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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- --------------------------
Commission file number 0-14746
-----------
Health Images, Inc.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 58-1485618
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
8601 Dunwoody Place, Building 200, Atlanta, Georgia 30350
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 770/587-5084
-----------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date 11,414,757.
<PAGE> 2
HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 4,200,800 $ 3,204,700
Marketable Securities 916,500 267,400
Trade Receivables (Less Allowance for Doubtful Accounts and
Discounts of $11,290,500 in 1996 and $10,565,200 in 1995) 23,297,300 24,537,600
Other Receivables 975,400 806,700
Inventories 338,100 316,500
Deferred Income Taxes 2,999,000 2,826,800
Other 3,095,900 2,689,400
------------ -------------
Total Current Assets 35,823,000 34,649,100
------------ -------------
PROPERTY AND EQUIPMENT
Total Property & Equipment 157,290,100 155,103,800
Accumulated Depreciation 62,337,900 60,647,700
------------ -------------
Cost Less Accumulated Depreciation 94,952,200 94,456,100
------------ -------------
OTHER ASSETS
Intangible Assets 46,472,700 47,058,700
Unclassified 122,500 148,500
------------ --------------
Total Other Assets 46,595,200 47,207,200
------------ --------------
TOTAL ASSETS $177,370,400 $176,312,400
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion of Long Term Debt $ 16,680,200 $ 16,352,500
Accounts Payable 7,686,400 9,369,400
Accrued Expenses 10,928,200 8,450,700
Unearned Revenue 507,200 135,500
------------ -------------
Total Current Liabilities 35,802,000 34,308,100
------------ -------------
LONG TERM DEBT 43,113,100 45,000,500
------------ -------------
DEFERRED INCOME TAXES 11,666,000 11,711,300
------------ -------------
OTHER LONG TERM LIABILITIES 251,000 245,700
------------ -------------
MINORITY INTEREST 1,348,700 1,258,100
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock - $.01 Par Value - 40,000,000 Shares Authorized -
13,397,377 Shares Issued as of March 31, 1996 and 13,380,052
as of December 31, 1995 134,000 133,800
Additional Paid-In Capital 77,779,300 77,674,400
Retained Earnings 22,831,800 21,288,000
Accumulated Translation Adjustment (603,900) (508,700)
Treasury Stock - 1,977,120 Shares at Cost as of March 31, 1996
and 1,957,300 as of December 31, 1995 (14,951,600) (14,798,800)
------------ -------------
Total Stockholders' Equity 85,189,600 83,788,700
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $177,370,400 $176,312,400
============ ============
</TABLE>
<PAGE> 3
HEALTH IMAGES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
--------------- --------------
<S> <C> <C>
REVENUE
Net Patient Service Revenue $30,172,000 $17,304,600
Engineering Revenue 427,300 729,800
Other Revenue & Income 316,000 204,500
----------- -----------
Total Net Revenue 30,915,300 18,238,900
----------- -----------
COSTS AND EXPENSES
Operating Costs 18,535,400 10,762,900
Depreciation and Amortization Expense 4,583,500 2,975,300
Provision for Bad Debts 1,236,400 772,700
General and Administrative Expenses 2,423,900 1,334,900
----------- -----------
Total Operating Expenses 26,779,200 15,845,800
----------- -----------
Operating Income 4,136,100 2,393,100
Interest Income 20,500 31,400
Interest Expense (1,005,800) (362,100)
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST AND PROVISION FOR INCOME TAXES 3,150,800 2,062,400
Minority Interest in Income of
Consolidated Entities 146,000 42,300
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION
FOR INCOME TAXES 3,004,800 2,020,100
Provision for Income Taxes 1,174,900 776,600
----------- -----------
NET INCOME FROM CONTINUING OPERATIONS $ 1,829,900 $ 1,243,500
----------- -----------
DISCONTINUED OPERATIONS
Loss on Discontinued Operations (Net of Income Taxes) --- 415,000
Loss on Disposal of Discontinued Operations (Net of Income Taxes) --- 744,000
----------- -----------
NET INCOME (LOSS) $ 1,829,900 $ 84,500
=========== ===========
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Primary and Fully Diluted Earnings per Share
Net Income from Continuing Operations per Share $ 0.16 $ 0.11
Discontinued Operations per Share --- $ (0.10)
----------- -----------
Net Income (Loss) per Share $ 0.16 $ 0.01
=========== ===========
WEIGHTED AVERAGE COMMON SHARE &
COMMON SHARE EQUIVALENTS
Primary 11,621,600 11,641,500
Fully Diluted 11,621,600 11,641,500
</TABLE>
<PAGE> 4
HEALTH IMAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE QUARTER ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $1,829,900 $ 84,500
Adjustments to Reconcile Net Income (Loss) to Net Cash
Depreciation 3,768,100 2,591,600
Amortization 815,400 383,700
Provision for Bad Debts 1,236,400 772,700
Minority Interest 146,100 42,300
Deferred Income Taxes (217,500) (233,900)
Increase in Receivables (164,800) (271,900)
(Increase) Decrease in Inventories (21,600) 101,600
Increase (Decrease) in Accounts Payable
and Accrued Expenses 1,147,200 1,405,100
Other - Net (124,900) (494,600)
---------- ----------
Net Cash Provided by Operating Activities 8,414,300 4,381,100
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Cash Used to Acquire Investments (649,100) (56,700)
Proceeds from Investments --- 281,000
Capital Expenditures (4,335,600) (2,123,200)
Payments for Intangibles (113,300) (485,700)
Other-Net --- ($8,500)
---------- ----------
Net Cash Used by Investing Activities (5,098,000) (2,393,100)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from Issuing Notes Payable 2,135,100 ---
Cash Used to Retire Debt (3,694,800) (3,351,400)
Cash Distributions to Minority Investors
In Limited Partnerships (55,500) (34,700)
Proceeds from Exercise of Stock Options 105,100 8,800
Cash Used to Pay Dividends (286,100) (231,800)
Cash Used to Purchase Treasury Shares (500,200) ---
---------- ----------
Net Cash (Used) Provided by Financing Activities (2,296,400) (3,609,100)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (23,800) 85,400
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 996,100 (1,535,700)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,204,700 3,804,100
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $4,200,800 $2,268,400
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Treasury Stock Reissued in Conjunction with Employee Benefit Plans $ 347,400 ---
</TABLE>
<PAGE> 5
PART I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparisons of the quarter ended March 31, 1996, to the quarter ended March
31, 1995
Net patient service revenue(1) increased $12,867,400, or 74.4%,
primarily due to an increase in net revenue at imaging centers that were in
operation for both the 1995 and 1996 periods ("same center revenue") of
$234,600, or 1.4%, and the Company's acquisition of 15 imaging centers from
MedAlliance, Inc. ("the MedAlliance centers acquisition"). The disposition of
the Company's Central Pennsylvania Magnetic Imaging facility on July 31, 1995,
reduced net patient service revenue by approximately $490,400. Health Images
signed a management agreement with the purchasers of Central Pennsylvania
Magnetic Imaging under which the Company provides management services under a
fee arrangement based upon collections of the facility. These revenues are
included in miscellaneous income on the Company's financial statements and are
contractually limited to a maximum of $750,000 per year.
Engineering revenue decreased $302,500, or 41.4%, primarily due to
decreased service revenue. Other revenue and income increased $111,500, or
54.5%.
Operating costs increased by $7,772,500, or 72.2%, primarily due to
expenses associated with the 15 imaging centers acquired from MedAlliance,
partly offset by the elimination of costs associated with the former Central
Pennsylvania Magnetic Imaging facility and the Company's continued cost
control efforts. Depreciation and amortization expense increased
$1,608,200, or 54.1%, due to increased depreciation charges and additional
goodwill amortization related to the MedAlliance center acquisition. The
Company's provision for bad debts was $1,236,400 or 4.1% of net patient service
revenue in the 1996 period as compared to $772,700, or 4.5%, in the 1995
period. Provisions for bad debts result from required write-offs of accounts
management deems to be uncollectible. Management expects future bad debt
experience to be comparable to these results. General and Administrative
expenses increased $1,089,000, or 81.6%, primarily due to the centralized
billing and collections operation acquired from MedAlliance and increased cost
related to the Company's expanded volume of business. General and
Administrative expenses as a percentage of net revenue was 7.8% in the 1996
period as compared to 7.3% in the 1995 period.
Interest income decreased by $10,900, or 34.7%, due to lower cash
balances. Interest expense increased by $643,700, or 177.8%, due to
__________________________________
(1) Net patient service revenue 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.
-3-
<PAGE> 6
higher amounts of debt outstanding resulting from the MedAlliance centers
acquisition. Minority interest in income of consolidated entities increased by
$103,700, or 245.2%, primarily due to minority interests assumed in the
MedAlliance centers acquisition. Income taxes increased by $398,300, or 51.3%,
primarily due to higher pretax income.
Net income from continuing operations increased $586,400, or 47.2%, to
$1,829,900 in the 1996 period from $1,243,500 in the 1995 period. Primary and
fully diluted earnings from continuing operations increased $.05 per share,
or 45.5%, to $0.16 in the 1996 period as compared to $0.11 in the 1995 period.
Earnings per share were calculated using 11,621,600 primary and fully diluted
weighted average common share equivalents for the 1996 period as compared to
11,641,500 in the 1995 period.
During the quarter ended March 31, 1995, the Company elected to
discontinue the operations of a subsidiary, Interactive Diagnostic Services,
Inc., and the financial results of such subsidiary are treated as Discontinued
Operations. For the quarter ended March 31, 1995, the loss from operations,
net of income taxes, of the subsidiary was $1,159,000. The Company reported
net income of $1,829,900, or $0.16 per share in the 1996 period, an increase of
$1,745,400 or 2,065.6% as compared to $84,500, or $0.01, per share in the prior
year period.
The MedAlliance centers acquistion was effected as of April 1, 1995.
Net of interest costs, this transaction was additive to earnings during the
period under review. During the 1996 quarter, the Company increased patient
volume levels and generated economies of scale related to the acquisition.
Management expects this trend to continue.
The diagnostic imaging business remains intensely competitive. The
growth of private managed care plans places downward pressure on imaging
reimbursements and leads 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 principal sources of revenue. In addition,
the Company may be at a competitive disadvantage to hospitals and hospital
systems which can offer a comprehensive range of health care services to
managed care plans. Management believes, however, that the Company is better
positioned than many of its competitors because of its lower cost structure,
superior service to its patients, and lack of reliance upon physician
self-referral practices. The Company's vertical integration results in lower
equipment costs and significantly reduced maintenance expenses. Health Images
began the first installation of its proprietary HI STARTM magnetic resonance
imaging system in April, 1996. Management believes that the HI STAR 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
diagnostic imaging industry continues to consolidate.
-4-
<PAGE> 7
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.
Management believes that reimbursements for its services will continue
to decline in the future, even in an otherwise inflationary environment. The
rate of decline in reimbursement levels, however, has slowed recently and may
indicate some pricing stabilization. The Company has historically responded to
reimbursement declines by lowering its capital costs and by increasing the
volume of its business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8,414,300 for the three
months ended March 31, 1996, an increase of $4,033,200, or 92.1%, from
$4,381,100 in the prior year period. This increase is primarily due to an
increase in net income and higher depreciation and amortization charges
(non-cash expenses) resulting from the MedAlliance centers acquisition. Net
trade receivables decreased by $1,240,300 to $23,297,300 during the three
months ended March 31, 1996, primarily due to improved collections. As of
March 31, 1996, the Company's average age of patient receivables outstanding
was 71 days as compared to 74 days as of December 31, 1995, and 82 days as of
March 31, 1995. The reduction in the Company's average age of patient
receivables demonstrates the Company's recent focus on improved collections and
further successful integration of the Company's centralized billing and
collections operation.
The Company reduced net outstanding debt by $1,559,700 during the
three months ended March 31, 1996, to $59,793,300. Cash and cash equivalents
increased by $996,100 for the three months ending March 31, 1996, to $4,200,800.
The Company had available $4,015,300 under its $5,000,000 bank line
at March 31, 1996. During the quarter the Company borrowed $1,690,500 to
finance the purchase of medical equipment used in the expansion of its center
business.
Capital expenditures for the three months ended March 31, 1996,
were $4,335,600. The principal capital expenditures for the remainder of 1996
will be purchases and construction of imaging equipment, upgrades and
enhancements for the Company's HI Standard and HI STAR MRI systems, the
expansion and upgrading of certain of the Company's existing imaging
facilities, and the construction of a new corporate headquarters.
Management considers current cash and liquidity together with cash
flows from operating activities adequate to fund the Company's existing
business operations. The Company may need to restructure its current debt
maturities or borrow additional amounts to fund all of its
-5-
<PAGE> 8
intended capital expenditures and expansion plans. Management believes such
financing is readily available from several sources.
At March 31, 1996, the Company had commitments of $2,072,700 on
equipment and construction contracts.
-6-
<PAGE> 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
There have been no material developments in the legal
proceedings described in the Company's Form 10-K for the
fiscal year ended December 31, 1995.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults under Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
a. Exhibits required to be filed by Item 601 of
Regulation S-K are included as Exhibits to this
report as follows:
Exhibit
Number
2(e) Waiver Letter from the Provident
Bank
4 -- Instruments defining rights of
security holders are incorporated
herein by reference to Exhibit 1 to
Registrant's Form 8-K filed June 20,
1989 and to Exhibits 3(a) and 3(b)
to Registrant's Annual Report on
Form 10-K for fiscal year ended
December 31, 1989.
27 -- Financial Data Schedule
(for SEC use only)
b. Reports on Form 8-K -- No reports on Form 8-K have
been filed by Registrant during the quarter for which
this report is filed.
-7-
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<S> <C> <C>
2(e) Waiver Letter from the Provident Bank
4 -- Instruments defining rights of security holders
are incorporated herein by reference to Exhibit 1
to Registrant's Form 8-K filed June 20, 1989 and
to Exhibits 3(a) and 3(b) to Registrant's Annual
Report on Form 10-K for fiscal year ended
December 31, 1989.
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
-8-
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH IMAGES, INC.
(REGISTRANT)
Date: May 10, 1996 By:/s/Robert D. Carl, III
---------------------- ---------------------------------
Robert D. Carl, III
Chairman and
Chief Executive Officer
By:/s/Ron L. Clark
---------------------------------
Ron L. Clark
Treasurer and Controller
(Principal Accounting
Officer)
<PAGE> 1
THE PROVIDENT BANK
COMMERCIAL BANKING
One East Fourth Street
Cincinnati, Ohio 45202
513/579-2736
Telecopy: 513/579-2201
PAUL L. KNUCKLES
Vice President
March 18, 1996
Mr. Ronald Clark
Controller
Health Images, Inc.
8601 Dunwoody Place
Atlanta, GA 30350
RE: Loan Covenant Violation 12/31/95
Loan and Security Agreement dated March 27, 1995
Dear Ron:
As Agent, this letter will serve as our written consent to waive the following
two loan covenants for the 12-31-95 reporting period.
Section 6.3 Limitation on Capital Expenditures, is hereby waived to allow
Capital Expenditures of $11,700,000 in lieu of $11,500,000 for the FYE
reporting period of 12-31-95. Future annual reporting periods will revert back
to maximum Capital Expenditures of $11,500,000.
Section 6.8 Consolidated Liabilities/Consolidated Tangible Net Worth, is
hereby waived to allow a maximum ratio of 2.41 in lieu of 2.25 for the
reporting period of 12-31-95. Future reporting periods will revert back to a
maximum ratio not greater than 2.25 to 1.
Sincerely,
/s/ Paul L. Knuckles
Paul L. Knuckles
Vice President
PLK:kab
cc: Mark Crosswell
SouthTrust Bank of Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,200,800
<SECURITIES> 916,500
<RECEIVABLES> 23,297,300
<ALLOWANCES> 11,290,500
<INVENTORY> 338,100
<CURRENT-ASSETS> 35,823,000
<PP&E> 157,290,100
<DEPRECIATION> 62,337,900
<TOTAL-ASSETS> 177,370,400
<CURRENT-LIABILITIES> 35,802,000
<BONDS> 43,113,100
0
0
<COMMON> 134,000
<OTHER-SE> 85,055,600
<TOTAL-LIABILITY-AND-EQUITY> 177,370,400
<SALES> 0
<TOTAL-REVENUES> 30,915,300
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 26,779,200
<LOSS-PROVISION> 1,236,400
<INTEREST-EXPENSE> 1,005,800
<INCOME-PRETAX> 3,004,800
<INCOME-TAX> 1,174,900
<INCOME-CONTINUING> 1,829,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,829,900
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
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