 ---
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NET INCOME $ 84,500 $ 879,900
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EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE
Primary
Net Income $ 0.01 $ 0.08
Fully Diluted
Net Income $ 0.01 $ 0.08
WEIGHTED AVERAGE COMMON SHARE AND COMMON
SHARE EQUIVALENTS
Primary 11,641,500 11,541,100
Fully Diluted 11,641,500 11,549,800
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<PAGE> 6
HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE QUARTER ENDED MARCH 31, 1995
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<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1995 MARCH 31, 1994
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CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 84,500 $ 879,900
Adjustments to Reconcile Net Income to
Net Cash
Depreciation 2,591,600 2,618,700
Amortization 383,700 502,700
Provision for Bad Debts 772,700 655,000
Minority Interest 42,300 30,900
Deferred Income Taxes (233,900) 286,400
Increase in Receivables (271,900) (1,357,500)
Decrease (Increase) in Inventories 101,600 47,700
Increase (Decrease) in Accounts Payable
and Accrued Expenses 1,405,100 275,500
Equity in Loss of Affiliate --- 166,200
Other - Net (494,600) (536,800)
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Net Cash Provided by Operating Activities 4,381,100 3,568,700
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CASH FLOW FROM INVESTING ACTIVITIES
Cash used to Acquire Investments (56,700) ---
Proceeds from Investments 281,000 ---
Capital Expenditures (2,123,200) (1,228,500)
Payments for Intangibles (485,700) (44,700)
Other - Net (8,500) ---
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Net Cash Used by Financing Activities (2,393,100) (1,273,200)
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CASH FLOW FROM FINANCING ACTIVITIES
Cash Used to Retire Debt (3,351,400) (2,450,500)
Cash Distibutions to Minority
Investors in Liminted
Partnerships (34,700) (61,700)
Proceeds from Exercise of
Stock Options 8,800 ---
Cash Used to Pay Dividends (231,800) ---
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Net Cash (Used) Provided by Financing
Activities (3,609,100) (2,512,200)
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EFFECT OF EXCHANGE RATE CHANGES ON
CASH 85,400 15,000
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,535,700) (201,700)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 3,804,100 4,703,200
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CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 2,268,400 $ 4,501,500
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<PAGE> 8
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the quarter ending March 31, 1995, to the quarter ending March
31, 1994
Net patient service revenue1 decreased $212,100, or 1.2%,
primarily due to the Company's ceasing operations at its Philadelphia Magnetic
Imaging Center as of December 31, 1994, partially offset by increases of
$252,500 in net revenue at imaging centers that were in operation for both the
1995 and 1994 periods ("same center revenue"). The increase in same center
revenue was due to an increase of 5.2% in same center MRI studies and an
increase in revenue from other imaging modalities, principally CT, x- ray,
partially offset by a 2.4% decline in average reimbursement per MRI study and a
decrease in revenue from the Company's radiation oncology center.
Engineering revenue decreased $275,700, or 27.4%, primarily
due to decreases of $180,900, or 99.6%, in upgrade revenue and $94,800, or
11.5%, in service revenue.
Other revenue and income decreased by $36,400 or 15.1%
primarily due to a decrease of $164,100 in Mobile Leasing revenue partially
offset by accrued dividends of $276,300 recognized on the Company's investment
in MedAlliance preferred stock.
Operating costs decreased by $1,024,600 or 7.1%, primarily due
to (1) elimination of costs associated with the former Philadelphia Magnetic
Imaging facility and (2) the Company's continuing cost control efforts.
Reflecting these items, operating costs as a percentage of net revenue
decreased to 74.1% in 1995 from 77.5% in 1994. The Company's provision for bad
debts was $772,700, or 4.5% of net patient service revenue in the 1995 period
as compared to $655,000, or 3.7%, in 1994. Provision for bad debts results
from required write-offs of patient account receivable balances that management
deems to be uncollectible. Management expects future bad debt experience to be
comparable to these results. General and administrative expenses decreased
$49,900, or 3.1%, primarily due to the Company's continued cost control
efforts. General and administrative expenses as a percentage of net revenue
was unchanged at 8.6% for both periods.
Interest income decreased by $19,000, or 37.7%, due to lower
cash balances. Interest expense increased by $17,200 due to higher amounts of
debt outstanding. Minority interest in income of consolidated entities
increased by $11,400, or 36.9%, primarily due to higher operating income at
imaging centers with minority partners. The Company's tax rate for the 1995
period was 38.4% as compared to 36.0% in the prior year period.
Net income from continuing operations increased $197,400, or
18.9%, to $1,243,500 from $1,046,100 in 1994 primary and fully diluted earnings
per share increased $0.02, or 22.2%, to $0.11 in the 1995 period as compared to
$0.09 in the 1994 period. Earnings per share were calculated using 11,641,500
primary and fully diluted weighted average common share equivalents as compared
to 11,541,100 primary and 11,549,800 fully diluted weighted average common
share equivalents in the prior year period.
During the 1995 period, the Company elected to discontinue the
operations of a subsidiary, Interactive Diagnostic Systems, Inc. and the
financial results of such subsidiary are treated as Discontinued Operations.
The quarterly loss, net of income taxes, of the subsidiary increased by
$248,800 or 149.7% to $415,000 in the 1995 period as compared to $166,200 in
the 1994 period. In addition, in the current period, the Company recognized a
special charge, net of income taxes, of $744,000, to cover estimated costs and
expenses associated with the termination of all operations of the discontinued
subsidiary. After giving effect to these losses from Discontinued Operations,
the Company report net income of $84,500 or $0.01 per share in the 1995 period
as compared to a restated $879,900 or $0.08 per share in the prior year period.
Subsequent to the end of the quarter, the Company acquired 15 imaging
centers from MedAlliance, Inc. Management expects the overall effect of such
acquisition to be additive to earnings. However, the continued growth of
private managed care plans has put downward pressure on imaging reimbursements
and has resulted in increased scrutiny of the appropriateness of referrals for
major diagnostic imaging procedures such as the MRI and CT services which are
the Company's principal sources of revenue. While the Company's vertical
integration results in generally lower operating costs as compared to its
competitors, declining reimbursements could adversely affect the Company's
profitability. Recently, the Company has seen weakness in comparable (same
center) volume and revenue comparisons. Management believes, however, that the
Company is relatively better positioned than many of its competitors who rely
on physician self-referral to deal with threats to unit volumes deriving from
increased scrutiny of inappropriate utilization, and from certain legislation
at both the national and state levels which bar physician self-referral.
Conversely, the Company may be at a competitive disadvantage to hospitals and
hospital systems which can offer a comprehensive range of health care services
to managed care plans.
____________________
(1) Net patient service revenue represents imaging revenue reduced by
contractual adjustments related to discount arrangements with third party
payers. Such discount arrangements are customary in the health care industry
and are, in the opinion of management, necessary for competitive reasons.
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<PAGE> 9
INFLATION
The impact of inflation and changing prices on the Company
has, to date, been primarily limited to salary increases and has not been
material to the Company's operation. In the event of increased inflation,
management believes that the Company may not be able to raise the prices for
its good and services by an amount sufficient to offset cost inflation.
Growing health care costs are a national concern. Management
believes that this concern will most likely lead to reduced reimbursements for
the Company's health care services even in an otherwise inflationary
environment. The Company has historically responded to this threat to its
margins by lowering its capital costs and by increasing the volume of its
business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4,381,100 in
the 1995 period, an increase of $812,400 or 22.8% from $3,568,700 in the prior
year period. Net trade receivables decreased by $1,156,000, or 6.5%, in 1995
primarily due to decreased net patient revenue during the quarter ended March
31, 1995 as compared to immediately preceding quarters. As of March 31, 1995,
the Company's average age of patient receivables outstanding was 82 days as
compared to 81 days as of December 31, 1994 and 82 days as of March 31, 1994.
While management believes that this age of receivables is within acceptable
norms for outpatient health care providers, management will continue to seek to
reduce such receivable aging and associated balances by implementing improved
billing methodologies in 1995. Some of the increase in patient days
outstanding is due to a change in the mix of the Company's patient referrals.
Recently, the Company has seen an increase in "legal patients" which typically
maintain open account balances until settlement of personal injury cases.
These legal patients account balances may be outstanding for more than 365 days
and, while generally collectible, cause an increase in average patient
receivable days outstanding.
The Company's total debt decreased by $3,351,400 during the
quarter ended March 31, 1995, while cash and cash equivalents decreased by
$1,535,700 and marketable securities decreased by $215,800. As of March 31,
1995, the Company had an investment carried at $11,254,400 in stated value of
preferred stock of MedAlliance, Inc. ("MDAL"). Subsequent to the end of the
quarter, the Company's entire investment in the MDAL preferred stock was
assigned back to MDAL in partial consideration for the purchase of 15 imaging
centers acquired by the Company from MDAL.
Prior to the end of the quarter, the Company entered into an
amended and restated credit facility (the "facility") with its principal banks.
This new credit facility provided for a $30,000,000 term loan due over 6 years
and a $5,000,000 revolving line of credit. All borrowings under the facility
are initially at Prime less 25 basis points (8.75% as of March 31, 1995),
decreasing to Prime less 50 basis points under certain circumstances. As of
March 31, 1995, the Company had borrowed $7,148,000 under the facility. The
facility is secured by substantially all of the assets of the Company and
contains certain covenants which, under certain circumstances, could restrict
the ability of the Company to declare dividends or purchase treasury stock. As
of March 31, 1995, under the most restrictive covenant, the Company must
maintain a "tangible capital base", as defined in the facility, of $40,000,000
plus 50% of net income from December 31, 1994. Accordingly, as of March 31,
1995, $25,748,000 of retained earnings and additional paid in capital was
available for payment of dividends and purchase of treasury stock. Subsequent
to the end of the quarter, the Company increased its borrowings under the term
loan portion of the facility to $30,000,000 to fund the cash portion of the
Company's acquisition of 15 imaging centers from MDAL.
Subsequent to the end of the quarter, the Company acquired 15
imaging centers from MDAL. In addition to borrowings under the facility, the
Company assumed capital lease obligations and debt of $24,490,300. In
addition, pursuant to the terms of a certain "Earnout Agreement" entered into
between the Company and MDAL, the Company, based on information presently
available, must pay up to an additional $8,250,000 in earnout payments to MDAL.
Under the terms of the Earnout Agreement, the Company can pay this obligation
in either cash or by delivery of a subordinated note bearing interest at 10%
and maturing in one year. Management presently intends to pay this obligation
by delivery of a note to MDAL.
Management believes that additional sources of credit are also
available to the Company.
Capital expenditures in the 1995 period were $2,123,200 as
compared to $1,228,500 in 1994. Management expects capital expenditures to
approximate $10,000,000 in 1995, including capital expenditures relating to the
15 imaging clinics acquired from MDAL. The principal capital expenditures for
1995 will be construction of imaging equipment, and upgrades and enhancements
for the Company's HI Standard and HI Star MRI systems. The Company also
engages in research and development activities which are expensed as period
costs when incurred. For the 1995 period, such research and development costs
were $145,100 as compared to $163,100 in 1994. These costs are reflected in
operating costs on the Company's financial statements. Management expects that
the costs of upgrades and the costs of research and development projects will
increase in future periods.
Management considers current cash and liquidity adequate to
fund the Company's existing business operation, including the capital
expenditure requirements discussed above.
At March 31, 1995, the Company had commitments on construction
contracts totaling $62,500 of which $41,000 had been paid, and commitments of
$3,308,800 on equipment contracts of which $3,257,100 had been paid. In
addition, the Company was committed to purchase certain imaging center assets
from MDAL for a total consideration, subject to certain adjustments and
additional payments, of $65,150,000.
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<PAGE> 10
PART II. OTHER INFORMATION
ITEM 2. Legal Proceedings.
There have been no material developments in the legal
proceedings described in the Company's Form 10-K for the
fiscal year ended December 31, 1994.
ITEM 3. Changes in Securities.
None.
ITEM 4. Defaults under Senior Securities.
None.
ITEM 5. Submission of Matters to a Vote of Security Holders.
None.
ITEM 6. Other Information.
None.
ITEM 7. Exhibits and Reports on Form 8-K.
a. Exhibits required to be filed by Item 601 of
Regulation S-K are included as Exhibits to this
report as follows:
Exhibit
Number
------
4 -- Instruments defining rights of
security holders are incorporated
herein by reference to Exhibit 4(c)
included in Registrant's Annual
Reports on Form 10-K for fiscal year
ended December 31, 1987; to Exhibit
10(b) to Registrant's Annual Report
on Form 10-K for fiscal year ended
December 31, 1988; to Exhibit 1 to
Registrant's Form 8-K filed June 20,
1989 and to Exhibits 3(a) and 3(b)
to Registrant's Annual Report on
Form 10-K for fiscal year ended
December 31, 1989.
27 -- Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K -- No reports on Form 8-K have
been filed by Registrant during the quarter for which
this report is filed.
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<PAGE> 11
EXHIBIT INDEX
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Exhibit Page
Number Description Number
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4 -- Instruments defining rights of security holders are incorporated
herein by reference to Exhibit 4(c) included in Registrant's Annual
Reports on Form 10-K for fiscal year ended December 31, 1987; to Exhibit
10(b) to Registrant's Annual Report on Form 10-K for fiscal year ended
December 31, 1988; to Exhibit 1 to Registrant's Form 8-K filed June 20,
1989 and to Exhibits 3(a) and 3(b) to Registrant's Annual Report on
Form 10-K for fiscal year ended December 31, 1989.
27 -- Financial Data Schedule (for SEC use only)
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<PAGE> 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.
HEALTH IMAGES, INC.
(REGISTRANT)
Date: May 15, 1995 By: /s/ Robert D. Carl, III
-------------------- -----------------------
Robert D. Carl, III
Chairman and
Chief Executive Officer
By: /s/ Ron L. Clark
-----------------
Ron L. Clark
Treasurer and Controller
(Principal Accounting
Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 2,268,400
<SECURITIES> 48,700
<RECEIVABLES> 16,498,100
<ALLOWANCES> 5,618,600
<INVENTORY> 497,500
<CURRENT-ASSETS> 35,286,800
<PP&E> 126,270,900
<DEPRECIATION> 52,788,900
<TOTAL-ASSETS> 123,415,500
<CURRENT-LIABILITIES> 12,596,700
<BONDS> 19,663,800
<COMMON> 133,400
0
0
<OTHER-SE> 79,669,600
<TOTAL-LIABILITY-AND-EQUITY> 123,415,500
<SALES> 0
<TOTAL-REVENUES> 18,238,900
<CGS> 0
<TOTAL-COSTS> 13,508,300
<OTHER-EXPENSES> 1,564,800
<LOSS-PROVISION> 772,700
<INTEREST-EXPENSE> 362,100
<INCOME-PRETAX> 2,020,100
<INCOME-TAX> 776,600
<INCOME-CONTINUING> 1,243,500
<DISCONTINUED> 1,159,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,500
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
