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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or
15(d) of the Securities and Exchange Act of 1934 (Fee Required)
OR
[ ] Transition Report Pursuant to Section 13 or
15(d) of Securities Act of 1934 (No Fee Required)
For the fiscal year ended December 31, 1995 Commission File No. 1-11654
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HEALTH IMAGES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1485618
(State of Incorporation) (I.R.S. Employer Identification No.)
8601 Dunwoody Place 30350
Building 200 (Zip Code)
Atlanta, Georgia
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (770) 587-5084
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 26, 1996, 11,428,257 shares of Common Stock were
outstanding, and the aggregate market value of the Common Stock (based upon the
NYSE closing price of these shares of $7.375 on that date) held by
non-affiliates was $79,895,381. For purposes of this paragraph, affiliates
includes the Executive Officers and Directors of the Company and 10%
shareholders.
Documents Incorporated by Reference:
Health Images, Inc., Proxy Statement in connection with its Annual
Meeting of Shareholders on May 31, 1996
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PART I
ITEM 1. BUSINESS
GENERAL
Health Images, Inc. (the "Company") is a radiology management
company which establishes and operates 52 freestanding diagnostic imaging
centers ("Imaging Centers"). Management believes the Company is the largest
operator of freestanding magnetic resonance imaging ("MRI") centers in the
United States. The Company began its imaging center business in 1984 and
recently began its second decade in the business of providing radiology
services.
Traditionally the Company's emphasis has been to provide MRI
services exclusively. In recent years the Company has begun adding other
imaging modalities in certain of its centers. The Company believes its
expertise in radiology services and the economies of scale in the imaging
business aid it in its expansion into other imaging modalities in its current
markets. The Company evaluates each of its centers separately to determine
whether to add other imaging modalities. In certain markets, the Company is
beginning to experience a preference by certain third party payors for
multi-modality diagnostic imaging centers. The Company is responding to these
preferences in those markets where they are apparent.
Effective March 31, 1995, the Company acquired fifteen (15)
multi-modality diagnostic imaging centers from MedAlliance, Inc. These centers
are located in Aurora, Colorado (2 centers) (a suburb of Denver); Denver,
Colorado; Baton Rouge, Louisiana (2 centers); Beaumont, Texas; Birmingham,
Alabama (2 centers); Carrollton, Georgia; Chattanooga, Tennessee; Greenville,
South Carolina; Huntsville, Alabama; Knoxville, Tennessee; Nashville,
Tennessee; and Port Arthur, Texas. The Company sold the Carrollton center
effective June 6, 1995, and the Chattanooga center effective November 1, 1995.
The Company retained its interest in an MRI joint venture in Chattanooga. The
Company also consolidated its two centers in Birmingham into one center in
September, 1995.
The MedAlliance acquisition of multi-modality centers
complements the Company's addition of imaging modalities other than MRI at
certain of its existing centers. Seventeen (17) of the Company's Imaging
Centers offer computerized tomography ("CT"), in addition to MRI, seventeen
(17) of the Company's Imaging Centers offer x-ray services, fifteen (15)
Imaging Centers offer ultrasound ("US") services, and twelve (12) Imaging
Centers offer mammography ("MM").
In 1996, Health Images of Jacksonville will expand into a
multi-modality center offering CT, X-ray, MM, US, nuclear medicine and
fluoroscopy services. Shamrock Imaging will add a second MRI
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system (1.5 Tesla) in 1996 as well as fluoroscopy and nuclear medicine. In
addition, Shamrock Imaging will be the first center to expand into the area of
pain management services. Health Images of Arlington will add a fixed site MRI
System (instead of a mobile) and nuclear medicine in 1996.
MRI uses magnetic fields and radio waves to produce diagnostic
images of cross-sectional anatomy. Although other imaging modalities may be
more cost efficient for certain purposes, MRI studies are generally better
defined and more precise than those produced by other imaging modalities. The
Company believes that MRI is the imaging modality of choice for diagnosing most
central nervous system disorders and that physicians are increasingly
requesting MRI for non-neurological applications. Licensed physicians provide
diagnostic readings of the imaging scans pursuant to contractual arrangements
with the Company.
As an outgrowth of its MRI business, the Company established
an Engineering Services Division in September, 1986, to provide maintenance to
MRI systems at certain of the Company's Imaging Centers as well as to provide
MRI system maintenance to other operators. In 1988, the Engineering Services
Division began to assemble the HI Standard(R) MRI system for use in the
Company's Imaging Centers. The HI Standard MRI system is a mid-field .6 Tesla
system which has received FDA approval. It is a derivative of systems
manufactured by Technicare Corporation, a subsidiary of Johnson & Johnson, and
is produced under licenses from Johnson & Johnson and the British Technology
Group. See "Business -- Engineering Services Division." In late 1991, the
Engineering Services Division also began servicing the Company's Diasonics MRI
Systems, which are located at seven (7) of the Company's Imaging Centers. In
1995, this Division began servicing the magnets on seven (7) GE MRI systems
acquired from MedAlliance. The Engineering Services Division also services the
Company's Picker CT Systems.
The Engineering Services Division reduces the Company's
effective cost of equipment and maintenance by repairing, refurbishing and
rebuilding certain of the Company's MRI systems and other imaging equipment and
by assembling the HI Standard MRI system for use in the Company's Imaging
Centers. Because the Company's MRI system costs the Company less than MRI
systems purchased from other manufacturers, the operating break even point
(before allocation of corporate overhead) is approximately 40% lower at the
Imaging Centers that use the HI Standard MRI system. All of the Imaging
Centers developed by the Company and opened since the beginning of 1989 use the
HI Standard MRI system. The Engineering Services Division also sells MRI
system upgrades such as surface coils to third parties, and is engaged in
research and development relating to enhancing and upgrading MRI systems.
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In June 1993, the Board of Directors authorized a major
technology program to develop a new state-of- the-art MRI system. This system,
the HI STAR(TM) will replace the HI Standard MRI system. The Company received
510(k) approval of the HI STAR MRI System in September 1995, and commenced beta
testing of the HI STAR in summer 1995. The Company has begun manufacturing the
HI STAR MRI System and plans to install the first system by summer 1996.
The Company was incorporated in 1982 as a Florida corporation
providing cardiovascular perfusion services to hospitals. In February 1984,
management expanded the business activities of the Company to establish the
Atlanta Imaging Center in north Atlanta, Georgia. Effective March 31, 1985,
the Company discontinued its cardiovascular perfusion business. On June 29,
1989, the Company changed its state of incorporation from Florida to Delaware.
DEVELOPMENT AND ACQUISITION OF IMAGING CENTERS
The Company currently has one Imaging Center under
development. It is located in York, England and is scheduled to open in
mid-1996. It will be the Company's fifth center in the United Kingdom.
The Company regularly reviews acquisition opportunities on an
individual basis. The Company plans to acquire an individual imaging center or
group of centers in geographic areas in which it currently operates or a
company in the diagnostic imaging business if management feels that the
purchase price is attractive. The Company believes its size provides economies
of scale that enhance any such prospective combination. The Company may also
develop new Imaging Centers in the future in areas where the HI STAR MRI System
and the Company's in-house construction capabilities allow the Company to
establish a cost-effective center in an area which is currently underserved by
MRI.
The Company currently views the expansion of certain of its
existing centers into additional diagnostic imaging modalities as being the
most immediate source for growth opportunities. The Company reviews each
center on an individual basis to determine whether to add a modality. In
certain markets, this decision is driven by managed care payors seeking
multi-modality imaging centers to supply the radiology needs of their
beneficiaries.
OPERATION OF IMAGING CENTERS
Each Imaging Center is staffed by administrative and technical
personnel. In addition, a physician or a physician group provides professional
services and interprets studies for each Imaging Center under a contract with
the Company. Such physicians are independent contractors and are not employees
of the Company or the affiliated partnerships; however, in certain isolated
instan-
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ces, some of these physicians have investment interests in the Company or in a
particular affiliated partnership or both.
The Imaging Centers are open at such hours as are appropriate
for the local medical community. Most are open from 7:30 a.m. to 9:00 p.m.
each weekday, and approximately one-third of the Imaging Centers routinely
maintain hours on Saturdays. Others will open on Saturdays as needed.
The diagnostic modalities at each Imaging Center are
maintained by either the Company's Engineering Services Division or under an
agreement with the manufacturer. The Company's Engineering Services Division
services all of the Imaging Centers which utilize either the HI Standard or
Diasonics MRI Systems. The Company and its affiliated partnerships purchase
upgrades for the MRI systems and other diagnostic modalities from time to time
as needed from either the Company's Engineering Services Division or from the
manufacturer of the modality.
Each Imaging Center generally charges patients a fee for
providing diagnostic studies on a per procedure or per study basis. The
physician or physician group that provides diagnostic readings of the studies
generally receives a contractually specified percentage of such fee when and if
collected by the Company or the limited partnership. At certain Imaging
Centers, the entity which provides the diagnostic readings bills the patient or
third- party payor directly for such services.
Pricing of medical services, including MRI scans, varies by
region and locality. The Imaging Centers maintain a competitive billing
strategy based upon evaluation of available pricing data with respect to each
location. Each Imaging Center adopts standard pricing procedures which may be
modified under certain circumstances. The current undiscounted average list
patient charge per non-contrast MRI study for the Imaging Centers, including
physician interpretation fees, is approximately $834.00. In most cases,
however, charges are discounted and the average realizable charge per MRI is
substantially less than list. Each Imaging Center maintains sufficient price
flexibility to enable it to compete with other diagnostic imaging services
provided in the local community.
ENGINEERING SERVICES DIVISION
In 1986, in response to the decision of Johnson & Johnson to
discontinue the MRI system manufacturing business of its wholly-owned
subsidiary, Technicare Corporation ("Technicare"), the Company's management
decided to establish an Engineering Services Division to service Technicare MRI
systems owned by the Company. The Company hired a number of MRI field service
technicians experienced in servicing Technicare CT and MRI systems and
purchased parts inventories in order to conduct its own engineering and service
functions.
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After determining that a market to service Technicare
equipment operated by others existed, the Company expanded the Engineering
Services Division to service such MRI systems. As of March 15, 1995, the
Engineering Services Division provided service for thirty-five (35) MRI systems
operated by parties other than the Company or any of its affiliated
partnerships.
The Engineering Services Division reduces the Company's
effective cost of equipment and maintenance by repairing, refurbishing and
rebuilding certain of the Company's MRI systems. As a result of expertise
acquired in repairing and improving these Company MRI systems and pursuant to
the licenses described below, the Company, through its Engineering Services
Division, began in August 1988 to assemble the HI Standard MRI system for use
in the Company's Imaging Centers.
To enable the Company to manufacture MRI systems arising from
the Technicare technology, the Company entered into a Master Patent License
Agreement (the "Patent Agreement") with The National Research Development
Corporation, an English corporation d/b/a British Technology Group ("BTG") as
of October 1, 1987, and a license agreement (the "J&J Agreement") with Johnson
& Johnson as of April 1, 1988. Pursuant to the Patent Agreement, the Company
obtained non-exclusive perpetual licenses under certain patents and patent
applications of which BTG is the proprietor. The licenses allow the Company to
develop, manufacture and market MRI systems and upgrade packages for MRI
systems in the United States. The Patent Agreement was amended as of January
1, 1989 to allow the Company to develop, manufacture and market MRI systems and
upgrade packages for MRI systems worldwide. Under the J&J Agreement, the
Company obtained non-exclusive perpetual licenses to create, copy, use, license
and sell certain Johnson & Johnson MRI software, hardware and derivative works
relating to the Teslacon II MRI system anywhere in the world. Johnson &
Johnson is the assignee of its wholly-owned subsidiary, Technicare.
The thirty-one (31) Imaging Centers opened since the beginning
of 1989 use the HI Standard MRI system. Because the Company's MRI system costs
the Company less than MRI systems purchased from other manufacturers, the
operating break even point (before allocation of corporate overhead) is
approximately 40% lower at the Imaging Centers which use the HI Standard MRI
system. The Company contemplates a comparable break even difference between
those imaging centers using the HI STAR MRI System and MRI Systems manufactured
by third parties.
In June 1993, the Board of Directors approved a major
technology program to develop a state-of-the-art MRI system. This system, the
HI STAR, will replace the Company's HI Standard MRI systems. The HI STAR MRI
system is not based on Technicare technology. The HI STAR will allow the
Company to retain its edge of having a more cost-effective MRI system than its
competitors.
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In September 1995 the federal Food and Drug Administration issued the 510(k)
approval of the HI STAR MRI system. The Company has commenced clinical beta
testing of the HI STAR MRI system and plans to begin manufacturing and
installing the HI STAR MRI system in certain centers in 1996.
IMAGING CENTERS
The following table sets forth certain information concerning
the Imaging Centers owned and operated by the Company as of March 15, 1996.
The table also set forth the Imaging Centers which provide diagnostic
modalities other than MRI.
The five (5) Imaging Centers that are not 100% owned by the
Company are owned by limited partnerships in which the Company is sole general
partner, except Lancaster and Health Images of Philadelphia where it is a co-
general partner. The Company has offered to buy out the remaining interests,
in each of these limited partnerships at fair market value but the remaining
limited partners do not wish to sell. The percentage of ownership shown for
limited partnerships represents the limited partnership interests owned by the
Company.
<TABLE>
<CAPTION>
Operating Additional
Location Name Since Modalities
- -------- ---- --------- ----------
<S> <C> <C> <C>
Atlanta, GA Health Images of Atlanta Nov. 1984 CT, US
Lancaster, PA Lancaster Magnetic Imaging Nov. 1985
(95% interest)
Frederick MD Maryland Magnetic Imaging Dec. 1985
(97% interest)
Jacksonville, Health Images of Jacksonville July 1986 X-Ray, MM
FL(1)
Philadelphia, PA Health Images of Philadelphia April 1987
(93% interest)
Riverdale, GA Health Images of Riverdale Sept. 1987
Athens, GA Athens Magnetic Imaging Dec. 1987
(98% interest)
Anderson, SC Anderson Magnetic Imaging May 1988
(98% interest)
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Orange Park, FL Health Images of Orange Park June 1988 X-Ray
Houston, TX(2) Shamrock Imaging Aug. 1988 CT, X-Ray,
MM, US
N. Charleston, SC Charleston Magnetic Imaging Feb. 1989
Stratford, NJ Stratford Magnetic Imaging April 1989
Savannah, GA Coastal Magnetic Imaging July 1989
Columbus, GA Health Images of Columbus Aug. 1989
Lebanon, PA Lebanon Magnetic Imaging Oct. 1989
Augusta, GA Health Images of Augusta Dec. 1989
Clear Lake, TX Health Images of Bay Terrace Feb. 1990
Warner Robins, GA Warner Robins Magnetic Imaging Feb. 1990 X-Ray
Wheaton, IL Health Images of DuPage March 1990
Columbia, SC Health Images of Columbia June 1990
Fort Worth, TX Health Images of Fort Worth June 1990
Memphis, TN Stage Road Magnetic Imaging July 1990
Fort Myers, FL Ft. Myers Magnetic Imaging Nov. 1990
Guildford, UK Guildford Magnetic Imaging Nov. 1990
Effingham, IL Effingham Magnetic Imaging Dec. 1990
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Tyler, TX Tyler Magnetic Imaging March 1991
Hilton Head, SC Hilton Head Magnetic Imaging April 1991
Austin, TX Austin Magnetic Imaging Sept. 1991
Tulsa, OK Tulsa Magnetic Imaging Oct. 1991
NE Ft. Worth, TX Health Images of Hurst Nov. 1991 CT, US,
X-Ray
South Dallas, TX Health Images of Dallas May 1992 CT, US,
X-Ray
Darlington, UK Darlington Magnetic Imaging April 1992
Waco, TX Waco Magnetic Imaging Aug. 1992
Belleville, IL(3) Health Images of Belleville April 1992
Colorado Springs, Front Range Magnetic Imaging June 1992 CT, X-Ray,
CO(3) MM, fluoro
Arlington, TX(3)(4) Health Images of Arlington Sept. 1992 CT, X-Ray,
fluoro,
US, MM
Somerset, UK(3) Somerset MRI Centre Nov. 1992
Wyomissing, PA Health Images of Reading Jan. 1993 CT, X-Ray,
US
Cape Coral, FL Cape Coral Magnetic Imaging July 1993
Welwyn Garden Hertfordshire Magnetic Imaging Aug. 1993
City, U.K.
Aurora, CO(3) Aurora MRI-South April 1995
Aurora, CO(3) Aurora MRI-North April 1995
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Baton Rouge, LA(3) Baton Rouge ODC April 1995 CT, X-Ray,
MM, US,
fluoro,
nuc.med.
Baton Rouge, LA(3) Digital Diagnostic April 1995 CT, X-Ray,
MM, US,
fluoro,
nuc.med.
Beaumont, TX(3) Beaumont ODC April 1995 CT, X-Ray,
MM, US, nuc.
med.
Birmingham, AL(3) Birmingham ODC April 1995 CT, X-Ray,
MM, US
Greenville, SC(3) Greenville ODC April 1995 CT, X-Ray,
MM, US,
fluoro,
nuc.med.
Huntsville, AL(3) Huntsville ODC April 1995 CT, X-Ray,
MM, US
Knoxville, TN(3) Knoxville ODC April 1995 CT, X-Ray,
MM, US,
fluoro,
nuc. med.
Denver, CO(3) MD-MRI April 1995 CT, X-Ray,
MM, US
Nashville, TN(3) Nashville ODC April 1995 CT, X-Ray,
MM, US
Grove, TX(3) MRI of Port Arthur April 1995 CT
</TABLE>
=========================================
(1) Health Images of Jacksonville will expand into a new 11,000 square
foot multi-modality facility in summer 1996 offering CT, ultrasound,
mammography, nuclear medicine and fluoroscopy.
(2) Shamrock is adding a 6,000 square foot expansion that will add a
second, higher field strength (1.5T) MRI system, fluoroscopy, and
nuclear medicine services in 1996. In addition, Shamrock will be the
first of the Company's imaging centers to offer pain management
services.
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(3) The Company acquired this center as of the date indicated from a party
unaffiliated with Health Images.
(4) Health Images of Arlington is relocating to a new 10,000 square foot
facility in 1996 that will offer a fixed site MRI system (rather than
a mobile) and will add nuclear medicine.
ONCOLOGY CENTER
On January 15, 1990, the Company opened a radiation oncology
center in Williamsport, Pennsylvania, the Williamsport Regional Radiation
Oncology Center (the "Oncology Center"). The Oncology Center provides
radiation treatment therapy to cancer patients in the Williamsport area on an
outpatient basis. Radiation therapy uses high energy x-rays produced by a
machine called a linear accelerator designed to stop cancer cells from growing
and multiplying. The Oncology Center's medical equipment (a Mevatron MD Class
Dual Photon Medical Linear Accelerator and a Mevasim S for simulation and
localization of radiation therapy) is used by the Oncology Center's board
certified oncologists and professional staff to assess, plan and provide
treatment to cancer patients. The Company has no current plans to operate
additional oncology centers.
GOVERNMENT REGULATION
The Imaging Centers and the Oncology Center are subject to
federal law and various federal and state regulations. While the Company
believes that its operations comply with applicable regulations, the Company
has not sought or received interpretive rulings to that effect. Additionally,
there can be no assurance that subsequent laws, subsequent changes in present
laws or interpretations of laws will not adversely affect the Company's
operations. Certain applicable laws and regulations are generally described
below:
FDA Regulation of MRI
No one may market a medical device without the approval of the
U.S. Food and Drug Administration (the "FDA"). The Company has obtained the
appropriate approval from the FDA to market its HI Standard MRI system for
commercial use. On June 23, 1989, the FDA also reclassified the HI Standard
MRI system from a Class III to a Class II Medical Device, which reduces the
level of FDA regulation applicable to new technological developments. The
Company filed with the FDA for 510(k) approval of the HI STAR MRI System on
September 22, 1994, and received approval in September 1995.
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The Company registered with the FDA as a Medical Device
Establishment on October 3, 1987. The Company updates this registration
annually.
Certificates of Need
Most states have Certificate of Need ("CON") programs which
control and regulate the construction of health care facilities and the
acquisition by health care facilities of major medical equipment. Although
such programs vary, generally a CON is required before constructing a "health
care facility," and a health care facility must obtain a CON before acquiring
major medical equipment or establishing new institutional services. A CON is
granted on the basis of various criteria relating to need, giving consideration
to the extent to which such facilities, equipment or services are available to
a specified geographical area and the population of such area. The term
"health care facility," as defined by many states, does not include facilities
that provide service only to outpatients. Accordingly, in those jurisdictions,
an outpatient clinic need not obtain a CON.
Some states, however, require that any person acquiring major
medical equipment, such as an MRI system, first obtain a CON regardless of
whether or not the MRI system is acquired by or placed in a health care
facility. In those states, even if an Imaging Center may be constructed
without a CON, the purchase of an MRI system at a cost comparable to that paid
by the Imaging Centers will require a CON.
The Company has CONs for Stage Road Magnetic Imaging in
Memphis and Nashville ODC in Nashville, Tennessee, the Philadelphia, Lancaster
and Lebanon Centers in Pennsylvania, and the Greenville Center, the Charleston
Center and the Hilton Head Center in South Carolina. Knoxville ODC's
operations were grandfathered by the State of Tennessee when it adopted its
current CON laws.
Prohibition Against Practice of Medicine
The establishment, marketing and operation of the Imaging
Centers are subject to laws prohibiting the practice of medicine by
non-physicians and the rebate or division of fees between physicians and
non-physicians. They also limit the manner in which patients may be solicited.
Management believes that its plan of operations complies with such laws. Under
the Company's plan, the employees of each Imaging Center provide only technical
services relating to the diagnostic scans. Professional medical services, such
as the reading of the diagnostic studies and related diagnosis, are separately
provided by licensed physicians. There can be no assurance, however, that
state authorities or courts will not determine that these relationships
constitute the unauthorized practice of medicine by the Company. Such
determinations could have a materially adverse effect upon the Company and the
partner-
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ships and would prohibit the affected Imaging Centers from continuing their
current procedures for conducting business.
Reimbursement
Because most patients at the Imaging Centers rely upon
third-party or government reimbursement in payment for medical services, the
amount and availability of third-party and government reimbursement for MRI
scans directly impact the use and revenues of the Imaging Centers.
Private third-party insurance carriers generally pay for
medically necessary MRI scans. The Company's Imaging Centers accept Medicare
patients and, for competitive reasons, enter from time to time into contractual
reimbursement arrangements with various third parties, including HMOs, Blue
Cross/Blue Shield and other insurers. These arrangements generally result in
net collected revenues lower than the Company's list prices for services.
Medicare reimbursement rates vary from state to state and vary
among regions within a state. During the year ended December 31, 1995,
approximately 11.6% of the patients referred to the Imaging Centers were
Medicare patients. The percentage of Medicare patients varies greatly among
the Imaging Centers, with the lowest percentage being 4.8% and the highest
percentage being 41.5% during the same period. The Company's average Medicare
reimbursement for MRI was $527.00.
Also, beginning in January 1992, HCFA, at the direction of
Congress, changed the way it paid for many health care services reimbursed
under Medicare, including MRI services. At that time, it implemented a
Resource-Based Relative Value Scale ("RBRVS") system for certain covered
services. As a result of this change, the Company's per scan reimbursement
from Medicare has been reduced in some instances.
The Company has been facing declining reimbursements in recent
years due to a number of factors although the rate of decline has diminished
recently. The reasons for this decline arise from cost containment efforts at
federal and state levels and from efforts of insurers and businesses to rein in
health care costs. The Company's average reimbursements per scan from
Medicare, Medicaid and Blue Cross/Blue Shield have all declined in recent
years. In addition, an increasing percentage of the patients are covered under
managed care agreements that stipulate a discount.
In addition, Pennsylvania, where five (5) of the Company's
Imaging Centers are located, adopted legislation that limits reimbursement in
cases of workmen's compensation and automobile injury. Effective August 31,
1993, it limits reimbur-
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sement to 113% of the Medicare reimbursement for the medical service. The Act
also eliminates a physician's or other provider's ability to refer to clinics
in which it has a financial interest.
The Company's emphasis on Managed Care (see "Business-Managed
Care Division") has resulted in fewer patients paying list prices for MRI
scans. The Company anticipates that this trend of discounting prices under
managed care contracts with HMOs, PPOs, IPAs, TPAs and directly with businesses
for their own employees will continue. The Company believes that its
competitors are suffering comparable declining reimbursements.
Fraud and Abuse
All medical providers, which accept Medicare or Medicaid
reimbursements, are currently subject to the fraud and abuse provisions of the
Social Security Act (the "Act"), which prohibit bribes, kickbacks, and rebates
and any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for providing Medicare-covered or Medicaid-covered
services, items or equipment. Violation of these provisions may result in
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. Recently, the Department of Justice has given health
care fraud a higher priority and made more personnel available to investigate
instances of alleged health care fraud.
An important case in this area is The Inspector General v. The
Hanlester Network, et.al. (the "Hanlester Decision"). In this case, the
Inspector General of HHS had alleged that distributions offered or paid by
medical laboratories operating as limited partnerships to their physician
investors constituted remuneration, which was paid or offered to induce
referrals, in violation of the Act. An Administrative Law Judge reviewing the
case had previously held that, in order to prove a violation of the Act, the
offer or payment of remuneration to the physician investors must have been
conditioned on the physicians agreeing to refer Medicare or Medicaid
program-related business to the laboratory. Because the partnership
distributions were not made on the basis of agreed referrals, no violation of
the Act was found. The Appeals Board overruled the Administrative Law Judge's
decision in this regard, holding that an agreement to refer program-related
business is not a necessary element of proof for violation of the Act. The
Appeals Board stated that "a violation occurs whenever an individual or entity
knowingly and willfully offers or pays anything of value, in any manner or
form, with the intent of exercising influence over a physician's reason or
judgment in an effort to cause the referral of a [Medicare or Medicaid]
program-related business."
The Appeals Board in the Hanlester Decision remanded the case
to the Administrative Law Judge to reconsider his findings in light of the
broad principles set forth in the Hanlester Decision. On March 10, 1992, the
Administrative Law Judge issued his decision
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on remand. In applying the standards established by the Departmental Appeals
Board, the Administrative Law Judge found that all of the respondents knowingly
and willfully offered remuneration to physicians to induce them to refer
Medicare business in violation of federal law. As a result, he permanently
excluded the three joint venture laboratories from the Medicare program and any
other federally funded health care program because he found that it was
impossible for them to exist, as then-structured, without violating the Act.
In addition, he excluded the Hanlester Network which acted as the general
partner in all three entities, for two years. None of the individual
respondents were excluded by the Administrative Law Judge.
On July 24, 1992, the Appeals Board issued its final decision
in the Hanlester case. The Appeals Board upheld the Administrative Law Judge's
decision that the respondents had violated the anti-kickback law, but found he
had erred in not excluding certain individuals affiliated with the laboratories
from the Medicare program and other federal health care programs. As a result,
the Appeals Board also ordered the exclusion of three of the individuals for
two years, and two of the individuals for one year. A U.S. District Court for
the Central District of California has affirmed this decision.
In April, 1995, the District Court's decision was overturned
in part by the U.S. Court of Appeals for the Ninth Circuit. The Appeals Court
found that the individual partners in the venture had not acted "knowingly and
willfully," as required by the statute, because there was no showing that they
had directed or approved of any of the partnerships' unlawful activities. The
Solicitor General, who represents HHS in court, has declined to ask the Supreme
Court to review the Ninth Circuit's decision.
As the Ninth Circuit's decision is only controlling in the
states of that Circuit, it is unclear what impact, if any, the Court of Appeals
decision will have on future HHS actions in this area. The principles
announced in the Appeals Board decision, and their application in the
Administrative Law Judge's decision on remand, could be applied by HHS
officials in future cases to find a violation of the Act in situations where
physicians and other health care providers have made investments in medical
care businesses, such as Imaging Centers. Although no express agreement
regarding referrals exists, such investors could be deemed to receive
proscribed remuneration under the Act.
In addition, in December 1992, National Health Laboratories
("NHL") entered into a settlement with the federal government by which it paid
$111 million and agreed to certain other conditions, as a result of charges
that it had submitted false claims to government health care programs. The
president of the company, and the company itself, also pleaded guilty to two
counts of submitting false claims. The government alleged that NHL had
defrauded the
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<PAGE> 16
government by manipulating doctors into ordering medically unnecessary tests by
charging them low prices on testing when it was billed to the physician. When
NHL billed Medicare for this testing, however, it did so at substantially
increased prices. The government alleged that physicians did not know that
Medicare was being charged these higher prices for these tests. Subsequent
cases have been brought against other laboratories based on the same theory.
Further, on July 29, 1991, the Office of the Inspector General
at HHS ("OIG") issued regulations which provide specific "safe harbors" for
certain practices that would not violate the provisions of the Act. These
regulations specify limited circumstances under which a "safe harbor" will be
available when physician investors refer Medicare patients to entities in which
they maintain a passive investment interest (i.e., either as a shareholder or a
limited partnership interest). Under the safe harbor rules, payments
constituting a return on investment (e.g., dividends, interest) will not
constitute proscribed remuneration under the Act in the following two
circumstances:
(A) Payments to investors will not violate the Act if the business
making the payment possesses more than $50,000,000 in
undepreciated net tangible assets, and
(1) the investment interest, if equity, is registered
with the U.S. Securities and Exchange Commission;
(2) the investment interest of an investor "in a position
to make or influence referrals to, furnish items or
services to, or otherwise generate business" for the
business (a "Referral Source") is acquired on terms
equally available to the public on a U.S. national
securities exchange or quotation system;
(3) neither the business nor any investor markets or
furnishes the business' items or services to passive
investors differently than to non-investors;
(4) the business does not loan funds to, or guarantee a
loan for, a Referral Source to acquire an interest in
the business; and
(5) the payment by the business to the investor is
directly proportional to the amount of capital
invested.
(B) Payments to investors will also not violate the Act if the
business making the payment has active and/or passive
investors, and
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<PAGE> 17
(1) no more than 40% of the value of the investment
interests of each class of investments in the
business is held by Referral Sources;
(2) the terms on which the investment interest in the
business is offered to a passive investor is the same
regardless of whether he or she is a Referral Source;
(3) the terms on which the investment interest in the
business is offered to a Referral Source is not
related to previous or expected volume of referrals,
items or services furnished, or the amount of the
business otherwise generated from such investor;
(4) there is no requirement that a passive investor in
the business be or remain a Referral Source to hold
his or her investment interest;
(5) neither the business nor any investor markets or
furnishes the business' items or services to passive
investors differently than to non-investors;
(6) no more than 40% of the gross revenue of the business
comes from referrals, items or services furnished, or
business otherwise generated by investors;
(7) the business does not loan funds to, or guarantee a
loan for, a Referral Source to acquire an interest in
the business; and
(8) the payment by the business is directly proportional
to the amount of capital invested.
On July 21, 1994, the OIG proposed a clarification of several
of these provisions. That proposal was subject to public comment and has yet
to be issued in final form.
None of Health Images' affiliated partnerships falls within
any of the safe harbors set forth in the HHS Regulations. Any of them may
therefore be deemed to violate the Act. This conclusion would be unchanged,
even if the proposed clarification, discussed above, were adopted in final, in
the same form as proposed. It is currently impossible to predict the risk of
prosecution. Health Images has offered to purchase the interests of the
limited partners in each of its affiliated partnerships in order to effect a
termination of the Partnerships and avoid any risk that Health Images or the
limited partners will be prosecuted under the Act. None of the remaining
limited partners wishes to
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<PAGE> 18
sell. None of the remaining limited partners has more than a nominal interest
in the limited partnership.
In addition, on November 5, 1992, the OIG proposed a second
set of safe harbors that would protect certain managed care activities from the
reach of the federal anti-kickback laws. That proposal was issued in final
form on November 25, 1995. In some instances, the safe harbor would cover
price reductions offered by providers to health plans. On September 21, 1993,
the OIG proposed another set of safe harbors which, among other things,
modified the investment safe harbor discussed above for entities located in
rural areas and serving residents of such areas. The Company is currently
reviewing these regulations to determine what action, if any, is necessary as a
result of these regulations.
In addition, the OIG periodically issues "Fraud Alerts," which
identify specific practices within the health care industry that the OIG
believes could raise questions under the federal fraud and abuse laws. The
following areas have been the subject of Fraud Alerts by the OIG: joint
venture arrangements; routine waiver of Medicare Part B copayments and
deductibles; hospital incentives to referring physicians; prescription drug
marketing practices; arrangements for the provision of clinical laboratory
services, arrangements for home health services; and arrangements involving
nursing homes. The Company monitors these Fraud Alerts to determine what
action, if any, is necessary to comply with their requirements.
In addition, many states also have their own anti-kickback
laws. The Company monitors these laws to determine what action, if any, is
necessary to comply with their requirements.
In August 1993, the Omnibus Budget Reconciliation Act of 1993
("OBRA '93") enacted new restrictions on the practice of physician
self-referral; i.e., the practice by which physicians refer to entities with
which they have a financial relationship. Under the terms of OBRA '93, it will
be unlawful for a physician, an immediate family member of a physician, or an
entity in which either has an ownership interest to refer patients, for certain
"designated health services," to an entity with which any one of them has a
"financial relationship," if the services are reimbursed by either Medicare or
Medicaid. Among the services included in the definition of "designated health
services" are "radiology services," such as MRI and CT services, and "radiation
therapy services." This provision became effective on January 1, 1995.
However, no regulations implementing the OBRA '93 provisions have been
proposed. In addition, the form on which providers would report their
financial relationships has not been issued. The Company has endeavored to
draft or amend its contracts with physicians to meet the personal services or
the rental of office space exceptions to the statute's prohibitions.
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<PAGE> 19
In addition, OBRA '93 also modified several of the exceptions
to the self-referral prohibition that were in existence prior to its enactment.
With respect to MRI and radiation therapy, these exceptions also became
effective in January 1995. The Company does not believe that the provisions of
OBRA '93 will impact its business directly, but there may be an indirect effect
over time if some competitors of the Company who rely on physician self-
referral and have a high volume of Medicare or Medicaid business cease
operations. The Company has not yet seen any material impact from the
statutes.
In addition, a number of proposals to curtail fraud and abuse
by health care providers were adopted by both houses of Congress during the
1995-96 legislative session. These proposals generally would have increased
the federal government's role in the monitoring and punishment of fraudulent
and abusive behavior by providers by, among other things, (i) significantly
increasing the monetary penalties for violations of the fraud and abuse laws;
(ii) establishing an anti-fraud and abuse trust funded through collection of
penalties and fines for violations of such laws; and (iii) establishing a
health care fraud and abuse task force. In addition, the bill also would have
relaxed a number of the provisions applicable to physician self-referral,
although physicians would still have been prohibited from referring Medicare
and Medicaid patients to MRI facilities in which they had an ownership or
investment interest. The President vetoed the conference bill that contained
these measures, but it is possible that other attempts could be made in the
future to reintroduce such legislation.
State Regulation
Many states are implementing their own health care reform
plans, which may include provisions that could affect the structure of health
care and the manner in which health care services are delivered in a particular
state. The Company's management monitors such legislation to determine what
action, if any, is necessary as a result of such provisions.
Also, certain of the states in which the Company has Imaging
Centers have enacted provisions concerning physician self-referral. In 1991,
the State of New Jersey enacted a law that prohibits physicians from referring
any patient to a health care entity in which they have a financial interest.
This law, however, exempted those entities that were in existence on the
effective date of the law, August 1, 1991.
The State of Illinois has also enacted prohibitions on
self-referral of diagnostic imaging. The Illinois law is effective January 1,
1993, or January 1, 1996, depending on when the interest was acquired. In
addition, the States of Florida, Georgia, Maryland, South Carolina and
Tennessee have all passed legislation
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<PAGE> 20
that would, in some form, prohibit physicians from referring patients to
entities in which they have a financial interest. Other states may also be
considering (or have enacted) similar legislation.
The Company is studying the proposed regulations and
monitoring legislative activity with respect to limiting physician investments
in MRI centers to determine what action, if any, may be necessary to comply
with pending legislation or new interpretations of existing laws applicable to
the Company's business.
COMPETITION
The health care industry, including the market for outpatient
imaging diagnostic facilities, is competitive. The Company and its Imaging
Centers compete with local hospitals, radiologists and other imaging diagnostic
centers. Competitors may have existing relationships with the medical
community which may be superior to those of the Company's Imaging Centers. In
addition, some hospitals use their control over inpatient services to extract
exclusive arrangements or advantageous pricing from third party payors for
their outpatient services such as diagnostic imaging.
MRI competes with less expensive imaging diagnostic devices
and procedures which may provide similar information to the physician.
Alternative imaging diagnostic technology includes CT scans, nuclear medicine,
radiography/fluoroscopy, ultrasound, x-ray mammography, and conventional x-ray.
The cost of a particular study depends upon the complexity of the procedure,
the length of time of equipment utilization and whether the procedure requires
introduction of contrast agents into the body. Management believes that MRI's
significant benefits justify the pricing differential between MRI and other
modalities.
As a provider of maintenance services to facilities operating
major medical diagnostic equipment, the Company's Engineering Services Division
competes with other companies that have significantly more capital, parts
inventory, personnel and office locations with which to provide such services.
EMPLOYEES
At December 31, 1995, the Company had 955 employees (762
full-time and 193 part-time). At March 16, 1996, the Company had 953
employees. An MRI Imaging Center typically has a full-time staff of
approximately ten (10) employees, generally consisting of three MRI
technicians, one marketing representative, two billing clerks, one
transcriptionist, two receptionists and one office manager. A multi-modality
imaging center requires more personnel and typically has a staff of 30
employees. The Company attracts and maintains qualified personnel by paying
competitive salaries and offering opportunities for rapid advancement.
-19-
<PAGE> 21
INSURANCE
The Company carries workers' compensation insurance and
maintains comprehensive and general liability and fire insurance in amounts
deemed adequate by management with respect to each Imaging Center. The Company
is self- insured with respect to its health and dental insurance risk. The
Company provides MRI technical services and has professional liability
insurance. The Company is not engaged in the practice of medicine, and
requires that physicians reading the diagnostic scans maintain medical
malpractice insurance. In addition, the Company maintains liability insurance
coverage. There can be no assurance that claims will not exceed the amounts of
insurance coverage, that the cost for such coverage will not increase to such
an extent that the Company will be forced to self-insure a substantial portion
of this risk, or that such coverage will not be reduced or become unavailable.
The Company does not maintain product liability insurance coverage with respect
to system upgrades sold to third parties. The Company carries officers and
directors liability insurance.
ITEM 2. PROPERTIES
The Company's headquarters are located in Atlanta, Georgia and
occupy approximately 52,600 square feet at this location under an 84-month
lease that commenced January 1, 1993, and expires December 31, 1999. The
annual rental rate for this lease is $473,791.
The Company or its affiliated partnerships lease the land or
building at thirteen (13) of the fifty- three (53) existing Imaging Centers.
The real property and improvements thereon may be collateralized under real
estate mortgages or security deeds. The real property and improvements for the
other existing Imaging Centers are subject to leases expiring between 1996 and
2010. The real property and the building for the Oncology Center is leased for
a term of twenty (20) years, terminating December 31, 2008.
The existing single modality Imaging Centers occupy an average
of 3,642 square feet. Multi-modality centers occupy an average of 10,500
square feet. The Company owns most of the diagnostic modalities utilized by
the Company at the imaging centers existing prior to the MedAlliance
acquisition. Most of the diagnostic modalities at the centers acquired from
MedAlliance were leased and the Company assumed the leases. The Company's
modalities are used from time to time as collateral for loans obtained by the
Company.
Management believes that its corporate offices and the
facilities in which each of the Imaging Centers is housed are suitable for the
purposes for which they are used but plans to move its corporate offices to new
space north of Atlanta. The move is
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<PAGE> 22
planned for late 1996. The Company does not anticipate any problems with
either subleasing or relinquishing the current corporate headquarters space.
ITEM 3. LEGAL PROCEEDINGS
On March 1, 1993, Pamela C. Smith, a former employee of the
Company, filed a charge with the U.S. Equal Employment Opportunity Commission.
In her charge, Ms. Smith asserted three claims against the Company. First, Ms.
Smith asserted a claim for "hostile working environment" sexual harassment.
Second, Ms. Smith asserted a claim for discriminatory denial of promotion,
alleging that she was denied the position of Corporate Buyer because of her
gender. Third, Ms. Smith asserted a claim for constructive discharge.
The Company has denied these allegations. On July 26, 1993,
the EEOC terminated its investigation at Ms. Smith's request and issued a
Right-To-Sue letter on the same day.
On August 13, 1993, Ms. Smith filed suit in Fulton County
Superior Court in Georgia against the Company and Robert D. Carl, III, the
Chairman of the Board of the Company. Upon the motion of counsel for the
Company and Mr. Carl on August 27, 1993, this case was moved to the United
States District Court for the Northern District of Georgia, Atlanta Division.
In her complaint, Ms. Smith is seeking declaratory, injunctive, and equitable
relief, general, compensatory, and punitive damages of $5,000,000.00, and costs
and attorney fees. In addition to the legal claims described above as part of
Ms. Smith's EEOC charge, the complaint originally accused the Company and Mr.
Carl of slander and libel, intentional infliction of emotional distress and
effecting illegal stock transactions. Ms. Smith has since voluntarily
dismissed her claims for libel and slander as well as the claim of
discriminatory denial of promotion.
Ms. Smith's stock allegations have been severed from the
action by the Federal court and are now pending in a separate case in Fulton
County Superior Court.
In the opinion of management for the Company, these lawsuits
are without merit. Management has defended, and will continue to defend these
lawsuits vigorously. Management further believes that resolution of this
litigation will not materially affect the Company's financial condition.
On February 21, 1995, the Company filed a lawsuit in the
Superior Court of the State of California, San Mateo County, against each of
the selling shareholders of National Diagnostic Systems, Inc. ("NDS"). The
Company acquired the remaining 51.5% of NDS from the selling shareholders in an
August 4, 1994, acquisition. The Company's complaint is for rescission and
res-
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<PAGE> 23
titution, breach of contract, intentional misrepresentation, negligent
misrepresentation, suppression of act, and indemnification. The Company's
complaint was instituted after the selling shareholders failed to respond
adequately to a February 13, 1995, demand letter for rescission of the
transaction.
On February 17, 1995, one of the selling shareholders, James J.
Fitzsimmons, the former President and Chief Executive Officer of Interactive
Diagnostic Services, Inc. ("IDSI") (the successor entity to NDS), filed a
complaint against the Company and IDSI in the Superior Court of the State of
California, San Mateo County. Mr. Fitzsimmons' complaint purports to allege
breach of his employment agreement with IDSI and the Company, and a breach of
Implied Covenant of Good Faith and Fair Dealing and Declaratory Relief. Mr.
Fitzsimmons' employment with IDSI terminated as of January 20, 1995.
On March 21, 1995, Mr. Fitzsimmons amended his complaint to substitute
attorneys, add the remaining selling shareholders as plaintiffs, and change the
causes of action. The amended complaint purports to allege causes of action
including a breach of fiduciary duty by the Company, fraud by the Company, and
a breach of the implied covenant of good faith and fair dealing by the Company
and IDSI, in addition to the previous causes of action asserted by Mr.
Fitzsimmons.
In August 1995 the California Superior Court judge ruled that the
Company's complaint and the selling shareholders' complaint be consolidated
into a single binding arbitration proceeding to be heard by an arbitrator
appointed through the American Arbitration Association ("AAA"). The AAA
selected an arbitrator in February 1996. The initial meeting of the parties
with the arbitrator is currently scheduled for April 3, 1996.
The Company intends to defend itself vigorously against this lawsuit
by the selling shareholders, and will continue to pursue its claims against the
selling shareholders. Management believes that its claims against the selling
shareholders are meritorious. Management regards the claims asserted in the
amended complaint as without merit.
On April 12, 1995, Paul W. Harris, who was involved in the acquisition
of NDS and served as an Executive Vice President of IDSI, sued the Company
alleging breach of his employment agreement because he received no severance
following his December 9, 1994, termination. The Company is vigorously
defending Mr. Harris' lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 1995.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company is authorized by its Certificate of Incorporation
to issue up to 42,000,000 shares of capital stock, of which 40,000,000 shares
are designated Common Stock, par value $.01 per share, and 2,000,000 were
designated Preferred Stock, par value $.01 per share.
COMMON STOCK
The Company's common stock (the "Common Stock") began trading
in the over-the-counter market through the NASDAQ System under the symbol
"HIMG" on July 30, 1985, the date on which the Common Stock was first publicly
traded. From January 5, 1987 to January 26, 1993, the Company's Common Stock
was included on the NASDAQ National Market System. Effective January 27, 1993,
the Company's Common Stock became listed on the New York Stock Exchange under
the symbol "HII."
The following table presents quarterly information on the
price range of the Company's Common Stock for 1994 and 1995. This information
indicates the high and low sale prices reported by the New York Stock Exchange.
These quotations and prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
Quarter High Low
1994
<S> <C> <C>
First Quarter 6 1/4 4 1/2
Second Quarter 5 5/8 4 3/4
Third Quarter 7 3/4 4 3/4
Fourth Quarter 7 1/2 5 1/2
<CAPTION>
Quarter High Low
1995
<S> <C> <C>
First Quarter 6 1/8 4 7/8
Second Quarter 6 1/4 4 3/4
Third Quarter 7 5/8 5 1/2
Fourth Quarter 8 6 3/4
</TABLE>
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<PAGE> 25
As of March 26, 1996, there were issued and outstanding
11,428,257 shares of the Company's Common Stock held of record by approximately
807 shareholders. At March 26, 1996 the Company's Common Stock closed at
$7.375.
In 1995, the Company began paying the dividend quarterly at a
rate of $0.02 per share. The Company paid a dividend of $0.02 per share on its
Common Stock on March 1, 1995, on June 1, 1995 and on September 1, 1995. In
September 1995, the Company's Board of Directors increased the quarterly
dividend to $.025. The Company paid a dividend of $.025 on December 1, 1995.
Actual dividends paid by the Company on its Common Stock in the future will
depend, among other things, upon the earnings and financial condition of the
Company.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
OPERATING DATA
NET PATIENT SERVICE REVENUE $111,347 $ 72,421 $ 68,511 $ 62,183 $ 52,026
ENGINEERING REVENUE 3,078 3,673 4,715 5,786 6,411
OTHER REVENUE AND INCOME 1,111 1,027 2,863 1,958 2,714
-------- -------- -------- -------- --------
115,536 77,121 76,089 69,927 61,151
COSTS AND EXPENSES
OPERATING COSTS 86,899 58,120 58,841 48,924 42,769
PROVISION FOR BAD DEBTS 4,646 2,835 2,652 2,202 1,896
GENERAL AND ADMINISTRATIVE
EXPENSES 8,504 6,159 6,335 6,859 6,159
INTEREST EXPENSE, NET 3,600 980 1,407 765 314
INCOME BEFORE MINORITY
INTEREST AND PROVISION FOR
INCOME TAXES 11,887 9,027 6,854 10,937 10,012
MINORITY INTEREST IN INCOME OF
CONSOLIDATED ENTITIES 606 196 172 379 621
PROVISION FOR INCOME TAXES 4,390 3,438 2,457 4,071 3,477
NET INCOME FROM CONTINUING
OPERATIONS $ 6,891 $ 5,393 $ 4,225 $ 6,726 $ 5,914
LOSS ON DISCONTINUED
OPERATIONS (NET) 418 6,528 466 239 --
LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS (NET) 744 -- -- -- --
NET INCOME (LOSS) $ 5,729 $ (1,135) $ 3,759 $ 6,487 $ 5,914
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 5,729 $ (1,135) $ 3,759 $ 6,487 $ 5,914
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 26,612 $ 17,902 $ 15,512 $ 15,528 $ 15,473
PRIMARY WEIGHTED AVERAGE
COMMON AND COMMON
EQUIVALENT SHARES: 11,583 11,726 11,612 12,299 12,128
EARNINGS PER COMMON AND
COMMON EQUIVALENT
SHARE:
PRIMARY NET INCOME FROM
CONTINUING OPERATIONS $ .59 $ .46 $ .36 $ .55 $ .49
PRIMARY NET INCOME (LOSS) $ .49 $ (.10) $ (.04) $ .53 $ .49
CASH DIVIDENDS PER COMMON
SHARE $ .085 $ .07 $ .06 $ .06 $ .04
BALANCE SHEET DATA:
CURRENT ASSETS $ 34,147 $ 37,610 $ 26,054 $ 29,140 $ 41,412
CURRENT LIABILITIES 34,308 11,736 9,869 12,615 9,321
WORKING CAPITAL (161) 25,874 16,185 16,525 32,091
</TABLE>
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<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS 176,312 125,827 119,355 121,100 115,058
LONG-TERM DEBT 45,001 23,071 18,354 20,376 18,726
STOCKHOLDERS' EQUITY 83,789 79,578 81,354 79,892 81,467
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentage of total net revenue
represented by certain line items in the Consolidated Statements of Operations
for the years indicated. The text following the table discusses year-to-year
variances.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net Patient Service Revenue 96.4% 93.9% 90.0%
Engineering Revenue 2.6% 4.8% 6.2%
Other Revenue 1.0% 1.3% 3.8%
Total Net Revenue 100.0% 100.0% 100.0%
COSTS AND EXPENSES
Operating Costs 60.0% 59.6% 61.8%
Depreciation and
Amortization Expense 15.2% 15.8% 15.6%
Provision for Bad Debt 4.0% 3.7% 3.5%
General and Administrative
Expenses 7.4% 8.0% 8.3%
OPERATING INCOME 13.4% 13.0% 10.9%
INTEREST INCOME 0.1% 0.4% 0.4%
INTEREST EXPENSE 3.2% 1.6% 2.2%
INCOME FROM CONTINUING
OPERATIONS BEFORE
MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 10.3% 11.7% 9.0%
MINORITY INTEREST IN INCOME OF
CONSOLIDATED ENTITIES 0.5% 0.3% 0.2%
PROVISION FOR INCOME TAXES 3.8% 4.5% 3.2%
NET INCOME FROM CONTINUING
OPERATIONS 6.0% 7.0% 5.6%
LOSS ON DISCONTINUED
OPERATIONS (NET OF INCOME TAXES) 0.4% 8.5% 0.6%
LOSS ON DISPOSAL OF
DISCONINUED OPERATIONS (NET
OF INCOME TAXES)
0.6% --- ---
NET INCOME (LOSS) 5.0% -1.5% 4.9%
</TABLE>
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<PAGE> 29
Comparison of the year ended December 31, 1995 to the year ended December 31,
1994
Net patient service revenue(1) increased $38,925,500 or 53.8% primarily
due to $41,783,800 in patient revenue from the Company's acquisition of 15
imaging centers from MedAlliance, Inc. ("the MedAlliance Acquisition"), an
increase in net revenue at imaging centers that were in operation for both the
1995 and 1994 periods ("same center revenue") of $825,200 or 1.3%, partially
offset by the sale of certain clinic properties during 1995. Health Images
signed a management agreement with the purchasers of one of the properties sold
(Central Pennsylvania Magnetic Imaging) under which the Company provides
management services under a fee arrangement based upon net collections of the
facility. This management fee is included in miscellaneous income of the
Company's financial statements and are contractually limited to a maximum of
$750,000 per year.
Engineering Revenue decreased $595,200 or 16.2% due to decreases in
demand for the Company's third party upgrade and maintenance services. Other
revenue and income increased $83,200 or 8.1%.
Operating costs increased $23,370,500 primarily due to expenses
associated with the MedAlliance Acquisition and increased patient volumes at
the Company's same center facilities, partially offset by the elimination of
costs at the sold centers and continued cost control efforts. Operating costs
as a percentage of revenue were 60.0% in 1995, 59.6% in 1994, and 61.8% in
1993. The consistency of operating costs as a percentage of revenue reflects
the Company's success in reducing expenses at its facilities and acquired
properties while experiencing declining patient service reimbursements.
Depreciation and amortization expenses increased $5,408,100 or 44.4% due to
increased depreciation charges and additional goodwill amortization related to
the MedAlliance Acquisition. The Company's provision for bad debts was
$4,646,000 or 4.2% of patient revenue compared to $2,835,500 or 3.9% in 1994.
Provision for bad debts results from required write-offs of accounts management
deems to be uncollectible. Management expects future bad debt results to be
comparable to these results. General and administrative expenses increased
$2,345,600 or 38.1%, primarily due to increased expenses related to the
Company's increased volume of business. General and administrative expense as
a percentage of net revenue was 7.4% in the 1995 period compared
- ---------------------------------
(1)Net patient service represents imaging revenue reduced by contractual
adjustments related to discount arrangements with third party payors. 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> 30
to 8.0% in 1994. The reduction in general and administrative expenses as a
percentage of revenue reflects the economies gained in the MedAlliance
Acquisition and the Company's continued cost control efforts.
Interest income decreased by $143,900 due primarily to lower cash
balances. Interest expense increased by $2,475,700 or 197.8% due to higher
amounts of debt outstanding resulting from the MedAlliance clinic acquisition.
Minority interest in income of consolidated entities increased by $409,600 or
208.9%, primarily due to minority interest expense associated with the clinics
acquired from MedAlliance. Income taxes increased $951,600 or 27.7% due to
higher pretax income.
Net income from continuing operations increased $1,498,000, or 27.8%,
to $6,890,800 in the 1995 period from $5,392,800 in 1994. Primary and fully
diluted earnings from continuing operations increased $0.13 per share, or
28.3%, to $0.59 in the 1995 period as compared to $0.46 in 1994. Earnings per
share were calculated using 11,582,700 primary and 11,651,100 fully diluted
weighted average common share equivalents for the 1995 period as compared to
11,725,600 primary and 11,727,900 fully diluted weighted average common share
equivalents in the prior year period.
During the quarter ended March 31, 1995, the Company discontinued the
operations of Interactive Diagnostics Services ("IDSI") based in San Francisco,
California, and the financial results are treated as discontinued operations.
During 1995 the Company recognized $1,161,900 in after tax losses from this
operation compared to $6,528,300 in after tax losses in 1994. Substantially
all costs related to IDSI, including estimated future expenditures, have been
accounted for in the 1995 loss from discontinued operations. After giving
effect to these losses the Company reported net income of $5,728,900, or $0.49
per share in the 1995 period compared to a net loss of $1,135,500 or $0.10 per
share in 1994.
As indicated in the preceding discussion, the MedAlliance Acquisition
(effective as of April 1, 1995) was a significant event for Health Images. Net
of interest costs, this acquisition was additive to earnings during the year
ended December 31, 1995, and management expects the acquisition to continue to
be additive to earnings in the future. The extent of the earnings increase, if
any, will ultimately depend on the Company's ability to reduce certain overhead
and operating costs as well as successfully maintain patient procedure volume
levels. During 1995 the Company generated economies of scale and increased
patient service revenues at its existing and acquired facilities, and
management expects these trends will continue for the future. Long term,
however, the diagnostic imaging industry remains intensely competitive. The
continued growth of managed care plans has placed downward pressure on imaging
reimbursements and has led to increased scrutiny of the appropriateness of
referrals for major diagnostic imaging procedures such as the MRI and CT
services which are the Company's
-29-
<PAGE> 31
principal sources of revenue. In addition, the Company may be at a competitive
disadvantage to hospital systems which can offer a comprehensive range of
health care services to managed care plans. Management believes, however, that
the Company is better positioned than many of its competitors because of its
lower cost structure and lack of reliance upon physician self-referral
practices. The Company's vertical integration results in lower equipment costs
and significantly reduced maintenance expenses. During 1996, Health Images
plans to begin installation of its new proprietary HI STAR MRI system currently
under development. If successful, this advance will significantly increase the
competitiveness of the Company's technology at a relatively low marginal cost.
Management also believes that internal growth opportunities and additional
acquisitions may be available during 1996 as the industry continues to
consolidate.
Comparison of the year ended December 31, 1994 to the year ended December 31,
1993
Net patient service revenue increased $3,910,000, or 5.7%, primarily
due to increases of $3,891,000 in net revenue at imaging centers that were in
operation for both 1994 and 1993 ("same center revenue"). The increase in same
center revenue was due to an increase of 8.8% in same center MRI studies and an
increase in revenue from other imaging modalities, principally CT and X-ray,
partially offset by a 6.2% decline in average reimbursement per MRI study and a
decrease in revenue from the Company's radiation oncology center.
Engineering revenue decreased $1,041,400, or 22.1%, primarily due to
decreases of $974,500, or 23.8%, in service revenue and $66,900, or 10.9%, in
upgrade revenue.
Other revenue and income decreased by $1,835,500, or 64.1%, primarily
due to a decrease of $328,700, or 43.2%, in the Company's Mobile Leasing
Program revenue, and a decrease of $1,539,400, or 97.9%, in the Company's
Medical Construction Revenue, offsetting an increase of $31,200 in
miscellaneous revenue and gains on sale of securities.
Operating costs decreased by $1,039,100, or 2.2%, primarily due to
decreases in expenses related to the decline in engineering revenue and the
Company's efforts to reduce clinical operating costs. Operating costs as a
percentage of net revenue decreased to 59.6% in 1994 from 61.8% in 1993 due
primarily to clinic cost control and reduced revenue contribution from the
Company's lower margin medical construction business. Depreciation and
amortization expense increased $317,800 or 2.7%. The Company's provision for
bad debts was $2,835,500, or 3.9% of net patient service revenue in 1994 as
compared to $2,651,500, or 3.9%, in 1993. General and administrative expenses
decreased $176,700, or 2.8% primarily due to decreased legal and professional
fees, offset by slightly higher costs associated with the Company's increased
-30-
<PAGE> 32
patient volumes. General and administrative expenses decreased as a percentage
of net revenue from 8.3% in 1993 to 8.0% in 1994.
On August 4, 1994, the Company purchased 100% of its former equity
affiliate, National Diagnostic Systems, Inc. ("NDS"), a start-up enterprise
that specialized in the development and operation of proprietary systems for
imaging prospective review and outcomes analysis. Before the acquisition of
NDS, the Company recognized its share of the net loss of NDS of $364,700 in
1994 as compared to $466,300 in 1993, a decrease of 21.8%.
Subsequent to its purchase of the remaining NDS equity, the Company
has determined that the financial statements of NDS did not fairly reflect
NDS's financial position or business prospects. After consultation with
independent legal counsel, the Company brought suit against the selling
shareholders of NDS seeking rescission of the Company's purchase of NDS, and
alleging, among other things, breach of contract, intentional
misrepresentation, negligent misrepresentation, and suppression of fact. The
Company cannot predict the outcome of this litigation. The Company has
concluded that its investment in NDS (subsequently merged into a Company
subsidiary, Interactive Diagnostic Services, Inc. ("IDSI") has become
substantially impaired and the Company discontinued the operation of this
division in March of 1995. The financial results are reported as discontinued
operations on the Company's financial statements.
Interest income decreased by $5,100, or 1.9%, due to lower cash
balances and lower interest rates. Interest expense decreased by $432,000 due
to lower amounts of debt outstanding. Minority interest in income of
consolidated entities increased by $24,400, or 14.2%, primarily due to higher
operating income at imaging centers with minority partners. The Company's tax
rate on continuing operations for 1994 was 38.9% as compared to 36.8% in 1993.
Net income from continuing operations increased $1,167,600, or 27.6%,
to $5,392,800 in 1994 from $4,225,200 in 1993. Loss on discontinued operations
related to IDSI totaled $6,528,300 in the 1994 period compared to $466,300 in
1993. After giving effect to these losses from discontinued operations, the
net loss for 1994 was $1,135,500 compared to net income of $3,758,900 in 1993.
The primary and fully diluted loss per share was $0.10 in 1994 as compared to
net income per share of $0.32 in 1993. Earnings per share were calculated
using 11,725,600 primary and 11,727,900 fully diluted weighted average common
share equivalents as compared to 11,611,700 primary and fully diluted weighted
average common share equivalents in 1993. The higher number of primary and
fully diluted weighted average common share equivalents in 1994 as compared to
1993 reflects the Company's issuing 559,811 shares of its common stock in
connection with the NDS acquisition, a higher common stock price which
increases the dilutive effect of outstanding stock options, partially offset by
the purchase of
-31-
<PAGE> 33
500,000 shares of treasury stock in 1994 for $3,433,100, and 239,900 shares of
treasury stock for $1,540,800 in 1993.
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 goods 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 a continuation of reduced
reimbursements for the Company's health care services even in an otherwise
inflationary environment. The Company believes, however, that the rate of
decline in reimbursements is decreasing. The Company has historically
responded to any 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 $28,611,700 in 1995, an
increase of $10,710,200 or 59.8% from $17,901,500 in 1994. Net trade
receivables increased $6,883,500 primarily due to the MedAlliance Acquisition,
partially offset by a decreased $274,000 in trade receivables related to
existing operations. As of December 31, 1995 the Company's average age of
patient receivables outstanding was 74, compared to 81 days at December 31,
1994, and 76 days as of December 31, 1993. The decrease in average age of
patient accounts receivable during the 1995 period is primarily due to the
collection patterns at the centers acquired from MedAlliance. These centers
benefit from a centralized billing and collection system and perform fewer
litigation cases than the existing Health Images clinics. These legal cases
can remain outstanding for over one year, and while generally collectible,
increase the average age of patient receivables. Management intends to improve
collections for all centers by utilizing this central billing and collection
methodology, potentially reducing days outstanding. Conversely, management may
attempt to increase legal cases at certain centers where capacity and market
conditions allow, which would increase average age. Overall the Company
believes its average age of receivables will be comparable to the previous
three years experience and feels these levels are within industry norms.
The Company's total debt outstanding increased by $36,304,800 from
$25,048,200 at December 31, 1994 to $61,353,000 at December 31, 1995, primarily
due to increased borrowings related to the MedAlliance Acquisition. The
Company funded the $23,859,200 in cash paid in 1995 related to the MedAlliance
Acquisition from a term loan issued by its primary bank. (See note #4 to the
-32-
<PAGE> 34
financial statements for detailed information on notes payable). As of
December 31, 1995 the Company had available $4,459,900 in unused credit under
an existing $5,000,000 bank line. This line, as well as the Company's primary
term loan, bear interest on a leveraged adjustment to prime which varies from
prime plus .25% to prime minus .50% dependant upon certain financial ratios.
At December 31, 1995 the Company had met the requirements necessary to reduce
the interest rate to prime minus .50%. At December 31, 1995 the Company was in
technical violation of two covenants related to the term loan. These violation
were subsequently in writing waived by the lender.
Capital expenditures in 1995 were $11,694,700 as compared to
$6,600,200 in 1994 primarily due to increased levels of expenditures related to
the MedAlliance Acquisition, addition of equipment to expand services at
certain of the Company's existing facilities, and costs incurred with the
Company's HI STAR MRI upgrade project. Management expects 1996 clinical and
equipment related capital expenditures will be comparable to the 1995 levels.
In addition, the Company plans to relocate its corporate headquarters during
1996 to a constructed facility expected to cost approximately $4,700,000. This
contemplated level of capital expenditures is subject to change in the event
the Company decides to undertake significant expansions of its business or
make additional acquisitions.
Health Images liquidity and working capital levels are substantially
reduced due to the increase in debt levels related to the MedAlliance
Acquisition. Such debt includes $16,352,500 in current maturities due in 1996.
While management considers current cash and liquidity adequate to fund the
Company's existing business, additional borrowings will be necessary to fund
equipment purchases and the Company's proposed headquarters relocation.
Management believes such additional funding is available to the Company from
several sources.
At December 31, 1995, the Company had outstanding commitments on
equipment contracts totaling $4,345,200 primarily related to the Company's HI
STAR MRI upgrade project and the expansion of imaging services at the centers.
-33-
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-30 herein.
-34-
<PAGE> 36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Audited Financial Statements: Page
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of
December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for
the years ended December 31, 1995, 1994, and 1993 F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1995,
1994 and 1993 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1994, and 1993 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
Note #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note #2 - PROPERTY AND EQUIPMENT
Note #3 - INTANGIBLE ASSETS
Note #4 - NOTES PAYABLE
Note #5 - ACCRUED EXPENSES
Note #6 - STOCK OPTION PLANS AND COMMON STOCK PURCHASE WARRANTS
Note #7 - RELATED PARTY TRANSACTIONS
Note #8 - LEASE COMMITMENTS
Note #9 - COMMITMENTS
Note #10 - PROVISION FOR INCOME TAXES
Note #11 - EARNINGS PER SHARE
Note #12 - BUSINESS SEGMENT INFORMATION
Note #13 - STOCKHOLDERS' EQUITY AND RIGHTS PLAN
Note #14 - EMPLOYEE BENEFIT PLAN
Note #15 - ACQUISITIONS
Note #16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Note #17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
F - 1
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Health Images, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets
of Health Images, Inc., and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Health Images, Inc., and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
JOSEPH DECOSIMO AND COMPANY
Atlanta, Georgia
February 23, 1996
F - 2
<PAGE> 38
HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 3,204,700 $ 3,804,100
Marketable Securities 267,400 264,500
Investment in Nonmarketable Preferred Stock (At Cost) --- 11,254,400
Trade Receivables (Less Allowance for Doubtful Accounts
and Discounts of $10,565,200 in 1995 and $5,435,000 in 24,537,600 17,654,100
1994)
Other Receivables 806,700 393,600
Inventories 316,500 599,100
Deferred Income Taxes 2,826,800 2,041,700
Other 2,187,600 1,598,900
------------- -------------
Total Current Assets 34,147,300 37,610,400
------------- -------------
PROPERTY AND EQUIPMENT
Property and Equipment 155,103,800 123,747,100
Accumulated Depreciation 60,647,700 50,075,300
------------- -------------
Cost Less Accumulated Depreciation 94,456,100 73,671,800
------------- -------------
OTHER ASSETS
Intangible Assets 47,058,700 14,074,100
Unclassified 650,300 470,600
------------- -------------
Total Other Assets 47,709,000 14,544,700
------------- -------------
TOTAL ASSETS $ 176,312,400 $ 125,826,900
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 3
<PAGE> 39
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion of Long Term Debt $ 16,352,500 $ 1,977,000
Accounts Payable 9,369,400 4,248,500
Accrued Expenses 8,450,700 5,281,300
Unearned Revenue 135,500 228,800
------------ -------------
Total Current Liabilities 34,308,100 11,735,600
------------ -------------
LONG TERM DEBT 45,000,500 23,071,200
------------ -------------
DEFERRED INCOME TAXES 11,711,300 10,910,300
------------ -------------
OTHER LONG TERM LIABILITIES 245,700 220,600
------------ -------------
MINORITY INTEREST 1,258,100 311,700
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock - $.01 Par Value - 40,000,000 Shares Authorized -
13,380,052 Shares issued as of December 31, 1995, and 133,800 133,400
13,340,856 as of December 31, 1994
Additional Paid-In Capital 77,674,400 77,314,400
Retained Earnings 21,288,000 16,537,200
Accumulated Translation Adjustment (508,700) (755,700)
Treasury Stock - 1,957,300 Shares at Cost as of December
31, 1995, and 1,752,400 as of December 31, 1994 (14,798,800) (13,651,800)
------------ -------------
Total Stockholders' Equity 83,788,700 79,577,500
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,312,400 $ 125,826,900
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 40
HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
REVENUE
Net Patient Service Revenue $111,346,900 $72,421,400 $68,511,400
Engineering Revenue 3,078,000 3,673,200 4,714,600
Other Revenue & Income 1,110,500 1,027,300 2,862,800
------------ ----------- -----------
Total Net Revenue 115,535,400 77,121,900 76,088,800
------------ ----------- -----------
COSTS AND EXPENSES
Operating Costs 69,319,300 45,948,800 46,987,900
Depreciation and Amortization Expense 17,579,400 12,171,300 11,853,500
Provision for Bad Debts 4,646,000 2,835,500 2,651,500
General and Administrative Expenses 8,504,100 6,158,500 6,335,200
------------ ----------- -----------
Total Operating Expenses 100,048,800 67,114,100 67,828,100
------------ ----------- -----------
Operating Income 15,486,600 10,007,800 8,260,700
Interest Income 127,300 271,200 276,300
Interest Expense (3,727,200) (1,251,500) (1,683,500)
------------ ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST AND PROVISION 11,886,700 9,027,500 6,853,500
FOR INCOME TAXES
Minority Interest in Income of
Consolidated Entities 605,700 196,100 171,700
------------ ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 11,281,000 8,831,400 6,681,800
Provision for Income Taxes 4,390,200 3,438,600 2,456,600
------------ ----------- -----------
NET INCOME FROM CONTINUING OPERATIONS $ 6,890,800 $ 5,392,800 $ 4,225,200
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 4
<PAGE> 41
<TABLE>
<S> <C> <C> <C>
DISCONTINUED OPERATIONS
Loss on Discontinued Operations (Net of Income Taxes) 417,900 6,528,300 466,300
Loss on Disposal of Discontinued Operations 744,000 --- ---
(Net of Income Taxes)
---------- ----------- ----------
NET INCOME (LOSS) $5,728,900 $(1,135,500) $3,758,900
========== =========== ==========
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Primary and Fully Diluted Earnings Per Share
Net Income from Continuing Operations per Share $ 0.59 $ 0.46 $ 0.36
Discontinued Operations per Share $ (0.10) $ (0.56) $ (0.04)
---------- ----------- ----------
Net Income (Loss) per Share $ 0.49 $ (0.10) $ 0.32
========== =========== ==========
WEIGHTED AVERAGE COMMON SHARE AND
COMMON SHARE EQUIVALENTS
Primary 11,582,700 11,725,600 11,611,700
Fully Diluted 11,651,100 11,727,900 11,611,700
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 42
HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TREASURY STOCK
COMMON STOCK --------------
------------ Additional Accumlated
Paid-In Retained Translation
Shares Amount Capital Earnings Adjustment Shares Amount
------ ------ ------- -------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1992 12,740,357 $127,400 $74,122,700 $15,413,300 $(1,093,700) 1,012,500 $ (8,677,900)
Purchase of Treasury Stock 239,900 (1,540,800)
Exercise of Stock Options 7,920 100 47,900
Tax Effect of Stock Options
Exercised 10,000
Issuance of Common Stock in Acquisition
of Imaging Facilities 10,000 100 59,900
Dividends on Common Stock (690,800)
Translation Adjustment (197,600)
Net Income 3,758,900
---------- -------- ----------- ----------- ----------- --------- ------------
BALANCE - DECEMBER 31, 1993 12,758,277 127,600 74,240,500 18,481,400 (1,291,300) 1,252,400 (10,218,700)
Purchase of Treasury Stock 500,000 (3,433,100)
Exercise of Stock Options 22,768 200 140,500
Issuance of Common Stock in NDS
Acquisition 559,811 5,600 2,933,400
Dividends on Common Stock (808,700)
Translation Adjustment 535,600
Net (Loss) (1,135,500)
---------- -------- ----------- ----------- ----------- --------- ------------
BALANCE - DECEMBER 31, 1994 13,340,856 133,400 77,314,400 16,537,200 (755,700) 1,752,400 (13,651,800)
Purchase of Treasury Stock 204,900 (1,147,000)
Exercise of Stock Options 39,196 400 215,000
Dividends on Common Stock (978,100)
Translation Adjustment 247,000
Net Income 5,728,900
Other Equity Transactions 145,000
---------- -------- ----------- ----------- ----------- --------- ------------
BALANCE - DECEMBER 31, 1995 13,380,052 $133,800 $77,674,400 $21,288,000 $ (508,700) 1,957,300 $(14,798,800)
========== ======== =========== =========== =========== ========= ============
</TABLE>
The accompany notes are an integral part of the financial statements.
F - 5
<PAGE> 43
HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $ 5,728,900 $(1,135,500) $ 3,758,900
Adjustments to Reconcile Net Income (Loss)
to Net Cash
Depreciation 14,952,400 10,273,400 9,721,400
Amortization 2,627,000 1,897,900 2,132,100
Provision for Bad Debts 4,646,000 2,835,500 2,651,500
Minority Interest 605,700 196,100 171,700
Deferred Income Taxes 15,800 1,224,000 1,605,300
Increase in Receivables (4,372,000) (3,973,900) (5,120,000)
Decrease in Inventories 282,600 84,400 138,300
Increase (Decrease) in Accounts 4,453,800 1,149,000 (244,700)
Payable and Accrued Expenses
Equity in Loss of Affiliate --- 364,700 466,300
Currency Exchange Loss 257,300 --- ---
Gain on Sale of Property and (549,200) --- ---
Equipment
Asset Impairment --- 5,579,500 ---
Other - Net (36,600) (593,600) 231,100
----------- ----------- -----------
Net Cash Provided by Operating Activities 28,611,700 17,901,500 15,511,900
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Cash Used to Acquire Investments (378,200) (12,266,800) ---
Proceeds from Investments 352,300 909,400 2,788,000
Capital Expenditures (11,694,700) (6,600,200) (14,721,300)
Acquisitions (Net of Cash (23,859,200) (372,500) (1,350,000)
Received
Proceeds from Sale of Assets 2,034,100 --- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 6
<PAGE> 44
<TABLE>
<S> <C> <C> <C>
Payments for Intangibles (347,900) (1,096,800) (129,200)
Other - Net --- --- (356,200)
----------- ----------- -----------
Net Cash Used by Investing Activities (33,893,600) (19,426,900) (13,768,700)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from Issuing Notes 36,540,000 11,500,000 5,900,000
Payable
Cash Used to Retire Debt (29,491,200) (6,632,300) (10,690,900)
Cash Paid for Debt Acquisition (383,400) --- ---
Costs
Cash Distibutions to Minority
Investors in Limited Partnerships (207,900) (285,900) (157,800)
Proceeds from Exercise of Stock 215,400 140,700 48,000
Options
Cash Used to Pay Dividends (978,100) (808,700) (690,800)
Cash Used to Purchase Treasury (1,147,000) (3,433,100) (1,540,800)
Shares
Other-Net 145,000 ---
----------- ----------- -----------
Net Cash (Used) Provided by Financing 4,692,800 480,700 (7,132,300)
Activities
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (10,300) 145,600 (59,600)
----------- ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (599,400) (899,100) (5,448,700)
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR
3,804,100 4,703,200 10,151,900
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -
END OF YEAR $ 3,204,700 $ 3,804,100 $ 4,703,200
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 45
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
<TABLE>
<S> <C> <C> <C>
Redemption of Preferred Stock in $11,569,300 --- ---
Conjunction with Acquisition
Assumption of Liabilities in $28,991,800 --- ---
Conjunction with Acquisition
Note Payable Issued in Conjunction $ 6,241,600 --- ---
with Acquisition
Investment Purchases in Accounts --- $ 91,700 ---
Payable
Common Stock Issued in Conjunction --- $2,939,000 $ 60,000
with Acquisition
Cancellation of Note Receivable in --- $1,010,000 ---
Conjunction with Acquisition
SUPPLMENTAL SCHEDULE OF CASH FLOWS
Cash Paid for Interest $ 3,604,300 $1,685,600 $2,381,000
Cash Paid for Income Taxes $ 2,654,700 $ 856,100 $1,404,700
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 46
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
A majority of the Company's revenue is derived from
out-patient medical diagnostic imaging services. The Company operates forty
nine domestic imaging centers and four imaging centers in the United Kingdom,
and one domestic radiation oncology center. Health Images also manufactures
MRI scanners and provides MRI and CT equipment maintenance, medical
construction services and mobile MRI leasing to third-party clients. The
Company's services are not concentrated in any one geographical area of the
United States or United Kingdom.
The significant accounting policies and practices followed by
the Company and its subsidiaries are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and investments in limited
partnerships in which the Company or a corporate subsidiary acts as a general
partner and owns a majority interest in the limited units of the partnership.
Intercompany balances and transactions have been eliminated in consolidation.
Investments in affiliated companies in which the Company owns less than fifty
percent (50%) interest are accounted for on the equity method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with
maturity of three (3) months or less to be cash equivalents. At December 31,
1995, cash equivalents consisted primarily of short-term commercial paper and
money market accounts. The Company, at times, maintains cash balances which
exceed federally insured limits.
INVENTORIES
Inventories, consisting principally of parts, are stated at
the lower of cost or market value. Cost is determined on a weighted average
basis.
MARKETABLE EQUITY SECURITIES
Effective January 1, 1994, the company adopted Statement of
Financial Standards No. 115,"Accounting for Certain Investments in Debt and
Equity Securities". As of December 31, 1995 and 1994, all marketable equity
securities were considered held for trading purposes and recorded at fair
value.
F - 7
<PAGE> 47
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is
calculated on a straight line basis over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and Improvements 5-40
Office Furniture and Equipment 3-7
Medical Equipment 3-15
</TABLE>
INTANGIBLE ASSETS
The cost of intangible assets are amortized on a straight line
basis over the period expected to receive benefits therefrom as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Organization and Start-Up Costs 2-5
Goodwill 10-20
Deferred Debt Costs 1-10
Licenses and Patents 3-14
Management Contracts 17
</TABLE>
Organizational and start-up costs include the direct cost of
organizing and initiating the operations of the Company's medical facilities.
The company reviews recoverability of the carrying value of
goodwill using projections of future cash flows and future earnings. The
company's basis for write-offs of the carrying value of goodwill is based on
management's best estimates of future performance of the affected entity. It
is reasonably possible that these estimates could change materially in the
near term.
REVENUE RECOGNITION
Revenue is recognized from medical services when services are
rendered. Medical services revenue is presented net of contractual adjustments
related to discount arrangements with third party providers. These discounts
amounted to 29.4% of medical services gross revenue for 1995, 25.5% for 1994,
and 25.0% for 1993. Amounts paid in advance on engineering service contracts
are recognized as revenue when earned. Revenue on medical construction
building contracts are recognized using the percentage of comple-
F - 8
<PAGE> 48
tion method. The Company maintains a policy of providing charity care to
indigent patients. These services amounted to 6.5% of conducted studies for
1995, 3.9% for 1994, and 1.7% for 1993.
INCOME TAXES
Deferred income taxes arise from temporary differences between
the income tax and financial reporting basis of assets and liabilities. If it
is more likely than not that some portion or all of a deferred tax asset will
be not realized, a valuation allowance is recognized.
DEVELOPMENT COSTS
Development costs related to enhancements of imaging equipment
are expensed as incurred. Total expenditures on development totaled $146,000
for 1995, $896,200 for 1994, and $741,300 for 1993.
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of foreign subsidiaries are translated
at the rate of exchange in effect on the balance sheet date; income and
expenses are translated at the average rates of exchange prevailing during the
year. The related translation adjustments are reflected in the accumulated
translation adjustment section of the consolidated balance sheet. Foreign
currency gains and losses resulting from transactions are included in results
of operations.
ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Management's estimate of the allowance for doubtful accounts and contractual
adjustments is based on historical experience and an evaluation of the balance
of accounts receivable. It is reasonably possible that these estimates could
change materially in the near term.
RECLASSIFICATIONS
Certain amounts in the presented financial statements have
been reclassified to conform to the current year presentation.
F - 9
<PAGE> 49
NOTE #2 - PROPERTY AND EQUIPMENT
Property and Equipment consist of the following major
classifications:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Land $ 9,333,800 $ -- $ 6,444,800 $ --
Building and
Improvements 32,248,100 5,287,500 25,618,800 4,326,700
Office Furniture and
Equipment 11,349,100 7,642,500 9,790,400 6,185,300
Medical Equipment 76,020,400 45,429,200 71,528,800 39,563,300
Equipment Under
Capital Leases 9,402,400 2,288,500 -- --
Buildings under
Construction 478,300 -- 386,200 --
Equipment under
Construction 16,271,700 -- 9,978,100 --
------------ ----------- ------------ -----------
$155,103,800 $60,647,700 $123,747,100 $50,075,300
============ =========== ============ ===========
</TABLE>
Equipment under capital leases is amortized on a straight line basis over the
lease term and amortization is included in depreciation expense. Amortization
of capital leases totaled $2,414,700 during 1995.
F - 10
<PAGE> 50
NOTE #3 - INTANGIBLE ASSETS
Intangible Assets consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Accumulated Accumulated
Cost Amortization Cost Amortization
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Organization and Start-Up Costs $ 19,200 $ 5,400 $ 219,000 $ 42,100
Goodwill 49,251,300 3,673,100 15,460,400 2,940,200
Deferred Debt Costs 558,000 146,300 870,600 702,800
Other 1,950,700 895,700 2,610,400 1,401,200
----------- ---------- ----------- ----------
$51,779,200 $4,720,500 $19,160,400 $5,086,300
=========== ========== =========== ==========
</TABLE>
Net goodwill increased $33,058,000 primarily due to the acquisition of
15 imaging centers from MedAlliance. (See Note #15).
F - 11
<PAGE> 51
NOTE #4 - NOTES PAYABLE
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
6.67% TO 14.87% EQUIPMENT LOANS - maturing on various dates
through 1999; payable $551,500 per month including interest (as
of 12-31-95) $12,302,200 $ 7,328,500
8.03% TO 10.5% REAL ESTATE MORTGAGE LOANS - maturing 2001;
payable $47,400 per month including interest (as of 12-31-95) 3,780,900 1,703,100
PRIME PLUS % REAL ESTATE MORTGAGE LOAN -
maturing 2010; payable $5,400 per month including interest (as
of 12-31-94) 0 546,600
10% SENIOR EXTENDIBLE NOTES - due June 15, 2000 3,705,000 5,470,000
PRIME PLUS OR MINUS LEVERAGED ADJUSTMENT TERM LOANS - maturing
in 1998 and 2001; $826,700 per month including interest (as of
12-31-95). Current rate is 8.25%. 32,141,000 0
PRIME MINUS .6% LINE OF CREDIT - expiring
August 1996 0 10,000,000
PRIME PLUS OR MINUS LEVERAGED ADJUSTMENT $5,000,000 LINE OF
CREDIT - expiring March 2001. Current rate is 8.25%. 540,100 0
CAPITAL LEASE OBLIGATIONS -imputed interest rates from 7.12% to
11.33% ending various dates through 1999; payable $281,900 per
month (as of 12-31-95) 6,817,200 0
7% TO 10% OTHER LOANS - expiring in 1999 2,066,600 0
----------- -----------
61,353,000 25,048,200
LESS: Current Portion 16,352,500 1,977,000
----------- -----------
$45,000,500 $23,071,200
=========== ===========
</TABLE>
Substantially all notes, other than the 10% Senior Extendable
notes, are collateralized by accounts receivable, inventory, property, plant
and equipment.
The Company is required to maintain certain financial ratios
related to liquidity, tangible capital, and debt service, and is limited to a
yearly fixed amount of capital expenditures under the terms of its primary bank
debt.
F - 12
<PAGE> 52
The Company obtained a waiver from its primary lender for
violations of the tangible capital and capital expenditure covenants of its
primary debt. The waiver is for 1995 only and does not extend to future
periods.
The Company's primary bank debt interest is based on a
leveraged adjustment to prime, ranging from prime plus .25% to prime minus .50%
dependant upon certain funded debt and cash flow criteria.
Long-term debt and capital lease obligations maturities during
the years subsequent to December 31, 1995, are set forth below:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
December 31, 1996 $16,352,500
December 31, 1997 17,253,200
December 31, 1998 10,341,500
December 31, 1999 6,078,100
December 31, 2000 10,159,400
Later Years 1,168,300
-----------
$61,353,000
===========
</TABLE>
Interest expense totaled $3,727,200 for 1995, $1,251,500 for
1994, and $1,683,500 for 1993. Interest costs totaled $4,651,300 for 1995,
$1,726,700 for 1994, $2,047,600 for 1993, of which $924,100, $475,200, and
$364,100, respectively, were capitalized as construction period interest.
The prime rate of interest paid by the Company as of December
31, 1995, was 8.75%.
F - 13
<PAGE> 53
NOTE #5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Interpretation Fees $3,798,200 $2,080,900
Interest 212,900 89,500
Income Taxes 839,600 371,400
Group Insurance 390,200 344,200
Salaries and Wages 1,330,700 1,135,000
Other 1,879,100 1,260,300
---------- ----------
$8,450,700 $5,281,300
========== ==========
</TABLE>
F - 14
<PAGE> 54
NOTE #6 - STOCK OPTION PLANS AND COMMON STOCK PURCHASE WARRANTS
The Company has a qualified employee incentive stock option
plan which provides for granting options to employees, including officers, to
purchase up to 900,000 shares of Common Stock. Options must be granted within
ten (10) years from the date of adoption of the plan, and options granted under
the plan must be exercised within ten (10) years from the date of grant. The
exercise price of the option must be at least 100% of the fair market value of
the shares on the effective date of grant. The right to exercise options thus
far granted under this plan vest over a three-year term of employment.
In addition, the Company grants non-qualified options from
time to time to certain officers and directors of the Company at prices
approximating the fair value of shares on the effective date of grant.
Non-qualified options for a total of 463,700 shares are outstanding as of
December 31, 1995.
At December 31, 1995, a Common Stock warrant for 250,000
shares at $4.50 per share held by the president of the Company was outstanding
and fully exercisable.
On July 1, 1995, the Company implemented an Employee Stock
Purchase Program. The Program allows an employee of the Company to receive
Common Stock contributions from the Company in an amount equal to 50% of the
participants net Common Stock purchases up to a maximum of 2,500 shares per
participant, per program year. To receive the Stock Contribution, the employee
must own the Common Stock for at least six (6) months.
F - 15
<PAGE> 55
Changes in stock options for the three (3) years ended
December 31, 1995, are as follows:
<TABLE>
<CAPTION>
SHARES Price Range
- -------------------------------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
Beginning of Year 1,046,800 1,228,200 1,191,200 $2.94-13.50
Granted 369,600 187,500 125,000 5.00- 6.75
Exercised (39,200) (22,800) (7,900) 2.94- 9.75
Cancelled (166,100) (346,100) (80,100) 5.00-13.50
- -------------------------------------------------------------------------------------------------------
Outstanding at
End of Year 1,211,100 1,046,800 1,228,200 $5.00-13.50
- -------------------------------------------------------------------------------------------------------
Exercisable at
End of Year 324,700 75,100 3,300 $2.94- 6.75
- -------------------------------------------------------------------------------------------------------
</TABLE>
SFAS Statement Number 123, "Accounting for Stock Based Compensation"
issued in 1995, defines a fair value method of accounting for stock options and
encourages companies to adopt that method. Management anticipates continuing
to use the intrinsic method acceptable under APB 25 and will disclose the
effect of not using the fair value method in its 1996 financial statements as
required by SFAS 123.
F - 16
<PAGE> 56
NOTE #7 - RELATED PARTY TRANSACTIONS
Transactions and outstanding balances with related parties are
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
RELATED COMPANIES 1995 1994 1993
<S> <C> <C> <C>
Deferred Gain on Sale
of Real Estate 3,300 3,900 7,200
Investment in
Affiliated Company -- -- 364,700
Accounts Receivable -- -- 895,000
</TABLE>
The Company recognized equity losses in National Diagnostic
Systems, Inc. ("NDS") of $466,300 in 1993 and $364,700 in 1994. On August 2,
1994 the Company purchased the remaining 51.5% ownership in NDS. (See Note
#15).
F - 17
<PAGE> 57
NOTE #8 - LEASE COMMITMENTS
The Company has certain equipment under capital leases and
also leases certain land, buildings and equipment under operating leases.
Minimum lease payments under existing non-cancelable capital and operating
leases are as follows:
<TABLE>
<CAPTION>
Operating Capital Total Lease
Year Ending: Leases Leases Commitments
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996 $ 2,818,900 $ 3,020,400 $ 5,839,300
December 31, 1997 1,998,000 2,871,200 4,869,200
December 31, 1998 1,944,800 1,490,100 3,434,900
December 31, 1999 1,806,400 208,500 2,014,900
December 31, 2000 1,045,900 - 1,045,900
Later Years 3,643,200 - 3,643,200
- -----------------------------------------------------------------------------------------------------
Total Payments $13,257,200 $ 7,590,200 $20,847,400
- -----------------------------------------===========--------------------------------------===========
Less: Amount representing interest (773,000)
Present Value of Capital Lease Payments $ 6,817,200
===========
</TABLE>
Certain building leases include provisions for short-term rent
deferral, additional rent payments equal to 5% of estimated collections in
excess of $400,000 at particular locations, and rent adjustments based on a
United States government index.
Rental expense is calculated on a straight line basis over the
life of each lease after giving effect to scheduled rent increases and totaled
$3,124,800 for 1995, $1,872,500 for 1994, and $1,626,300 for 1993.
F - 18
<PAGE> 58
NOTE #9 - COMMITMENTS
As of December 31, 1995, the Company had no material
commitments on construction contracts. As of December 31, 1995, the Company
had outstanding commitments to purchase equipment totaling $4,345,200 primarily
related to the Company's expansion of imaging services provided at the centers
and the Company's upgrade program for its magnetic resonance imaging ("MRI")
equipment.
The Company is subject to legal proceedings and claims which
arise in the ordinary course of business. In management's opinion, the amount
of ultimate liability will not materially affect the financial position or
results of operations of the company.
The Company is a defendant in a lawsuit brought against the
Company and its Chairman and CEO by a former employee, alleging sexual
harassment and gender discrimination. Management believes the lawsuit to be
without merit and intends to defend itself vigorously. Management further
believes that resolution of this litigation will not materially affect the
Company's financial condition. The Company is a plaintiff in a lawsuit against
the former shareholders of National Diagnostic Systems, Inc. (NDS), and is a
defendant in a countersuit filed by a former NDS shareholder. Further details
are available in note # 15.
F - 19
<PAGE> 59
NOTE #10 - PROVISION FOR INCOME TAXES
Provisions for income taxes attributable to continuing
operations consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
Current Provision -
Federal Income Taxes $3,567,200 $2,129,500 $1,054,600
Foreign Income Taxes 436,500 371,400 --
State Income Taxes 671,800 439,400 218,900
General Business Credit (50,700) (210,800)
Minimum Tax Credit (250,400) (514,900) (200,700)
---------- ---------- ----------
4,374,400 2,214,600 855,800
---------- ---------- ----------
Deferred Provision -
Federal Income Taxes $ (225,600) $ 590,400 $1,158,600
Foreign Income Taxes -- 21,000 --
State Income Taxes (9,000) 97,700 241,500
Minimum Tax Credit Carryforward 250,400 514,900 200,700
---------- ---------- ----------
15,800 1,224,000 1,600,800
---------- ---------- ----------
$4,390,200 $3,438,600 $2,456,600
========== ========== ==========
</TABLE>
Reconciliation of the provisions for income taxes to statutory
rates is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
Tax at Statutory Rates-US $3,404,700 $2,664,500 $2,271,800
Tax at Statutory Rates-Foreign 430,800 338,200 --
Amortization of Goodwill
General Business Credit 77,200 68,000 70,800
State Taxes - net of (50,700) (210,800) (217,000)
Federal Income Taxes 437,500 354,600 303,800
Meals and Entertainment 110,800 63,700 --
Permanent Differences of
Foreign Subsidiary 22,800 64,200 --
Other (42,900) 96,200 27,200
---------- ---------- ----------
$4,390,200 $3,438,600 $2,456,600
========== ========== ==========
</TABLE>
F - 20
<PAGE> 60
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give 2ise to significant
portions of the net deferred income tax liability relate to the following:
<TABLE>
<CAPTION>
Temporary
December 31, December 31, Differences
1995 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Property and equipment, principally due to $7,196,000 $8,681,800 $(1,485,800)
differences in depreciation
Machinery enhancement costs expensed for income 4,434,800 2,806,200 1,628,600
tax purposes
Accounts receivable, principally due to (2,561,000) (1,822,600) (738,400)
allowance for doubtful accounts
Net operating loss carryforward 408,500 408,500 0
Minimum tax credit -- (235,000) 235,000
Other, net (185,400) (561,800) 376,400
---------- ---------- ----------
Subtotal 9,292,900 9,277,100 15,800
Valuation allowance (408,500) (408,500) 0
---------- ---------- ----------
Net deferred income tax liability $8,884,400 $8,868,600 $ 15,800
========== ========== ==========
</TABLE>
The Company has net operating loss carryforwards for income tax purposes as of
December 31, 1995 of approximately $1,201,400. The carryforwards expire in the
year 2008 and are restricted for use against a subsidiary's future earnings.
F - 21
<PAGE> 61
NOTE #11 - EARNINGS PER SHARE
Primary earnings per share is computed based on the weighted
average number of shares actually outstanding plus common equivalents which
would arise from the exercise of stock options and warrants. Fully diluted
earnings per share are similarly computed but would include the dilutive effect
of the Company's common equivalents. Earnings per share have been computed by
dividing net income by the weighted average number of common stock and
equivalent shares outstanding.
<TABLE>
<CAPTION>
PRIMARY: 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted Average Common Shares 11,492,500 11,664,700 11,550,800
Stock Options and Warrants 90,200 60,900 60,900
- --------------------------------------------------------------------------------------------------
Weighted Average Common
Stock and Equivalents 11,582,700 11,725,600 11,611,700
FULLY DILUTIVE:
Additional Dilutive Effect of
Stock and Equivalents 68,400 2,300 -0-
- --------------------------------------------------------------------------------------------------
Weighted Average Common
Stock and Equivalents 11,651,100 11,727,900 11,611,700
- --------------------------------------------------------------------------------------------------
</TABLE>
F - 22
<PAGE> 62
NOTE #12 - BUSINESS SEGMENT INFORMATION
Since March 31, 1985, the Company's principal operations have
been devoted to the establishment and operation of imaging centers providing
magnetic resonance imaging diagnostic services ("Medical Imaging"). Since
January 1990, the Company has also operated a radiation oncology center, which
provides radiation oncology services, and is included in Medical Imaging. In
1992, the Company expanded its Medical Imaging services at certain locations to
include computed tomography, ultrasound, mammography and X-ray. During 1995,
the Company acquired 15 diagnostic facilities from MedAlliance Inc. (See note
#15). The newly acquired centers were primarily multi-modality. During
September 1986, the Company established an engineering services division which
is engaged in the service and maintenance of major medical diagnostic equipment
primarily owned by outside parties ("Engineering Services"). During February
1987, the Company established a medical construction management division which
provides medical facility development consulting services to the Company's
affiliated imaging centers and to non-affiliated third parties ("Medical
Construction Services"). For the three years presented, the operations of
Medical Construction Services did not have a material impact upon the overall
consolidated operations of the Company. Capital expenditures and assets of
Medical Construction Services for the three years presented have, therefore,
been combined with the Medical Imaging category in the accompanying table.
Operations of all segments have been limited to the United
States until November 1990 at which time the Company opened its first center
providing magnetic resonance imaging diagnostic services in Guildford, England.
The Company opened or acquired two additional imaging centers in the United
Kingdom during 1992 and opened one additional imaging center in 1993. In 1994,
the Company leased two mobile MRI units in Tiajuana and Celaya, Mexico. The
company discontinued the operation of these mobile units during 1995. Results
of operations for the Company's United Kingdom and Mexico operations were not
significant to the overall consolidated results of the Company for the three
years presented and are, therefore, not separately presented in the
accompanying table.
The following table presents financial data for business
segments:
F - 23
<PAGE> 63
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-----------------------------------------------------------------------------------------
Revenue Net Deprecia-
from Un- Inter- Income Capital tion and
affiliated segment Total Before Expendi- Amortiza-
Customers Revenue Revenue Taxes tures tion Assets
--------- ------- ------- ------ -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Medical Imaging 111,346,900 -- 111,346,900 $18,527,400 $10,644,500 $15,899,600 $145,107,500
Engineering
Services 3,078,000 5,411,400 8,489,400 1,794,900 651,100 744,700 20,945,400
------------ ----------- ------------ ----------- ----------- ----------- ------------
20,322,300 11,295,600 16,644,300 166,052,900
Eliminations and 114,424,900 5,411,400 119,836,300
Adjustments --
Intersegment
Sales -- (5,411,400) (5,411,400) -- -- -- --
General Cor-
porate 1,110,500 -- 1,110,500 (4,708,400) 399,100 935,100 10,259,500
Minority
Interest in
Income of
Consolidated
Entities -- -- -- (605,700) -- -- --
Interest Expense -- -- -- (3,727,200) -- -- --
------------ ----------- ------------ ----------- ----------- ----------- ------------
TOTAL 115,535,400 $ -- 115,535,400 $11,281,000 $11,694,700 $17,579,400 $176,312,400
============ =========== ============ =========== =========== =========== ============
Year Ended December 31, 1994
------------------------------------------------------------------------------------------------
Medical Imaging $ 72,421,400 $ -- $ 72,421,400 $ 5,924,000 $ 4,997,700 $10,768,900 $ 88,739,200
Engineering
Services 3,673,200 6,652,600 10,325,800 2,016,800 358,200 497,300 14,875,800
------------ ----------- ------------ ----------- ----------- ----------- ------------
76,094,600 6,652,600 82,747,200 7,940,800 5,355,900 11,266,200 103,615,000
Eliminations and
Adjustments --
Intersegment
Sales -- (6,652,600) (6,652,600) -- -- -- --
General Cor-
porate 1,027,300 -- 1,027,300 2,338,200 1,244,300 905,100 22,211,900
Minority
Interest in
Income of
Consolidated
Entities -- -- -- (196,100) -- -- --
Interest Expense -- -- -- (1,251,500) -- -- --
------------ ----------- ------------ ----------- ----------- ----------- ------------
TOTAL $ 77,121,900 $ -- $ 77,121,900 $ 8,831,400 $ 6,600,200 $12,171,300 $125,826,900
============ =========== ============ =========== =========== =========== ============
Year Ended December 31, 1993
------------------------------------------------------------------------------------------------
Medical Imaging $ 68,511,400 $ -- $ 68,511,400 $ 3,942,600 $12,090,100 $ 9,928,000 $ 92,430,900
Engineering
Services 4,714,600 9,219,400 13,934,000 2,869,200 874,200 288,800 12,050,000
------------ ----------- ------------ ----------- ----------- ----------- ------------
73,226,000 9,219,400 82,445,400 6,811,800 12,964,300 10,216,800 104,480,900
Eliminations and
Adjustments --
Intersegment
Sales -- (9,219,400) (9,219,400) -- -- -- --
General Cor-
porate 2,862,800 -- 2,862,800 1,725,200 1,757,000 1,675,600 14,873,700
Minority
Interest in
Income of
Consolidated
Entities -- -- -- (171,700) -- -- --
Interest Expense -- -- -- (1,683,500) -- -- --
------------ ----------- ------------ ----------- ----------- ----------- ------------
TOTAL $ 76,088,800 $ -- $ 76,088,800 $ 6,681,800 $14,721,300 $11,892,400 $119,354,600
============ =========== ============ =========== =========== =========== ============
</TABLE>
F - 24
<PAGE> 64
NOTE #13 - STOCKHOLDERS' EQUITY AND RIGHTS PLAN
The Board of Directors is authorized to issue shares of
preferred stock in one or more series, and to determine the designations and
the powers, preferences, and other special rights of each series.
On May 10, 1989, the Company adopted a Stockholder Rights Plan
and, pursuant to the plan, declared a dividend on its Common Stock of one right
("Right") for each share of Common Stock then outstanding and for each share of
Common Stock issued thereafter and prior to the time the Rights expire or
become exercisable. Upon the occurrence of certain events, each Right becomes
exercisable to purchase one one-hundredth of a share of Series B Participating
Preferred Stock at a price of $56. The Rights expire on May 21, 1999, and,
prior to the occurrence of certain events, may be redeemed at a price of $.01
per Right. Of the Company's 2,000,000 authorized shares of preferred stock,
the Board of Directors has designated 200,000 shares as Series B Participating
Preferred Stock.
F - 25
<PAGE> 65
NOTE #14 - EMPLOYEE BENEFIT PLAN
During 1989, the Company adopted the Health Images, Inc.,
Profit Sharing and Savings Plan which qualified under Internal Revenue Code
Section 401(k). Contributions by the Company are discretionary and made from
profits to match a portion of the elective before-tax contributions of
participating employees. In 1993, the Company made a cash contribution of
$105,300 to the Plan to match 25% of the contributions made by participating
employees in 1992. In 1994, the Company made a cash contribution of $125,100
to the plan to match 25% of the contributions made by participating employees
in 1993. In 1995, the Company made a cash contribution of $121,200 to the plan
to match 25% of the contributions made by participating employees in 1994.
The Company changed its employer contribution method in 1995
to match employees'contributions to the Plan on a dollar-for-dollar basis with
a maximum match of three per cent (3%) of the contributing employee's salary.
In 1996, the Company contributed $332,600 in Common Stock and cash to match
1995 contributions by participating employees.
F - 26
<PAGE> 66
NOTE #15 - ACQUISITIONS
During April 1993, the Company purchased the assets of Matlock
Imaging Center in Arlington, Texas, for $1,410,000 with $1,350,000 cash and
10,000 shares of restricted common stock. The acquisition was accounted for as
a purchase with the excess purchase price over the fair value of the assets
attributed to goodwill.
During August 1994, the Company acquired the remaining interest in its
equity affiliate, National Diagnostic Systems, Inc. ("NDS") and merged NDS into
a wholly-owned subsidiary of the Company, Accountable Radiology, Inc. The
resulting subsidiary was renamed "Interactive Diagnostic Services, Inc."
("IDSI"). The Company issued an aggregate of 559,811 shares of its common
stock, market value of $2,939,000, to the selling shareholders of NDS to
acquire their respective equity interests in NDS. As additional consideration,
the Company paid off NDS indebtedness of $524,000 and paid $22,200 to a selling
shareholder for his NDS stock options. The Company paid $315,000 in salary
buydowns to selling shareholders who would remain employees of IDSI and
$120,000 in a consulting agreement with the former Chairman and Chief Executive
Officer of NDS. In addition, the Company cancelled indebtedness of $1,010,000
owed by NDS to Health Images. Goodwill of $4,271,900 was recorded and
acquisition costs of $1,087,400 related to the salary buydowns, the consulting
agreement, a write-off of abandoned software and other miscellaneous costs were
expensed.
On December 31, 1994, the Company wrote off the $5,359,300
related to NDS investment items previously mentioned. In addition, the Company
expensed $218,900 for estimated contract losses, and $538,700 in organization
and start-up costs. The nonrecurring asset impairment charge totaled
$6,116,900 and was expensed in 1994.
The Company filed a lawsuit on February 21, 1995 against the
selling shareholders of NDS asking for rescission of the acquisition described
above and restitution. The complaint alleges breach of contract, intentional
misrepresentation, negligent misrepresentation, and suppression of fact.
The Company discontinued the operations of IDSI
during the quarter ending March 31, 1995. Revenues attributable to
discontinued operations were $401,800 for 1995. The loss from discontinued
operations and loss on disposal of discontinued operations before taxes
totaled $1,874,100. An income tax benefit of $712,200 was recognized in 1995
based on a 38% applicable rate, which differs from the Company's overall
effective rate due to
F - 27
<PAGE> 67
certain permanent tax differences. The net loss attributable to discontinued
operations was $1,161,900 for 1995.
On April 14, 1995, the Company acquired 15 imaging centers
from MedAlliance, Inc. by paying $23,859,200 in cash (net of cash received),
redemption of MedAlliance preferred stock and accumulated dividends of
$11,569,300, assumption of liabilities totaling $28,991,800, and the issuance
of a note payable to MedAlliance of $6,241,600. The acquisition was accounted
for as a purchase with the excess purchase price over the fair value of the
assets attributed to goodwill. The transaction was effective for accounting
purposes as of April 1, 1995. The following table discloses unaudited pro
forma operating statement information as if the acquisition occurred at the
beginning of each period presented.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Net Revenue $127,048,400 $124,097,700
Net Income from Continuing Operations $ 7,286,700 $ 5,426,600
Net Income (Loss) $ 6,124,800 $ (1,101,700)
Primary Earnings per Share
Net Income from Continuing Operations $ 0.63 $ 0.46
Net Income (Loss) $ 0.53 $ (0.09)
</TABLE>
F - 28
<PAGE> 68
NOTE #16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1995
----
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Cash and Short-Term Investments $ 3,472,100 $ 3,472,100
Long-Term Debt $54,535,800 $54,788,700
</TABLE>
The fair value of long-term debt is based on current rates at which
the Company could borrow funds with similar remaining maturities.
F - 29
<PAGE> 69
NOTE #17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1995 Quarters
--------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenue $18,238,900 $32,421,200 $32,655,000 $32,220,300
Operating Expenses 15,845,800 28,238,600 28,093,100 27,871,300
Income from Operating
Activities 2,393,100 4,182,600 4,561,900 4,349,000
Net Income 84,500 1,708,300 1,945,400 1,990,700
Earnings (Loss) Per
Share*
Net Income from
Continuing Operations
per Share 0.11 0.14 0.17 0.17
Discontinued Operations
per Share (0.10) 0.00 0.00 0.00
Net Income per Share 0.01 0.14 0.17 0.17
1994 Quarters
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenue $18,763,100 $19,880,500 $19,393,800 $19,084,500
Operating Expenses 16,802,600 17,090,000 16,705,500 16,516,000
Income from Operating
Activities 1,960,500 2,790,500 2,688,300 2,568,500
Net Income (Loss) 879,900 1,382,800 591,900 (3,990,100)
Earnings (Loss) Per
Share*
Net Income from
Continuing Operations
per Share 0.09 0.14 0.12 0.11
Discontinued Operations
per Share (0.01) (0.02) (0.07) (0.46)
Net Income per Share 0.08 0.12 0.05 (0.35)
</TABLE>
- ----------------------
* The sum of the 1995 and 1994 quarterly earnings per share may differ
from the annual earnings per share because of the differences in the
weighted average number of common shares outstanding and common shares
used in the quarterly and annual computation as well as differences in
rounding.
F - 30
<PAGE> 70
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has neither changed its independent accountants
nor had any disagreements on accounting and financial disclosure with such
accountants.
PART III
The Company's Proxy Statement to be filed in connection with
its Annual Meeting of Shareholders on May 31, 1996, is hereby incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K
(A)1. FINANCIAL STATEMENTS
The following consolidated financial statements of Registrant
are filed with this report and included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report...................... F-2
Consolidated Balance Sheets as of
December 31, 1995 and 1994...................... F-3
Consolidated Statements of Operations
for the Three Years in the
Period Ended December 31, 1995.................. F-4
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Years in the Period Ended December 31, 1995..... F-5
Consolidated Statements of Cash Flow
for the Three Years in the
Period Ended December 31, 1995.................. F-6
Notes to Consolidated Financial
Statements...................................... F-7
</TABLE>
(A)2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of Registrant are
filed with this report:
-35-
<PAGE> 71
<TABLE>
<S> <C> <C>
Schedule II - Valuation and Qualifying
Accounts......................... 37
Exhibit 11 - Computation of Net Earnings
Per Share........................ 38
</TABLE>
All other schedules not listed above have been omitted because
they are not applicable or the required information is included in the
financial statements or notes thereto.
-36-
<PAGE> 72
Board of Directors and Stockholders
Health Images, Inc.
Atlanta, Georgia
We have audited the consolidated financial statements of Health
Images, Inc., and subsidiaries as of December 31, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, and have issued our
report thereon dated February 23, 1996, such financial statements and report
are included elsewhere in this annual report. Our audits also included the
financial statement schedules of Health Images, Inc., and subsidiaries, listed
in Item 14(a)2. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
JOSEPH DECOSIMO AND COMPANY
Atlanta, Georgia
February 23, 1996
-37-
<PAGE> 73
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
HEALTH IMAGES, INC., AND SUBSIDIARIES
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions End of
Period Expenses Accounts Describe Period
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful
Accounts and Discounts $5,435,000 $4,646,000 $3,745,000 $3,260,800 (a) $10,565,200
YEAR ENDED DECEMBER 31, 1994
Allowance for Doubtful
Accounts and Discounts $4,360,200 $2,835,500 $ -- $1,760,700 (a) $ 5,435,000
YEAR ENDED DECEMBER 31, 1993
Allowance for Doubtful
Accounts and Discounts $3,263,000 $2,751,500 $ -- $1,654,300 (a) $ 4,360,200
</TABLE>
- ---------------
(a) Accounts written off.
-38-
<PAGE> 74
EXHIBIT 11--COMPUTATION OF NET EARNINGS PER SHARE
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) for Primary and
Fully Diluted Earnings Per Share $ 5,728,900 $(1,135,500) $ 3,758,900
=========== =========== ===========
Number of Shares Used in Calculation
of Per Share Date:
Weighted Average Number of Shares
Outstanding During the Year 11,492,448 11,664,663 11,550,819
Add - Common Equivalent Shares (Deter-
mined Using the Treasury Stock Method) Com-
posed of Shares Issuable Upon:
Exercise of Stock Options 24,342 8,321 4,957
Exercise of Stock Warrants 65,906 52,608 55,934
----------- ----------- -----------
Weighted Average Number of Shares Used
in Primary Net Income (Loss) Per
Share 11,582,696 11,725,592 11,611,710
Add - Incremental Shares Composed
of:
Shares Issuable Upon Exercise of
Options Above (24,342) (8,321) (4,957)
Shares Issuable Upon Exercise of Stock
Options Based on the Higher of
Average Market Price or Year End
Market Price 63,889 8,910 4,957
Shares Issued Upon Exercise of Stock
Warrants Above (65,906) (52,608) (55,934)
Shares Issuable Upon Exercise of Stock
Warrants Based on the Higher of
Average Market Price or Year End
Market Price 94,828 54,348 55,934
----------- ----------- -----------
Weighted Average Number of Shares Used
in Calculation of Fully Diluted Net
Income (Loss) per Share 11,651,165 11,727,921 11,611,710
=========== =========== ===========
Net Income (Loss) Per Share:
Primary $ 0.49 $ (0.10) $ 0.32
=========== =========== ===========
Fully Diluted $ 0.49 $ (0.10) $ 0.32
=========== =========== ===========
</TABLE>
-39-
<PAGE> 75
(A)3. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following Executive Compensation Plans and Arrangements
are filed with this Form 10-K or have previously been filed as indicated below:
1. Employment Agreement dated as of October 1, 1994, by and between the
Company and Robert D. Carl, III (12) Exhibit 10(b)(i)).
2. Employment Agreement dated as of October 1, 1994, by and between the
Company and W.A. Wilson (12) (Exhibit 10(b)(ii)).
3. Amended and Restated Employee Incentive Stock Option Plan of
Registrant dated December 20, 1985 (1) (Exhibit 10(v)(i)).
4. Amended and Restated Employee Incentive Stock Option Plan of
Registrant dated May 19, 1987 (9) (Exhibit 4(d)).
5. First Amendment to the Amended and Restated Employee Incentive Stock
Option Plan dated June 29, 1989 (5) (Exhibit 10(p) (vii)).
6. Second Amendment to the Amended and Restated Employee Incentive Stock
Option Plan dated June 5, 1992 (10) (Exhibit 10(c)(iv)).
7. Form of Incentive Stock Option Agreement (7) (Exhibit 10(p) (ix)).
8. Form of Non-Qualified Option Agreement (5) (Exhibit 10(p) (xi)).
9. Non-Qualified Stock Option Plan (8) (Exhibit 10(d)(i)).
10. Form of Option Agreement under the Non-qualified Stock Option Plan (8)
(Exhibit 10(d)(ii)).
11. Form of Non-Employee Director Option Agreement (8) (Exhibit 10(d)
(iii)).
12. 1995 Formula Stock Option Plan for Outside Directors (Exhibit
10(d)(iv) below).
13. Form of Formula Stock Option Agreement (Exhibit 10(d)(v) below).
14. Key man life insurance policy on the life of Robert D. Carl, III (2)
(Exhibit 10(p)).
15. Exchange Agreement dated May 19, 1987 between Registrant and Robert D.
Carl, III (3) (Exhibit 10(q)(vii)).
-40-
<PAGE> 76
16. Warrant Agreement and Certificate dated May 19, 1987, between
Registrant and Robert D. Carl, III (3) (Exhibit 10(q) (viii)).
(A)4. ADDITIONAL INFORMATION
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking
shall be incorporated by reference into registrant's Registration Statements on
Form S-8 Nos. 33-18747 (filed November 25, 1987), 33-32666 (filed December 28,
1989), 33-38369 (filed December 21, 1990), 33-39216 (filed February 28, 1991)
and 33-50170 (filed July 29, 1992) related to the Company's compensation plans:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 14(B) In the quarter ended December 31, 1995, there were no
reports filed on Form 8-K:
-41-
<PAGE> 77
ITEM 14(C) Table of Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K
are included as Exhibits to this report as follows:
<TABLE>
<CAPTION>
EXHIBIT
- -------
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
2(a) Asset Purchase Agreement dated December 21, 1994, among the Company and MedAlliance, Inc., and certain
subsidiaries of MedAlliance, Inc., listed on the signature pages thereto. (11)
2(b) Agreement and Plan of Reorganization dated as of August 4, 1994, by and among the Company, Accountable
Radiology, Inc. (a wholly-owned subsidiary of the Company), National Diagnostic Systems, Inc., and John
H. Trimmer, James J. Fitzsimmons, David J. Soffa, Linda Jansen, Roderick L. Prince, Melissa Cunanan,
and Michael and Carol Kolb. (12)
2(c) Amended and Restated Loan and Security Agreement dated March 27, 1995, Among The Provident Bank
("Provident"), as Agent, the Company, as Borrower, and Provident and South Trust Bank of Georgia, N.A.,
as the Lenders. (12)
2(d) Amendment to Amended and Restated Loan and Security Agreement dated December 29, 1995 among the Company
and the Lenders.
4(a) Instruments defining the rights of security holders are contained in the Restated Certificate of
Incorporation of Registrant, and Article I of the Restated Bylaws of Registrant.(5)
4(d) Form of Indenture between the Registrant and The Provident Bank, Cincinnati, Ohio, as trustee.(6)
4(e) Successor Rights Agreement between the Registrant and First Union National Bank of North Carolina as
Successor Rights Agent dated as of September 1, 1992.(10)
10(a)(i) Lease Agreement dated January 1, 1993 between Brannen Goddard Company as Managers for Metropolitan Life
Insurance Company, d/b/a Northridge Business Park as Lessors and Registrant as Lessee.(10)
10(b)(i) Employment Agreement dated as of October 1, 1994, by and between the Company and Robert D. Carl, III.
(12)
</TABLE>
-42-
<PAGE> 78
<TABLE>
<S> <C>
10(b)(ii) Employment Agreement dated as of October 1, 1994, by and between the Company and W.A. Wilson. (12)
10(c)(i) Amended and Restated Employee Incentive Stock Option Plan of Registrant dated December 20, 1985.(1)
10(c)(ii) Amended and Restated Employee Incentive Stock Option Plan of Registrant dated May 19, 1987.(9)
10(c)(iii) First Amendment to the Amended and Restated Employee Incentive Stock Option Plan dated June 29,
1989.(10)
10(c)(iv) Second Amendment to the Amended and Restated Employee Incentive Stock Option Plan dated June 5,
1992.(10)
10(c)(v) Form of Incentive Stock Option Agreement.(7)
10(c)(vi) Form of non-qualified Option Agreement.(5)
10(d)(i) Non-Qualified Stock Option Plan.(8)
10(d)(ii) Form of Option Agreement under the Non-Qualified Stock Option Plan.(8)
10(d)(iii) Form of Non-Employee Director Option Agreement.(8)
10(d)(iv) 1995 Formula Stock Option Plan for outside Directors
10(d)(v) Form of Formula Stock Option Agreement
10(e)(i) Key man life insurance policy on the life of Robert D. Carl, III.(2)
10(f)(i) Exchange Agreement dated May 19, 1987 between Registrant and Robert D. Carl, III.(3)
10(f)(ii) Warrant Agreement and Certificate dated May 19, 1987 between Registrant and Robert D. Carl, III.(3)
10(g)(i) MRI License Agreement among Registrant, Johnson & Johnson and Ethicon, Inc. dated April 26, 1988.
Parts of this Agreement are Confidential.(4)
10(g)(ii) Master Patent License Agreement between The National Research Development Corporation and Regis-
</TABLE>
-43-
<PAGE> 79
<TABLE>
<S> <C>
trant dated October 1, 1987. Parts of this Agreement are Confidential.(4)
10(g)(iii) Amendment dated February 1, 1989 of Master Patent License Agreement between The National Research
Development Corporation and Registrant dated October 1, 1987. Parts of this Agreement are
Confidential.(4)
10(g)(iv) Patent License Agreement - U.S. Patent 4,803,433 between Montefiore Hospital Association of Western
Pennsylvania and Registrant dated March 22, 1990. (5)
21 Subsidiaries of the Registrant
23 Consent of Joseph Decosimo and Company
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------------
(1) Incorporated herein by reference to exhibit of same number to
Registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1985
(File No. 0-14746).
(2) Incorporated herein by reference to exhibit of same number to
Amendment No. 2 to Registrant's Registration Statement on Form S-1, filed July
14, 1986 (Reg. No. 33-5855).
(3) Incorporated herein by reference to exhibit of same number to
Registrant's Registration Statement on Form S-1, filed May 20, 1987 (Reg. No.
33-14437).
(4) Incorporated herein by reference to exhibit of same number to
Registrant's Annual Report on Form 10-K for fiscal year ended December 31,
1988. (File No. 0-14746).
(5) Incorporated herein by reference to exhibit of same number to
Registrant's Annual Report on Form 10-K for fiscal year ended December 31,
1989. (File No. 0-14746)
(6) Incorporated herein by reference to exhibit of same number to
Amendment No. 2 to Registrant's Registration Statement on Form S-2 filed June
14, 1990. (Reg. No. 33-34161)
(7) Incorporated herein by reference to exhibit of same number to
Registrant's Annual Report on Form 10-K for fiscal year ended December 31,
1990. (File No. 0-14746)
(8) Incorporated herein by reference to exhibit of same number to
Registrant's Annual Report on Form 10-K for fiscal year ended December 31,
1991. (File No. 0-14746)
-44-
<PAGE> 80
(9) Incorporated herein by reference to exhibit 4(d) to
Registrant's Registration Statement for Form S-8, filed November 24, 1987 (Reg.
No. 33-18747).
(10) Incorporated herein by reference to exhibit of same number to
Registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1992
(File No. 0-14746).
(11) Incorporated herein by reference to exhibit of same number to
Registrant's Current Report on Form 8-K dated December 28, 1994 (File No.
0-14746).
(12) Incorporated herein by reference to exhibit of same number to
Registrant's Annual Report on Form 10-K for fiscal year ended December 31,
1994.
-45-
<PAGE> 81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HEALTH IMAGES, INC.
Date: March 29, 1996 BY:/s/ ROBERT D. CARL, III
-----------------------
Robert D. Carl, III Chairman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/S/ROBERT D. CARL, III Chairman of the Board, March 29, 1996
- ---------------------- President
Robert D. Carl, III Chief Executive
Officer
/S/ANTHONY T. PRESCOTT Senior Executive Vice March 29, 1996
- ---------------------- President, Chief
Anthony T. Prescott Operating Officer and
Director
/S/RON L. CLARK, JR. Treasurer and March 29, 1996
- -------------------- Controller (Principal
Ron L. Clark, Jr. Financial and
Accounting Officer)
/S/MARC I. RAPHAELSON, M.D. Director March 29, 1996
- ---------------------------
Marc I. Raphaelson, M.D.
/S/WILLIAM E. WHITESELL, PH.D. Director March 29, 1996
- ------------------------------
William E. Whitesell, Ph.D.
/S/JACK O. GREENBERG, M.D. Director March 29, 1996
- --------------------------
Jack O. Greenberg, M.D..
/S/ROBERT L. TAYLOR
- ------------------- Director March 29, 1996
Robert L. Taylor
/S/STUART B. STRASNER, SR.
- -------------------------- Director March 29, 1996
Stuart B. Strasner, Sr.
</TABLE>
<PAGE> 1
================================================================================
------------
EXHIBIT 2(d)
TO
FORM 10-K
------------
================================================================================
<PAGE> 2
AMENDMENT TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(the "Amendment") dated December 29, 1995, is to that certain Amended and
Restated Loan and Security Agreement dated March 27, 1995 (the "Loan
Agreement"), by and among HEALTH IMAGES, INC., a Delaware corporation, HEALTH
IMAGES TEXAS, INC., a Georgia corporation, and HEALTH IMAGES PENNSYLVANIA,
INC., a Georgia corporation (collectively, the "Borrowers"), THE PROVIDENT
BANK, an Ohio banking corporation, as Agent, and THE PROVIDENT BANK and
SOUTHTRUST BANK OF GEORGIA, N.A. (the "Lenders").
W I T N E S S E T H:
WHEREAS, the Borrowers have requested certain additional financing and
other modifications of the Loan Agreement in connection with various terms and
conditions set forth therein; and
WHEREAS, the Agent and the Lenders have agreed to such modifications
in the Loan Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. All capitalized terms used herein shall have the meanings
assigned to them in the Loan Agreement unless the context hereof requires
otherwise.
2. The following definitions set forth in Section 1.1 of the Loan
Agreement are hereby amended to read as follows:
(a) The definition of "Participation Percentage" is hereby
amended in its entirety to read as follows:
"Participation Percentage" means, in relation to the Term
Loans, the Credit Commitment of any particular Lender with
respect thereto expressed as a percentage on Schedule 1.
(b) The definition of "Term Loan" is hereby amended in its
entirety to read as follows:
"Term Loans" means the term loans to be made to Borrowers
pursuant to this Agreement as set forth in Article 2 hereof.
<PAGE> 3
- 3 -
3. Section 2.4 of the Agreement is hereby amended in its entirety
to read as follows:
Section 2.4 Term Loan Commitment.
(a) Each Lender severally and not jointly,
subject to the terms and conditions of this Agreement, hereby
agrees to make a term loan to Borrowers in an amount equal to
its Participation Percentage of Thirty Million and 00/100
Dollars ($30,000,000.00) ("Term Loan A"); and
(b) Each Lender severally and not jointly,
subject to the terms and conditions of this Agreement, hereby
agrees to make a term loan to Borrowers in an amount equal to
its Participation Percentage of Six Million and 00/100 Dollars
($6,000,000.00) ("Term Loan B").
4. Section 2.5 of the Agreement is hereby amended in its entirety
to read as follows:
Section 2.5 Term Promissory Notes. The absolute and
unconditional obligation of the Borrowers to repay the principal of
the Term Loans and the interest thereon shall be evidenced by
promissory notes executed by the Borrowers (a) to each Lender in
substantially the form of Exhibits C-1 and C-2 attached to this
Agreement and covering Term Loan A ("Term Notes A"), and (b) to each
Lender in substantially the form of Exhibits C-3 and C-4 attached to
this Agreement and covering Term Loan B ("Term Notes B") . The Term
Notes shall include the following terms:
(a) Terms. Term Notes A shall be dated as of the
Closing Date and shall mature and be due and payable in full
on the last day of the month immediately preceding the sixth
anniversary of the First Principal Payment Date (as defined
below) . Term Notes B shall be dated of even date herewith and
shall mature and be due and payable in full on June 30, 1998.
(b) Interest Rate. Each Term Note shall bear
interest (computed on the basis of the actual number of days
elapsed over a 360-day year) on the daily outstanding
principal balance thereunder at the Interest Rate calculated
by Lender in accordance with the provisions of Section 2.2 (b)
hereof; provided, however, that any required increases or
decreases in the amount of interest
<PAGE> 4
- 4 -
accrued but unpaid or overpaid on the Term Notes, as the case
may be, based on the Agent's calculation of the applicable
Leverage Adjustment, shall be added to or credited against the
next succeeding payment required under the Term Notes, with
interest thereon at the Interest Rate, taking into account the
applicable Leverage Adjustment.
(c) Interest Payment Dates. Interest on the Term
Notes A shall be payable on the Interest Payment Dates
commencing on the last day of the month following the month in
which the Closing Date occurs, and on the date such Term Loan
is due (whether by maturity, acceleration or otherwise) .
Interest on Term Notes B shall be payable monthly, in arrears,
on the last day of each calendar month commencing on January
31, 1996, and on the date such Term Loan is due.
(d) Principal Payments.
(i) Monthly installments of principal on
Term Loan A in the amount of Four Hundred Sixteen Thousand Six
Hundred Sixty-Six and 67/100 Dollars ($416,666.67) shall be
payable commencing on the last day of the third month
following the month in which the Closing Date occurs (the
"First Principal Payment Date"), and continuing on the last
day of each of the next seventy-one (71) months thereafter;
and
(ii) Monthly installments of principal on
Term Loan B in the amount of Two Hundred Thousand and 00/100
Dollars ($200,000.00) shall be payable commencing on January
31, 1996, and continuing on the last day of each of the next
twenty-nine (29) months.
5. Section 2.8 (b) of the Agreement is hereby amended in its
entirety to read as follows:
(b) Optional Prepayment of the Term Loans.
(i) The Borrowers shall have the right to prepay
the principal of Term Loan A in full or in part at any time
and from time to time upon notice to Agent at least ten (10)
days prior to the specified prepayment date and upon payment
to Agent, for the benefit of Lenders, of the principal amount
to be prepaid, together with accrued interest thereon to the
date fixed for
<PAGE> 5
- 5 -
such prepayment, plus a premium calculated as follows:
<TABLE>
<CAPTION>
If the Prepayment Occurs: Then the Premium Shall Be:
- ------------------------- --------------------------
<S> <C>
During the first Loan Year 3% of the Prepayment Amount
During the second Loan Year 2% of the Prepayment Amount
During the third Loan Year 1% of the Prepayment Amount
</TABLE>
(ii) The Borrowers shall have the right to prepay
the principal of Term Loan B in full or in part at any time
and from time to time upon notice to Agent at least ten (10)
days prior to the specified prepayment date and upon payment
to Agent, for the benefit of Lenders, of the principal amount
to be prepaid, together with accrued interest thereon to the
date fixed for such prepayment, plus a premium calculated as
follows:
<TABLE>
<CAPTION>
If the Prepayment Occurs: Then the Premium Shall Be:
- ------------------------- --------------------------
<S> <C>
During the first Loan Year 2% of the Prepayment Amount
During the second Loan Year 1% of the Prepayment Amount
</TABLE>
(iii) Provided, however, if the Borrowers prepay the
principal of the Term Loans at any time with funds internally
generated by normal business operations and not from any third
party borrowings, then no premium on such prepayment shall be
payable to any Lender.
6. Sections 2.10(c), (d), (e) and (f) of the Agreement are hereby
amended in their entirety and there is hereby added to Section 2.10 two
additional subparagraph (g) and (b) to read as follows:
(c) Third, to the payment of interest on Term Note A
then due;
(d) Fourth, to the payment of interest on Term Note
B then due;
(e) Fifth, to the payment of principal then due on
Term Note A;
(f) Sixth, to the payment of principal then due on
Term Note B;
<PAGE> 6
- 6 -
(g) Seventh, to the payment of any outstanding
principal on the Revolving Credit Note; and
(h) Eighth, the surplus remaining (if any) to the
Borrowers or such other Person or Persons as may be determined
by Borrowers or any court of competent jurisdiction.
7. Section 6.3, Limitations on Capital Expenditures, is hereby
amended in its entirety to read as follows:
Section 6.3 Limitations on Capital Expenditures. The
Borrowers shall not, without first obtaining the written consent of
Agent, such consent not to be unreasonably withheld, make Capital
Expenditures in any fiscal year in an aggregate amount greater than
Eleven Million Five Hundred Thousand and 00/100 Dollars
($11,500,000.00).
8. Section 6.4, Maintenance of Consolidated Tangible Net
Worth, is hereby amended in its entirety to read as follows:
Section 6.4 Maintenance of Consolidated Tangible Net Worth.
On each Computation Date, the Borrowers shall not permit Consolidated
Tangible Net Worth of Health Images to be less than the sum of (a)
Thirty-Five Million and 00/100 Dollars ($35,000,000.00), plus (b) an
amount equal to Fifty Percent (50%) of Consolidated Net Income
calculated on a cumulative basis beginning January 1, 1995 (and if
Consolidated Net Income is a negative number, the amount added under
this clause (b) shall be zero).
9. Section 6.7, Consolidated Current Assets/Current Liabilities,
is hereby amended in its entirety to read as follows:
Section 6.7 Consolidated Current Assets/Current Liabilities.
On each Computation Date (except for (a) the March 31, June 30 and
September 30 Computation Dates during the fiscal year 1995 of the
Borrowers, for which the ratio of Consolidated Current Assets to
Consolidated Current Liabilities shall not be less than .92 to 1.0,
and (b) the December 31 Computation Date during the fiscal year 1995
of the borrowers, for which the ratio of Consolidated Current Assets
to Consolidated Current Liabilities shall not be less than .85 to
1.0), the Borrowers shall not permit, for the
<PAGE> 7
- 7 -
relevant Reference Period, the ratio of Consolidated Current Assets to
Consolidated Current Liabilities to be less than 1.0 to 1.0.
10. This Amendment shall not be effective until receipt by the
Agent and Lenders of the following documents and other items in form and
substance satisfactory to the Agent:
(a) Executed Amendment. Copies of this Amendment duly
executed by the Borrowers.
(b) Promissory Note. Term Notes B duly executed by Borrowers
in favor of Lenders.
(c) Proof of Appropriate Action. Receipt by the Agent of
evidence of the action taken by the Borrowers to authorize the
execution and delivery of this Amendment.
(d) Payment of Closing Fee. Lenders shall have received
from Borrowers the loan fee separately agreed upon by the parties.
(e) Other Information. Such other information and documents
as the Agent may reasonably request.
11. The Borrowers will execute such additional documents as are
reasonably requested by the Agent to reflect the terms and conditions of this
Amendment.
12. The Borrowers hereby agree and covenant that all
representations and warranties in the Loan Agreement, including without
limitation, all those set forth in Article 4, are true and accurate as of the
date hereof, and Borrowers hereby reaffirm all covenants in the Loan Agreement,
including without limitation, all of those set forth in Articles 5 and 6, as if
fully set forth herein.
13. The Borrowers shall pay all reasonable costs and expenses in
connection with the preparation, execution and delivery of and compliance with
this Amendment.
14. This Amendment may be executed in any number of counterparts,
each of which when so executed and delivered, shall be deemed an original.
15. This Amendment and the Loan Agreement, as amended hereby,
shall be deemed to be contracts made under and, for all
<PAGE> 8
- 8 -
purposes, shall be construed in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
<TABLE>
<S> <C>
WITNESSES: HEALTH IMAGES, INC.
_________________________ BY: _________________________
_________________________ ITS: ________________________
HEALTH IMAGES TEXAS, INC.
_________________________ BY: _________________________
_________________________ ITS: ________________________
HEALTH IMAGES PENNSYLVANIA, INC.
_________________________ BY: _________________________
_________________________ ITS: ________________________
THE PROVIDENT BANK, as Agent
_________________________ BY: _________________________
_________________________ ITS: ________________________
THE PROVIDENT BANK, as Lender
_________________________ BY: _________________________
_________________________ ITS: ________________________
SOUTHTRUST BANK OF GEORGIA, N.A.,
as Lender
_________________________ BY: _________________________
_________________________ ITS: ________________________
</TABLE>
<PAGE> 9
SCHEDULE 1
Term Loan Commitments
<TABLE>
<CAPTION>
Term Loan A
-----------
Participation
Lender Percentage
------ -------------
<S> <C>
The Provident Bank 66.67%
One East Fourth Street
Seventh Floor
Cincinnati, Ohio 45202
Attention: Paul L. Knuckles
(513) 579-2735
SouthTrust Bank of Georgia, N.A. 33.33%
One Georgia Center
600 W. Peachtree Street, N.E.
Atlanta, Georgia 30308
Attention: C. Mark Crosswell
(404) 853-5751
Term Loan B
-----------
Participation
Lender Percentage
------ -------------
The Provident Bank 66.67%
One East Fourth Street
Seventh Floor
Cincinnati, Ohio 45202
Attention: Paul L. Knuckles
(513) 579-2735
SouthTrust Bank of Georgia, N.A. 33.33%
One Georgia Center
600 W. Peachtree Street, N.E.
Atlanta, Georgia 30308
Attention: C. Mark Crosswell
(404) 853-5751
</TABLE>
<PAGE> 1
================================================================================
-----------------
EXHIBIT 10(d)(iv)
TO
FORM 10-K
-----------------
================================================================================
<PAGE> 2
HEALTH IMAGES, INC.
1995 FORMULA STOCK OPTION PLAN
THIS FORMULA STOCK OPTION PLAN is made as the 15th day of September,
1995, by Health Images, Inc., a corporation organized and doing business under
the laws of the State of Delaware (the "Company").
1. Purpose.
The Company adopts the Health Images, Inc., 1995 Formula Stock
Option Plan (the "Plan") to secure and retain the services of outside directors
of the Company, the Parent and any Subsidiary by giving them an opportunity to
invest in the future success of the Company. The terms "Parent" or
"Subsidiary" shall mean any corporation which qualifies as a parent or
subsidiary of the Company pursuant to Internal Revenue Code Section 424(e) or
(f), as amended.
2. Administration.
The Plan shall be administered by the Board of Directors of
the Company (the "Board of Directors") or the Compensation Committee of the
Board of Directors (the "Committee"). It is intended that the grants of
options pursuant to the Plan and the participation of directors hereunder shall
constitute "participation in a formula plan which does not disqualify a direct
from being disinterested" under Rule 16b-3 for purposes of serving as a member
of a committee that administers other Company plans.
If the Committee consists of fewer than all of the members of
the Board of Directors, each member of the Committee shall serve at the
discretion of the Board of Directors, which may fill any vacancy, however
caused, in the Committee. The Committee shall select one of its members as a
chairman and shall hold meetings at the times and in the places as it may deem
advisable. All actions the Committee takes shall be made by majority decision.
Any action evidenced by a written instrument signed by all of the members of
the Committee shall be as fully effective as if the Committee had taken the
action by majority vote at a meeting duly called and held.
The Committee shall have complete and conclusive authority to
(i) interpret this Plan, (ii) prescribe, amend and rescind rules and
regulations relating to it, (iii) determine the terms of each stock option
agreement with optionees who are granted Options pursuant to Section 5,
consistent with the terms of the Plan and the form of stock option agreement
attached hereto as Exhibit A (the "Agreement"), and (iv) make all other
determinations necessary or advisable for the administration of this Plan. The
Committee's determinations on these matters shall be conclusive.
In addition to any other rights of indemnification that they
may have as directors of the Company or as members of the Committee, the
directors of the Company and members of the
<PAGE> 3
Committee shall be indemnified by the Company against the reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of action taken
or failure to act under or in connection with this Plan or any Option granted
thereunder, and against all amounts paid by them in settlement thereof or paid
by them in satisfaction of a judgment in any action, suit or proceeding, except
in relation to matters as to which it shall be adjudged in the action, suit or
proceeding that the Committee member is liable for gross negligence or
misconduct in the performance of his duties; provided that within 60 days after
institution of any action, suit or proceeding, a Committee member shall in
writing offer the Company the opportunity, at its own expense, to handle and
defend the same.
3. Eligibility.
Directors of the Company, the Parent or a Subsidiary who are
not employees on the date an Option is to be granted pursuant to Plan Section 5
shall be granted Options hereunder (the "Eligible Optionees").
4. Stock Subject to Plan.
The Company has authorized and reserved for issuance upon the
exercise of options pursuant to this Plan an aggregate of one hundred thousand
(100,000) shares of $0.01 par value common stock of the Company (the "Shares").
If any option is cancelled, expires or terminates without the respective
optionee exercising it in full, the Committee may grant Options with respect to
those unpurchased Shares to that same optionee or another Eligible Optionee.
The Committee shall adjust the total number of Shares and any
Shares subject to outstanding Options, both as to the number of Shares and the
option price, for any increase or decrease in the number of outstanding Shares
resulting from a stock split or a payment of a stock dividend on the Shares, a
subdivision or combination of the Shares, a reclassification of the Shares, a
merger or consolidation of the Shares or any other like changes in the Shares
or in their value. The Committee shall not issue fractional shares as a result
of any of these changes, and shall eliminate from the outstanding Options any
fractional shares that result from a change. The Committee shall not adjust
outstanding Options for cash dividends or the issuance to optionees of rights
to subscribe for additional stock or securities of the Company.
The foregoing adjustments and the manner of application for
the foregoing provisions shall be determined by the Committee in its sole
discretion.
The grant of an Option by the Committee shall not affect in
any way the right or power of the Company to make
-2-
<PAGE> 4
adjustments, reclassifications, reorganizations or changes in its capital or
business structure, or to merge, consolidate dissolve, liquidate, sell or
transfer all or any part of its business or assets.
Subject to any required action by the shareholders, if the Company is
a party to any merger or consolidation or there is a change in control of the
Company, each outstanding option shall vest in full at the time of such merger
or consolidation. Each option shall then pertain to and apply to the
securities which a holder of the number of shares subject to the option would
have been entitled.
5. Formula and Terms of Option Grants.
Each Eligible Optionee shall be granted a non-qualified stock
option ("Option") to purchase Two Thousand (2,000) Shares, as of the Effective
Date (defined in Section 6) and each year thereafter two (2) business days
following the filing of the second quarter 10-Q in August, until the Plan is
terminated. In the event the remaining number of Shares reserved for issuance
under the Plan is insufficient to grant options for the appropriate number of
Shares to all Eligible Optionees as of any grant date, then no options shall be
granted as of that grant date.
The exercise price of each Share granted pursuant to an Option
shall be the Fair Market Value of a Share on the business day on which the
Option is granted. "Fair Market Value" shall be determined in good faith by
the Committee provided that:
(a) if the Shares are actively traded on any national
securities exchange or the Nasdaq National Market, fair market value
shall be the closing sales price per share of the Shares on such day;
(b) if the Shares are otherwise traded over the counter,
fair market value shall be the arithmetic mean of the bid and asked
prices for the Shares, as reported by Nasdaq or any other recognized
reporting services, on such day;
(c) if the Shares are not traded, fair market value shall
be determined by the Committee which shall, in making such
determination, consider, where applicable, among other facts: the
existence and extent of a private market for the Shares and a public
market for the Company's securities of the same class, if any; the
price at which the Shares were acquired, if applicable, by the
Company; the estimated period of time, if any, during which the Shares
will be freely marketable; the estimated amount of floating supply of
Shares available; changes in the financial condition and prospects of
the Company; the existence of merger proposals or tender offers
affecting the Company; and any other factors affecting fair market
value; provided, however, that fair market value shall be determined
without regard to any
-3-
<PAGE> 5
restriction other than a restriction which, will never lapse.
Each Option granted pursuant to this Plan shall be authorized
by the Committee, shall be evidenced by an Agreement and shall be subject to
such additional terms as set forth in the Agreement.
6. Terms of Plan.
The Company shall submit this Plan to its shareholders for
approval within 12 months of the adoption of this Plan by the Board of
Directors. Unless shareholder approval is obtained within said twelve-month
period, both this Plan and all outstanding Options shall be rendered
immediately void and of no effect. If shareholder approval is obtained at the
1996 Annual Meeting, the effective date of this Plan shall be September 19,
1995 (the "Effective Date"). The Effective Date was established by the Board
of Directors to be the second business day following the announcement of the
dividend increase approved by the Board of Directors in its September 15, 1995
meeting. This Plan shall terminate 10 years after the Effective Date.
7. Assignability.
No Option or any of the rights and privileges thereof accruing
to an optionee shall be transferred, assigned, pledged or hypothecated in any
way whether by operation of law or otherwise other than as (1) the will of the
optionee, or (2) the applicable laws of descent and distribution permit, and no
Option, right or privilege shall be subject to execution, attachment or similar
process.
8. No Right to Continued Service.
No provision in this Plan or any Option shall confer upon any
right to continue performing services for or to interfere in any way with the
right of shareholders for the Company to remove such optionee as a director at
any time for any reason.
9. Amendment and Termination.
To the extent required under Rule 16b-3, the provisions of the
Plan and the Agreement relating to eligibility and to the amount, price and
timing of an Option may not be amended by the Board of Directors more than once
every six months, other than to conform it with changes in the Internal Revenue
Code, the Employee Retirement Income Security Act of 1974, or any rules under
either of the foregoing. Except as otherwise provided in this Section, the
Board of Directors at any time may amend or terminate the Plan without
shareholder approval; provided, however, that the Board of Directors may
condition any amendment on the approval of the shareholders of the Company if
such approval is necessary or advisable with respect to tax, securities (which
require such approval for a material increase
-4-
<PAGE> 6
of the number of Shares subject to Options and for material modifications to
the eligibility requirements of this Plan, among other amendments, or other
applicable laws to which the Company, this Plan, optionees or Eligible
Optionees are subject. No Amendment or termination of this Plan shall
adversely affect the rights of an optionee with regard to his Options without
his consent.
10. Choice of Law.
The laws of the State of Delaware will govern this Plan.
11. General Restriction.
Notwithstanding anything contained herein or in any of the
Agreements to the contrary, no purported exercise of any Option granted
pursuant to the Plan shall be effective without the written approval of the
Company, which may be withheld to the extent that the exercise, either
individually or in the aggregate together with the exercise of the previously
exercised stock options and/or offers and sales pursuant to any prior or
contemplated offering of securities, would, in the sole and absolute judgment
of the Company, require the filing of a registration statement with the United
States Securities and Exchange Commission or with the securities commission of
any state. The Company shall avail itself of any exemptions from registration
contained in the applicable federal and state securities laws which are
reasonably available to the Company on terms which, in its sole and absolute
discretion, it deems reasonable and not unduly burdensome or costly. Each
optionee shall, prior to the exercise of an Option, deliver to the Company such
information, representations and warranties as the Company may reasonably
request in order for the Company to be able to satisfy itself that the Shares
to be acquired pursuant to the exercise of an Option is being acquired in
accordance with the terms of an applicable exemption from the securities
registration requirements of applicable federal and state securities laws.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed in
the form and as of the date set forth above.
ATTEST: HEALTH IMAGES, INC.
_________________________ By: __________________________
Secretary
[CORPORATE SEAL] Title: __________________
-5-
<PAGE> 1
================================================================================
----------------
EXHIBIT 10(d)(v)
TO
FORM 10-K
----------------
================================================================================
<PAGE> 2
OPTION AGREEMENT
THIS OPTION AGREEMENT ("Agreement") made as of the ____ day of
_________, 199_, between HEALTH IMAGES, INC., a Delaware corporation (the
"Company"), and ___________________________, a Director of the Company (the
"Optionee").
W I T N E S S E T H:
WHEREAS, the Company maintains the 1995 Formula Stock Option
Plan (the "Plan");
WHEREAS, the Plan provides for the automatic grant to
eligible directors of an option annually to purchase 2,000 shares of the Common
Stock, $0.01 par value, of the Company;
WHEREAS, the Optionee is eligible annually for an option
grant pursuant to the terms of the Plan and effective as of the date specified
in the Plan (the "Grant Date");
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties agree as follows:
1.
a. The Company hereby grants and Optionee hereby accepts
an option ("Option") to purchase 2,000 shares of Common Stock (the
"Shares") of the Company at a purchase price per share of $_____,
payable in cash upon exercise of the Option, such Option being
exercisable for a period of ten years from the Grant Date (or for a
shorter period determined pursuant to Section 3(a)), provided,
however, that such Option shall vest pursuant to Section 1(b) before
Optionee has the right to exercise such Option.
b. The Option to purchase Shares shall vest at a rate of
55.55 Shares per calendar month over a 36-month period, commencing as
of the Grant Date. In the event of a merger, acquisition,
reorganization or change in control of the Company, the Option shall
immediately vest.
2.
Optionee hereby covenants, represents and warrants to the
Company as follows and acknowledges that each such covenant, representation and
warranty is material to and relied upon by the Company in connection with its
grant of Option and issuance of Shares to Optionee:
a. Optionee is acquiring the Option and shares solely
for his or her own account for investment purposes and not with a view
to resale or distribution of all or any part thereof.
<PAGE> 3
b. Optionee acknowledges that the Option granted hereby
and underlying Shares are to be granted or issued and sold to him or
her without registration and in reliance upon certain exemptions under
the Federal Securities Act of 1933, as amended, and in reliance upon
certain exemptions from registration requirements under applicable
securities acts.
c. Optionee will make no pledge, transfer or assignment
of any of the Option or Shares unless in compliance with the
Securities Act of 1933, as amended, and any other applicable
securities laws. Optionee consents and agrees that a legend to such
effect may be affixed to the certificate or certificates representing
the Shares issued to him or her.
d. Optionee is aware that no federal or state agency has
made any recommendation or endorsement of the Option or Shares or any
finding or determination as to the fairness of the investment in such
Option or Shares.
e. Optionee has full legal power and authority to
execute and deliver, and to perform his or her obligations under this
Agreement and such execution, delivery and performance will not
violate any agreement, contract, law, rule, decree or other legal
restriction by which the undersigned is bound.
f. Optionee is a non-employee director of the Company
and in such capacity is fully knowledgeable about the Company and its
business and has fully investigated and reviewed the Company and its
business prior to execution of this Agreement.
g. Optionee has been advised by his or her own
independent personal tax advisors of the tax consequences of the grant
and exercise of Option hereunder.
3.
In the event Optionee ceases to be a director of the Company
prior to the full vesting of the Option (____________, 19__), the non-vested
portion of the Option will immediately expire. Any unexercised but vested
Option shall automatically terminate and expire ten (10) years from the date of
this Option.
4.
a. The Option granted hereunder is not transferable by
Optionee, and during Optionee's lifetime shall be exercisable only by
Optionee. The Option shall confer no rights on the holder thereof to
act as a stockholder with respect to any of the Shares until payment
of the purchase price and delivery of share certificate(s) have been
made.
b. The Company reserves the right to request
-2-
<PAGE> 4
additional documentation from Optionee in connection with the issuance
of Shares in compliance with the applicable securities laws.
c. A legend shall be placed on the back of the
certificate evidencing Shares issued pursuant hereto to the effect
that such shares are subject to this Agreement and may not be sold,
transferred, pledged or assigned except in accordance with the terms
of this Agreement.
5.
In the event of any reorganization, recapitalization,
reclassification, stock dividend, stock split or similar event affecting the
Company's Common Stock, the Company shall make an appropriate adjustment in
number of Shares for which the Option has been granted in accordance with the
terms hereof.
6.
This Agreement constitutes the sole agreement setting forth
the terms of the Option, supersedes any other agreement, certificate or
understanding relating to the grant of such Option and no separate certificate
evidencing such Option shall be issued.
7.
This option grant is being made pursuant to that certain
Non-Qualified Stock Option Plan attached hereto as Exhibit A and is contingent
upon the approval of that plan and this grant by the Company's Shareholders at
the 1996 Annual Meeting.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written.
OPTIONEE:
---------------------------
---------------------------
HEALTH IMAGES, INC.
By:
------------------------
Name:
----------------------
Title:
---------------------
-3-
<PAGE> 1
================================================================================
-------------
EXHIBIT 21
TO
FORM 10-K
-------------
================================================================================
<PAGE> 2
SUBSIDIARIES OF HEALTH IMAGES, INC.
Health Images Texas, Inc.
Health Images Pennsylvania, Inc.
Interactive Diagnostic Services, Inc.
Health Images, Inc. (UK) plc
Hertfordshire Magnetic Imaging Limited
Guildford Magnetic Imaging Limited
Darlington Magnetic Imaging Limited
Somerset MRI Centre Limited
Magnetic Imaging of Belleville, Ltd.
<PAGE> 1
================================================================================
-------------
EXHIBIT 23
TO
FORM 10-K
-------------
================================================================================
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Health Images, Inc.:
We hereby consent to the inclusion in this Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, of our report, dated February 23, 1996, on
the consolidated financial statements of Health Images, as of December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995
(the "Report") and to the use of our report, dated February 23, 1996, on the
financial statement schedules appearing in the full Annual Report. We further
consent to the incorporation by reference of the Report to the following
Registration Statements on Form S-8 related to the compensation plans of Health
Images, Inc.: Nos. 33-18747 (filed November 25, 1987), 33-32666 (filed
December 28, 1989) and 33-38369 (filed December 21, 1990), 33-39215 (filed
February 28, 1991) and 33-50170 (filed July 29, 1992).
JOSEPH DECOSIMO AND COMPANY
Atlanta, Georgia
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,204,700
<SECURITIES> 267,400
<RECEIVABLES> 24,537,600
<ALLOWANCES> 10,565,200
<INVENTORY> 316,500
<CURRENT-ASSETS> 34,147,300
<PP&E> 155,103,800
<DEPRECIATION> 60,647,700
<TOTAL-ASSETS> 176,312,400
<CURRENT-LIABILITIES> 34,308,100
<BONDS> 45,000,500
0
0
<COMMON> 133,800
<OTHER-SE> 83,654,900
<TOTAL-LIABILITY-AND-EQUITY> 176,312,400
<SALES> 0
<TOTAL-REVENUES> 115,535,400
<CGS> 0
<TOTAL-COSTS> 86,898,700
<OTHER-EXPENSES> 8,504,100
<LOSS-PROVISION> 4,646,000
<INTEREST-EXPENSE> 3,727,200
<INCOME-PRETAX> 11,281,000
<INCOME-TAX> 4,390,200
<INCOME-CONTINUING> 6,890,800
<DISCONTINUED> 1,161,900
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,728,900
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
