<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 13, 1999
COMMISSION FILE NUMBER: 0-16334
ALLIANCE IMAGING, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0239910
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1065 NORTH PACIFICENTER DRIVE
SUITE 200
ANAHEIM, CALIFORNIA 92806
-------------------------
(Address of principal executive office)
(714) 688-7100
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name or former address, if changed since last report)
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<PAGE>
Item 7 of the Registrant's Current Report on Form 8-K, event date May 13, 1999,
is amended to read in its entirety as follows:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Item 7(a). Financial Statements of Business Acquired.
INDEX TO FINANCIAL STATEMENTS TO CURRENT REPORT ON FORM 8-K/A
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 3
Report of KPMG LLP, Independent Auditors 4
Consolidated Balance Sheets as of December 31, 1998 and 1997 5-6
Consolidated Statements of Operations
Year ended December 31, 1998
Period August 5, 1997 to December 31, 1997
Predecessor:
Period January 1, 1997 to August 4, 1997
Year ended December 31, 1996 7
Consolidated Statements of Changes in Stockholders' Equity
Year ended December 31, 1998
Period August 5, 1997 to December 31, 1997
Predecessor:
Period January 1, 1997 to August 4, 1997
Year ended December 31, 1996 8
Consolidated Statements of Cash Flows
Year ended December 31, 1998
Period August 5, 1997 to December 31, 1997
Predecessor:
Period January 1, 1997 to August 4, 1997
Year ended December 31, 1996 9-10
Notes to Consolidated Financial Statements 11-29
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 30
Condensed Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998 (unaudited) 31
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited) 32
Notes to Condensed Consolidated Financial Statements (unaudited) 33
</TABLE>
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<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
SMT Health Services Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of SMT Health
Services Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year ended December 31, 1998, for the period August 5, 1997 to
December 31, 1997, and for the period January 1, 1997 to August 4, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SMT Health
Services Inc. and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1998, for the period August 5, 1997 to December 31, 1997, and for
the period January 1, 1997 to August 4, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
February 19, 1999
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<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
SMT Health Services Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of SMT Health Services Inc. and
subsidiaries for the year ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of SMT Health Services Inc. and subsidiaries for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
January 31, 1997
-4-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,402,398 $ 1,456,626
Accounts receivable--net of allowance for doubtful accounts of
$125,000 at December 31, 1998 and $0 at December 31, 1997 4,833,538 2,002,184
Other current assets 551,959 188,250
----------------------------------------
Total current assets 6,787,895 3,647,060
Property and equipment:
Equipment 427,119 127,510
Furniture and fixtures 62,264 26,284
Vehicles 354,998 149,244
Leasehold improvements 241,212 10,557
Diagnostic imaging equipment 47,767,289 34,514,450
----------------------------------------
Total property and equipment 48,852,882 34,828,045
Less accumulated depreciation and amortization (7,848,337) (1,806,313)
----------------------------------------
Property and equipment, net 41,004,545 33,021,732
Other assets:
Debt issuance costs, net of accumulated amortization of $590,000 and
$174,000 at December 31, 1998 and 1997, respectively 1,909,722 2,326,390
Goodwill, net of accumulated amortization of $4,293,000 and
$1,097,000 at December 31, 1998 and 1997, respectively 60,908,775 51,564,875
Deferred income taxes - 1,808,000
Deposits and other assets 1,155,534 600,305
----------------------------------------
Total other assets 63,974,031 56,299,570
----------------------------------------
Total assets $111,766,471 $92,968,362
========================================
</TABLE>
-5-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 708,519 $ 398,268
Accrued wages and related taxes 347,037 169,998
Current portion of long-term debt and capital lease obligations 2,488,632 1,168,370
Other current liabilities 2,165,612 1,571,208
----------------------------------------
Total current liabilities 5,709,800 3,307,844
Deferred tax liability 1,228,254 -
Long-term debt and capital lease obligations--less current portion 65,945,359 54,876,723
----------------------------------------
Total liabilities 72,883,413 58,184,567
Stockholders' equity:
Common stock, $0.01 par value; authorized 400,000 shares;
issued and outstanding 335,600 shares 3,356 3,356
Additional paid-in capital 35,006,644 34,906,644
Retained earnings (deficit) 3,873,058 (126,205)
----------------------------------------
Total stockholders' equity 38,883,058 34,783,795
----------------------------------------
Total liabilities and stockholders' equity $111,766,471 $92,968,362
========================================
</TABLE>
SEE ACCOMPANYING NOTES.
-6-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
PERIOD PERIOD
YEAR ENDED AUGUST 5 TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 4, DECEMBER 31,
1998 1997 1997 1996
-------------------------------------------------------------------------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Revenues $45,049,136 $12,514,427 $15,378,259 $19,021,954
Costs and expenses:
Operating expenses 15,841,259 4,097,433 4,949,242 6,279,915
Depreciation and amortization 9,810,507 2,985,060 3,786,771 4,724,909
Selling, general and
administrative 5,250,739 1,522,002 2,398,323 2,877,421
Stock option compensation 100,000 1,349,976 - -
Other (Note 14) - - - (300,000)
-------------------------------------------------------------------------------
Total costs and expenses 31,002,505 9,954,471 11,134,336 13,582,245
-------------------------------------------------------------------------------
Operating income 14,046,631 2,559,956 4,243,923 5,439,709
-------------------------------------------------------------------------------
Other income (expense):
Interest income 28,170 15,627 340,137 190,399
Interest--third parties (6,312,338) (2,161,788) (1,170,122) (2,005,429)
Interest--related parties - - (77,437) (35,818)
-------------------------------------------------------------------------------
Total other income (expense) (6,284,168) (2,146,161) (907,422) (1,850,848)
-------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 7,762,463 413,795 3,336,501 3,588,861
Income taxes 3,763,200 540,000 1,423,407 1,178,000
-------------------------------------------------------------------------------
Income (loss) before extraordinary
item 3,999,263 (126,205) 1,913,094 2,410,861
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $115,000) - - 181,000 -
-------------------------------------------------------------------------------
Net income (loss) $ 3,999,263 $ (126,205) $ 1,732,094 $ 2,410,861
===============================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
-7-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------------- --------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Balances (Predecessor)--December 31, 1995 2,654,400 $ 26,544 $ 6,636,070 $(1,260,961) $ 5,401,653
Exercise of stock options and warrants 793,500 7,935 2,219,094 - 2,227,029
Tax adjustments regarding stock option and
warrant exercises - - 1,360,000 - 1,360,000
Stock dividend 247,130 2,471 1,866,450 (1,868,921) -
Net income - - - 2,410,861 2,410,861
------------- --------------- ----------------- ------------------ ------------------
Balances (Predecessor)--December 31, 1996 3,695,030 36,950 12,081,614 (719,021) 11,399,543
Exercise of stock options and warrants 2,051,270 20,513 12,249,998 - 12,270,511
Tax adjustment regarding stock option and
warrant exercises - - 245,000 - 245,000
Net income - - - 1,732,094 1,732,094
------------- --------------- ----------------- ------------------ ------------------
Balances (Predecessor)--August 4, 1997 5,746,300 57,463 24,576,612 1,013,073 25,647,148
Purchase of "Predecessor" common stock (5,746,300) (57,463) (24,576,612) (1,013,073) (25,647,148)
Issuance of common stock 335,600 3,356 33,556,668 - 33,560,024
Employee stock option rollover value - - 1,349,976 - 1,349,976
Net loss - - - (126,205) (126,205)
------------- --------------- ----------------- ------------------ ------------------
Balances--December 31, 1997 335,600 3,356 34,906,644 (126,205) 34,783,795
Employee stock option rollover value - - 100,000 - 100,000
Net income - - - 3,999,263 3,999,263
------------- --------------- ----------------- ------------------ ------------------
Balances--December 31, 1998 335,600 $ 3,356 $35,006,644 $ 3,873,058 $ 38,883,058
============= =============== ================= ================== ==================
</TABLE>
SEE ACCOMPANYING NOTES.
-8-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD PERIOD
YEAR ENDED AUGUST 5 TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 4, DECEMBER 31,
1998 1997 1997 1996
-------------------------------------------------------------------------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,999,263 $ (126,205) $ 1,732,094 $ 2,410,861
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Stock option compensation 100,000 1,349,976 - -
Extraordinary loss on early
extinguishment - - 296,000 -
Depreciation and amortization 9,810,507 2,985,060 3,786,771 4,724,909
Amortization of debt issuance costs 416,664 173,610 - -
Deferred income tax expense 3,131,247 535,600 1,013,407 1,288,000
Undistributed earnings of affiliate (235,457) - - -
Other 4,906 - - -
Changes in certain operating assets and
liabilities:
Accounts and notes receivable (1,385,548) 161,885 (385,387) (544,660)
Other current assets (359,569) 672,658 (218,329) (470,751)
Accounts payable and other (9,967) (270,113) 1,292,159 (21,064)
Accrued wages and related taxes (69,434) 11,225 47,109 53,841
-------------------------------------------------------------------------------
Net cash provided by operating activities 15,402,612 5,493,696 7,563,824 7,441,136
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (9,196,483) (4,801,928) (3,061,710) (2,977,334)
Sale of equipment 350,000 - - -
Payment for purchase of acquired entities,
net of cash acquired (12,495,025) - - (642,840)
Net change in cash restricted for equipment
financing purposes - 400,000 - 1,200,000
Other (14,387) 26,475 2,500 (146,472)
-------------------------------------------------------------------------------
Net cash used in investing activities (21,355,895) (4,375,453) (3,059,210) (2,566,646)
</TABLE>
SEE ACCOMPANYING NOTES.
-9-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PERIOD PERIOD
YEAR ENDED AUGUST 5 TO JANUARY 1 YEAR ENDED
DECEMBER 31, DECEMBER 31, TO AUGUST 4, DECEMBER 31,
1998 1997 1997 1996
-------------------------------------------------------------------------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility 15,970,000 8,269,092 - -
Borrowings on term loan credit facility - 50,000,000 - -
Debt issuance costs - (2,500,000) - -
Principal payments under revolving credit
facility (6,400,000) (4,000,000) - -
Principal payments under term loan credit
facility (500,000) (125,000) - -
Principal payments under long-term debt and
capital leases:
Third parties (2,328,278) (324,650) (2,962,214) (4,735,551)
Related parties - - (145,424) (64,329)
Refinance of short- and long-term debt and
capital leases (842,667) (20,312,619) - -
Principal payoff of long-term debt and
capital leases - - (4,271,787) -
Extraordinary loss on early extinguishment
of debt - - (296,000) -
Payment for purchase of "Predecessor" common
stock - (77,971,322) - -
Issuance of "Predecessor" common stock from
exercise of stock options and warrants - - 12,270,511 2,227,029
Issuance of common stock - 33,560,024 - -
Other - 12,386 (12,386) -
-------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 5,899,055 (13,392,089) 4,582,700 (2,572,851)
-------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (54,228) (12,273,846) 9,087,314 2,301,639
Cash and cash equivalents--beginning of period 1,456,626 13,730,472 4,643,158 2,341,519
-------------------------------------------------------------------------------
Cash and cash equivalents--end of period $ 1,402,398 $ 1,456,626 $13,730,472 $ 4,643,158
===============================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
-10-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
SMT Health Services Inc. and its wholly owned subsidiaries (the "Company") are
engaged primarily in providing medical diagnostic imaging and management
services to hospitals, physicians and patients. The Company, through its
subsidiaries, operates thirty-four (34) mobile Magnetic Resonance Imaging
("MRI") Systems ("MRI Systems") in North Carolina, West Virginia, Ohio,
Pennsylvania, South Carolina, Tennessee, Kentucky, Virginia, Indiana and New
Mexico. In addition, the Company also operates one Computed Tomography ("CT")
system in Arizona. See Note 13 for acquisitions in 1998.
The Company also owns 50% of a partnership as a general partner and a 50%
interest in a limited liability company. These entities provide services similar
to the Company's activities and are accounted for under the equity method.
On June 23, 1997, SMT Health Services Inc. (the "Predecessor") signed a
definitive agreement with Three Rivers Holding Corporation ("Holding"), which is
wholly owned by affiliates of Apollo Management L.P. ("Apollo"), and Three
Rivers Acquisition Corp. ("Three Rivers"), which is wholly owned by Holding,
pursuant to which Three Rivers agreed to acquire all of the outstanding shares
of the Predecessor for $11.75 per share through a cash tender offer which
commenced on June 30, 1997, followed by a merger with the Company. The total
transaction was valued at approximately $100 million including outstanding stock
options and warrants and the assumption of debt.
On August 5, 1997, Three Rivers successfully completed its tender offer and
purchased 91.9% of the issued and outstanding common stock of the Predecessor.
On September 29, 1997, Three Rivers purchased the remaining 8.1% of the issued
and outstanding Predecessor common stock that completed the merger and the
Company became a wholly owned subsidiary of Holding. This transaction was
accounted for as a purchase pursuant to Accounting Principles Board ("APB")
Opinion No. 16, and accordingly, the purchase price was allocated to assets
acquired and liabilities assumed.
Also on August 5, 1997, Holding, Three Rivers, the Company and various lenders
entered into an $80 million term loan and revolving credit facility that was
used to fund a portion of the cash tender and refinance approximately $20
million of indebtedness. Total borrowings related to this transaction was
approximately $58.3 million, consisting of a $50 million term loan and an $8.3
million revolving loan. The remainder of the credit facility will be used for
working capital requirements, general corporate purposes, and future
acquisitions. The remainder of the cash tender was funded by the issuance of
$33.6 million of common stock from Three Rivers.
The accompanying consolidated financial statements and notes to the consolidated
financial statements include Predecessor financial information for the period
January 1, 1997 to August 4, 1997 and the year ended December 31, 1996.
-11-
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of SMT Health
Services Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
REVENUE RECOGNITION
Revenue from diagnostic imaging services is recognized as patient services are
performed.
SERVICE AGREEMENTS
The Company provides services to hospitals and physician practices under Mobile
MRI Service Agreements that expire at various times between 1999 and 2004. The
majority of the Company's revenues are derived directly from health care
providers. To a lesser extent, revenues are generated from direct billings to
patients or their medical payors (including Medicare and Medicaid) and are
recorded net of contractual discounts. Net revenues from direct patient billing
amounted to approximately 6% of revenues in the year ended December 31, 1998.
There was no direct patient billing in the periods ended December 31, 1997 and
August 4, 1997, and the year ended December 31, 1996. During 1998, 1997 and
1996, approximately 18%, 28% and 29%, respectively, of the Company's billings
and collections under service contracts were processed through Hospital Shared
Services ("HSS"), a representative of certain hospitals. As a fee for these
services, HSS retains approximately 2.5% of gross billings to these hospitals
and, accordingly, the Company records related revenues on a net basis. Such fees
totaled approximately $197,000 for the year ended December 31, 1998, $83,000 and
$113,000 for the periods ended December 31, 1997 and August 4, 1997,
respectively, and $150,000 for the year ended December 31, 1996.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation, as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare and Medicaid program.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with original maturities of
ninety days or less.
-12-
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
The Company provides shared diagnostic imaging equipment and management services
to the health care industry and directly to patients on an outpatient basis.
Substantially all of the Company's accounts receivable are due from hospitals,
other health care providers and health insurance providers located throughout
the United States. Services are generally provided pursuant to long-term
contracts and directly to patients, and generally collateral is not required.
Receivables generally are collected within industry norms for third party
payors. Credit losses are provided for in the consolidated financial statements
and losses experienced have been within management's estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
which is generally eight years. Four (4) mobile MRI Systems financed with fair
market value leases are being amortized using the straight-line method over the
term of the leases which is generally five years.
GOODWILL
The excess of the purchase price paid over net assets acquired is recorded as
goodwill and amortized over 20 years using the straight-line method.
DEBT ISSUANCE COSTS
Debt issuance costs represent fees incurred related to the establishment of the
$80 million term loan and revolving credit facility the Company entered into on
August 5, 1997, as further described in Notes 1 and 3. These costs are amortized
over the term of the facility using the effective interest method. Amortization
was approximately $416,000 for the year ended December 31, 1998 and $174,000 for
the period ended December 31, 1997.
INCOME TAXES
The Company files a consolidated federal income tax return. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
-13-
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company utilizes software and related technologies that will be affected by
the date change in the year 2000. The Company is comprehensively reviewing its
computer systems and non-information technology systems to identify potential
Year 2000 Issues and is in the process of assessing the impact of the Year 2000
Issue on the Company's business. Although the Company's assessment of the Year
2000 problem is incomplete, the Company has recently installed new or upgraded
software for certain internal management information systems that was developed
as Year 2000 compliant. The Company is evaluating all other systems for Year
2000 compliance. If needed, a plan will be developed to resolve any
deficiencies. The Company is also undertaking efforts to verify that all vendors
and suppliers will be Year 2000 compliant.
All of the Company's diagnostic imaging equipment used to provide imaging
services have computer systems and applications that could be affected by Year
2000 Issues. The Company has begun to assess the impact on its diagnostic
imaging equipment by contacting the vendors of such equipment. The vendors of
the MRI and CT equipment used by the Company have provided information
identifying certain MRI and CT equipment as Year 2000 compliant or provided
plans to ensure Year 2000 compliance with respect to the balance of the
noncompliant MRI and CT equipment. The remediation of the MRI and CT equipment
will be made during future regularly scheduled maintenance visits.
The Company has not determined the most reasonably likely worst case scenario
and any related contingency plan to deal with such scenario. This assessment is
anticipated to be made as part of the comprehensive review of the Year 2000
Issue that is currently underway. Management does not expect the most reasonably
likely worst case scenario or the related contingency plan to have a material
impact on the Company's business, results of operation, or financial condition.
-14-
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CERTAIN SIGNIFICANT ESTIMATES
The Company operates mobile MRI Systems which are capital intensive and subject
to changes in technology. The Company primarily purchases the mobile MRI
equipment and depreciates the equipment over eight years to an estimated
residual value which typically approximates 15% of the original cost of the
equipment. The useful lives and residual values estimated by management are
considered significant estimates. Management does not currently anticipate
significant technological advances which could materially affect its estimates.
The Company is not dependent on any one customer or geographic region as a
source of its revenues. However, during 1998, 1997 and 1996, the Company
utilized the services of HSS to process approximately 18%, 28% and 29% of its
billings and collections, respectively.
FINANCIAL INSTRUMENTS
Management believes that the carrying values of its financial instruments
approximates their fair values due to the variable nature of the underlying
interest rates.
STOCK-BASED COMPENSATION
During 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. As permitted under SFAS
123, the Company has elected to continue to follow the guidance of APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for its
stock-based employee compensation arrangements. Because the Company elected the
disclosure-only method available under SFAS 123, the adoption of SFAS 123 did
not have any impact on the consolidated financial statements (see Note 7).
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS 130, REPORTING
COMPREHENSIVE INCOME, which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. For the year ended December 31, 1998, the periods ended December
31, 1997 and August 4, 1997, and the year ended December 31, 1996, the
Company did not have any components of comprehensive income or other
comprehensive income as defined in SFAS 130.
3. OTHER CURRENT LIABILITIES
Other current liabilities is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------
<S> <C> <C>
Accrued expenses $ 890,499 $ 485,569
Income taxes payable 441,355 202,720
Accrued bonuses 444,154 312,800
Accrued interest 149,810 252,370
Other 239,794 317,749
------------------- ------------------
$ 2,165,612 $ 1,571,208
=================== ==================
</TABLE>
-15-
<PAGE>
4. LONG-TERM DEBT AND LEASE OBLIGATIONS
A summary of the Company's debt at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
<S> <C> <C>
Term loan $49,375,000 $49,875,000
Revolving loan 13,839,092 4,269,092
Equipment loans 2,297,751 -
Capital lease obligations 2,922,148 1,901,001
------------------ -------------------
68,433,991 56,045,093
Less current portion 2,488,632 1,168,370
------------------ -------------------
$65,945,359 $54,876,723
================== ===================
</TABLE>
Future minimum lease payments under capital lease obligations, equipment loans,
and maturities of long-term debt as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
LONG-TERM EQUIPMENT LOANS CAPITAL LEASE
DEBT OBLIGATIONS
----------------------- --------------------- ----------------------
<S> <C> <C> <C>
Year ending December 31:
1999 $ 500,000 $ 487,507 $1,655,326
2000 500,000 474,367 739,756
2001 500,000 325,574 567,676
2002 500,000 290,348 210,852
2003 47,375,000 315,985 -
Thereafter - 403,970 -
----------------------- --------------------- ----------------------
49,375,000 2,297,751 3,173,610
Less amounts representing interest - - 251,462
----------------------- --------------------- ----------------------
$ 49,375,000 $ 2,297,751 $2,922,148
======================= ===================== ======================
</TABLE>
On August 5, 1997, the Company entered into a two-tranche $80 million credit
facility (the "Facility") that was used to fund a portion of the cash tender
offer and to refinance approximately $20 million of Predecessor indebtedness
(see Note 1). One tranche is an available revolving loan of up to $30 million
and the other tranche is a term loan of $50 million.
The Company had $13,839,092 and $49,375,000 outstanding at December 31, 1998
under the revolving and term loans, respectively. The Company has the right to
prepay the revolving or term loans, in minimum principal amounts as defined, in
whole or in part without premium or penalty subject to certain terms and
conditions of the Facility. The Facility requires the Company to reduce
commitments under the revolving loan to $15 million at August 31, 2002 and to
reduce the remaining $15 million commitment at August 31, 2003. The term loan
has scheduled quarterly principal repayments of $125,000 due beginning on
December 31, 1997 with the balance outstanding due at the final maturity date of
the Facility on August 31, 2003. The term loan also requires a mandatory
repayment within 120 days of year-end based on a calculation of Excess Cash Flow
(as defined by the Facility agreement). Management estimates the repayment due
in 1999 to be approximately $2.3 million. The $2.3 million repayment due in 1999
has been classified as long-term based on management's intent and ability to
continuously renew the borrowings on the revolving loan beyond December 31,
1999.
-16-
<PAGE>
4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
The interest rates for borrowings under the Facility are at the Company's
option. Interest on loans can be based on Eurodollar rates plus 2.25% for
revolving loans or 2.5% for term loans. Interest can also be based on the higher
of 1/2 of 1% in excess of the Federal Reserve reported certificate of deposit
rate, the rate which is 1/2 of 1% in excess of the Federal Funds Rate and the
Prime Lending Rate, plus 1.25% for revolving loans or 1.5% for term loans. All
outstanding revolver and term loans under the Facility at December 31, 1998 were
at Eurodollar rates plus the applicable percentages as required. The interest
rates on these borrowings ranged from 7.8125% to 8.1875%. The Company is also
required to pay a commitment fee equal to .50% per annum payable quarterly on
the unused portion of the revolving loan facility.
All of the issued and outstanding stock of the Company and substantially all of
the Company's assets are pledged as collateral under the Facility.
Under the Facility, the Company is required to meet certain covenants that
include a consolidated fixed charge coverage ratio, consolidated interest
coverage ratio, adjusted leverage ratio, all as defined. Other covenants include
minimum consolidated levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), restrictions on the ability of the Company to make
loans and investments, incur additional indebtedness, engage in mergers,
acquisitions, asset sales as well as other certain covenants as defined in the
Facility agreement.
The Company has capital lease and equipment loan obligations that primarily
relate to seven (7) MRI Systems and one (1) CT system. The cost and accumulated
amortization of property securing capital lease obligations at December 31, 1998
were approximately $7,826,000 and $1,892,000, respectively. Interest rates
related to the capital leases range from approximately 8.0% to 11.6%.
On January 2, 1998, the Company refinanced approximately $843,000 of short and
long-term debt related to the Mid American Imaging, Inc. ("MAI") and Dimensions
Medical Group, Inc. ("DMG") acquisition described in Note 13. A borrowing on the
Company's revolving credit facility was used to refinance this debt. The
interest rates associated with the refinanced debt ranged from 8.3% to 9.4%.
During March 1997, the Company paid off the remaining principal balance of three
capital lease obligations totaling $4,236,000. The total amount paid to
extinguish the capital leases totaled $4,532,000. The difference between the
amount paid to extinguish the capital leases and the net carrying amount of the
debt totaled $296,000, relating primarily to prepayment penalties, and has been
recorded as an extraordinary loss, net of income taxes, in the consolidated
statements of operations. The interest rates under the capital leases ranged
from 10.6% to 13.5%.
During the period ended August 4, 1997, the Predecessor entered into capital
leases or financing arrangements of $3.1 million related to the purchase of two
new 1.0 Tesla mobile MRI Systems that cost approximately $3.5 million. Interest
rates related to the capital leases or financing arrangements approximated 9%.
The $3.1 million financed was subsequently refinanced as part of the $80 million
credit facility the Company entered into on August 5, 1997.
-17-
<PAGE>
4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
The long-term debt and capital lease obligations balance at December 31, 1997
included approximately $27,000 of capital lease obligations due to third parties
related to equipment at a radiation oncology center. Also, during September
1997, outstanding debt of approximately $526,000 related to a freestanding
full-service diagnostic imaging center was paid off by a third party (see Note
10). The Predecessor had treated these centers as discontinued operations and
sold the radiation oncology center in October 1994 and the freestanding
full-service diagnostic imaging center in June 1995. Although the buyers assumed
all future operating liabilities of the centers, the Company remained obligated
on the related capital lease obligations. Accordingly, the Company has recorded
an offsetting receivable for the lease receivables due from the purchaser of the
centers. Such lease receivables are secured by the equipment and accounts
receivable of the centers.
The Company leases certain tractors for the transportation of mobile MRI
Systems. Operating lease expenses related to such tractor rentals totaled
$601,000 for the year ended December 31, 1998, $160,000 and $211,000 for the
periods ended December 31, 1997 and August 4, 1997, respectively, and $346,000
for the year ended December 31, 1996.
The future minimum lease payments (excluding variable mileage costs of
approximately $.065 per mile) required under these operating leases are as
follows:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C>
1999 $ 671,000
2000 669,000
2001 591,000
2002 521,000
2003 393,000
Thereafter 134,000
-------------------
Total $ 2,979,000
===================
</TABLE>
5. INCOME TAXES
Income tax expense (benefit) for the year ended December 31, 1998, the periods
ended December 31, 1997 and August 4, 1997, and the year ended December 31, 1996
were as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED
---------------------------------------------------------- -------------------------------------------------------
YEAR PERIOD PERIOD YEAR YEAR PERIOD PERIOD YEAR
ENDED AUGUST 5 TO JANUARY 1 TO ENDED ENDED AUGUST 5 TO JANUARY 1 ENDED
DECEMBER 31, DECEMBER 31, AUGUST 4, DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 4, DECEMBER 31,
1998 1997 1997 1996 1998 1997 1997 1996
---------------------------------------------------------- -------------------------------------------------------
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR)(PREDECESSOR)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ 471,191 $ 74,000 $ 26,000 $ - $ 2,522,00 $ 338,635 $1,082,407 $ 1,014,000
State 255,761 135,000 129,000 (110,000) 514,239 (7,635) 186,000 274,000
---------------------------------------------------------- -------------------------------------------------------
$ 726,952 $ 209,000 $ 155,000 $(110,000) $ 3,036,24 $ 331,000 $1,268,407 $ 1,288,000
========================================================== =======================================================
<CAPTION>
TOTAL
-------------------------------------------------------
YEAR PERIOD PERIOD YEAR
ENDED AUGUST 5 TO JANUARY 1 TO ENDED
DECEMBER 31, DECEMBER 31, AUGUST 4, DECEMBER 31,
1998 1997 1997 1998
-------------------------------------------------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Federal $ 2,993,200 $ 412,635 $ 1,108,407 $ 1,014,000
State 770,000 127,365 315,000 164,000
-------------------------------------------------------
$ 3,763,200 $ 540,000 $ 1,423,407 $ 1,178,000
=======================================================
</TABLE>
-18-
<PAGE>
5. INCOME TAXES (CONTINUED)
In addition to the deferred tax expense disclosed above, deferred tax benefits
of approximately $2,100,000 and $245,000 for the periods ended December 31, 1997
and August 4, 1997, respectively, and $1,360,000 for the year ended December 31,
1996 were allocated to Predecessor equity or goodwill in connection with the tax
deductions generated by the exercise of certain Predecessor stock options and
warrants.
The difference between the Company's effective income tax rate and its statutory
rate is reconciled below:
<TABLE>
<CAPTION>
PERIOD PERIOD
YEAR ENDED AUGUST 5 TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 4, DECEMBER 31,
1998 1997 1997 1996
-----------------------------------------------------------------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Income tax expense at statutory rate $2,639,000 $140,690 $1,134,410 $1,220,213
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of
federal income tax benefit 286,200 28,310 207,900 110,000
Nondeductible goodwill amortization 838,000 371,000 - -
Change of state net operating loss
carryforward - - 81,097 (61,000)
Decrease in valuation allowance - - - (103,000)
Other items - - - 11,787
-----------------------------------------------------------------------
$3,763,200 $540,000 $1,423,407 $1,178,000
=======================================================================
</TABLE>
The components of the net deferred tax (liability) asset recognized in the
consolidated balance sheets of the Company are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,570,560 $3,583,000
Stock option compensation 540,000 540,000
Nondeductible accrued expenses 62,776 244,000
Alternative minimum tax credits 115,000 -
Other 44,210 33,000
------------------- -------------------
3,332,546 4,400,000
Deferred tax liabilities:
Diagnostic medical equipment, principally due
to differences in depreciation (4,560,800) (2,592,000)
------------------- -------------------
Net deferred tax (liability) asset $(1,228,254) $1,808,000
=================== ===================
</TABLE>
-19-
<PAGE>
5. INCOME TAXES (CONTINUED)
Deferred income taxes are provided to account for temporary differences between
financial statement accounting and income tax reporting and relate principally
to differences in reporting for diagnostic medical equipment, depreciation and
net operating loss carryforwards. There was no valuation allowance as of
December 31, 1998 and 1997 and the net change in the total valuation allowance
for the year ended December 31, 1996 was a decrease of $103,000. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods that the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits for these deductible
differences. The amount of the deferred tax asset considered realizable,
however, could be reduced if estimates of future taxable income during the
carryforward period are reduced.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $6,100,000, which are available to
offset future federal taxable income through 2013. The Company has approximately
$8,200,000 of available carryforwards as of December 31, 1998 for state
purposes, which are available principally through 2012.
6. STOCKHOLDERS' EQUITY
In accordance with the Predecessor's March 1992 initial public offering, the
Predecessor issued warrants to purchase shares of common stock of the
Predecessor. Pursuant to the warrant agreement, the outstanding warrants were
recapitalized to reflect the July 1995 5% and January 1997 7% common stock
dividends. Accordingly, the outstanding warrants' exercise price of $7.00
entitled the holder to purchase 1.1235 shares of common stock of the
Predecessor. During January through March 4, 1997 (the warrants expired at 5:00
p.m. on March 4, 1997), 1,677,000 warrants were exercised and the Predecessor
issued 1,882,000 shares of common stock of the Predecessor. The Predecessor
received net cash proceeds of approximately $11.7 million as a result of such
warrant exercises. The warrants ceased trading on March 5, 1997.
7. STOCK OPTION PLANS
In connection with the MAI acquisition described in Note 13, on January 2, 1998,
a former MAI officer and current Company employee converted a $100,000 bonus,
payable by MAI on the sale of MAI (the "Bonus"), into fully vested options (the
"MAI Sale Options") to purchase 1,563 shares of Holding common stock. The
exercise price for shares of Holding common stock issuable upon exercise of the
MAI Sale Options is equal to 36% of the per share Holding Equity Value (as
defined below), or $36 per share of Holding common stock. The Bonus was recorded
as stock option compensation by the Company. The MAI Sale Options contain the
same terms and conditions as the Holding rollover options. The maximum term of
the MAI Sale Options is ten years.
-20-
<PAGE>
7. STOCK OPTION PLANS (CONTINUED)
In connection with the acquisition described in Note 1, on September 29, 1997,
certain fully vested options to acquire shares of common stock of the
Predecessor held by officers and employees of the Predecessor were converted
into fully vested options to acquire 21,094 shares of Holding common stock.
Similar to the push-down accounting applied in recording the transaction
described in Note 1, the aggregate value of the options to acquire the
Predecessor common stock converted (approximately $1.35 million) was recorded as
stock option compensation by the Company. The exercise price for converted
options has been determined in a manner to provide the holders of the
Predecessor options with the benefit of the excess of the purchase price of
shares of the Predecessor common stock by Holding ($11.75 per share) over the
exercise price applicable to the shares of the Predecessor common stock that
would have been acquired upon exercise of the Predecessor option being
converted, adjusted to reflect the revised capitalization structure of Holding
(as compared to the Predecessor). The average exercise price of the Predecessor
options prior to the rollover was 36% of the $11.75 per share price paid by
Holding for shares of the Predecessor common stock, or $4.23 per share. The
average exercise price for shares of Holding common stock issuable pursuant to
options issued pursuant to the rollover is equal to 36% of the per share Holding
Equity Value (as defined below), or $36 per share of Holding common stock. The
"Holding Equity Value" is equal to the sum of the cash contributed by Apollo
(approximately $33.5 million) in connection with the acquisition of the
Predecessor by Holding, plus the aggregate value of the Predecessor options
being converted (approximately $1.35 million). The maximum term of the options
is ten years. The weighted-average remaining contractual life of the Holding
rollover options (including the MAI Sale Options) as of December 31, 1998 and
1997 is approximately 8.8 and 9.8 years, respectively.
In addition, on October 14, 1997, Holding adopted a stock option plan (the
"Three Rivers Option Plan"), pursuant to which Holding would grant to certain
officers and employees of the Company options to purchase up to 35,000 shares of
Holding common stock. The maximum term of the options is ten years. The
weighted-average remaining contractual life of the Three Rivers Option Plan
options outstanding as of December 31, 1998 and 1997, is approximately 8.9 and
9.8 years, respectively. The exercise price for each share issuable upon
exercise of options issued pursuant to the Three Rivers Option Plan initial
grant on October 14, 1997 will be $100.00, the per share equity value of
Holding. Subject to certain exceptions, one half of such options will vest over
four years based solely on continued employment with the Company. The other half
of such options will vest after seven and one-half years, subject to
acceleration if certain per share equity targets are achieved, based on
continued employment with the Company.
-21-
<PAGE>
7. STOCK OPTION PLANS (CONTINUED)
Following is a summary of the status of the Holding rollover options (including
MAI Sale Options) and the Three Rivers Option Plan options during the year ended
December 31, 1998 and the period August 5, 1997 to December 31, 1997:
<TABLE>
<CAPTION>
THREE RIVERS HOLDING CORPORATION
ROLLOVER OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED-AVERAGE
EXERCISE PRICE
NUMBER PER SHARE
------------------------- -------------------------
<S> <C> <C>
Balance--August 5, 1997 -- $--
Granted 21,094 $36
------------------------- -------------------------
Balance--December 31, 1997 21,094 $36
Granted 1,563 $36
------------------------- -------------------------
Balance--December 31, 1998 22,657 $36
========================= =========================
</TABLE>
<TABLE>
<CAPTION>
THREE RIVERS HOLDING CORPORATION
OPTION PLAN OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED-AVERAGE
EXERCISE PRICE
NUMBER PER SHARE
------------------------- -------------------------
<S> <C> <C>
Balance--August 5, 1997 -- $ --
Granted 29,996 $100
------------------------- -------------------------
Balance--December 31, 1997 29,996 $100
Granted 1,800 $100
Granted 3,204 $225
------------------------- -------------------------
Balance--December 31, 1998 35,000 $111.50
========================= =========================
</TABLE>
The Predecessor's 1991 and 1996 Employee Stock Option Plans (the "Employee
Plans") and Director Stock Option Plan for nonemployee directors (the
"Directors' Plan") provided for the granting of options to purchase shares of
Predecessor common stock at the fair market value on the date of grant. Options
granted under the Employee Plans and the Directors' Plan had to be exercised
within ten years of the date of grant and while the recipient was an employee or
director of the Predecessor. All options granted under these plans were
nonqualified stock options.
During the period ended August 4, 1997, stock options covering 82,367 shares of
common stock were exercised pursuant to the Predecessor's Employee Plans. The
Predecessor received approximately $312,000 from such stock option exercises.
Upon completion of the merger on September 29, 1997 (see Note 1), no options to
purchase shares and no additional shares were available for future grant
pursuant to the Predecessor Employee Plans or the Directors' Plan.
-22-
<PAGE>
7. STOCK OPTION PLANS (CONTINUED)
The total number of options to purchase shares of Predecessor common stock and
the exercise prices of any options granted pursuant to the Predecessor's
Employee Plans and Directors' Plan prior to July 1995 have been adjusted to
reflect the July 1995 5% common stock dividend (see Note 12).
In January 1997, the Predecessor granted a 7% common stock dividend. The total
number of options to purchase shares of Predecessor common stock and the
exercise prices of any options granted pursuant to the Employee Plans and the
Directors' Plan have been adjusted to reflect the January 1997 dividend.
<TABLE>
<CAPTION>
PREDECESSOR EMPLOYEE OPTIONS OUTSTANDING
-------------------------------------------
NUMBER PRICE PER SHARE
---------------------- --------------------
<S> <C> <C>
Balance--December 31, 1995 780,042 $1.28-$3.56
Granted 309,770 $3.92-$6.43
Exercised (439,900) $1.28-$3.11
Expired (10,480) $3.11
----------------------
Balance--December 31, 1996 639,432 $1.28-$6.43
Granted 12,000 $9.81
Exercised or converted into Holding stock option plan (650,758) $3.11-$6.43
Expired (674) $3.11
----------------------
Balance--September 29, 1997 --
======================
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR DIRECTOR
OPTIONS OUTSTANDING
-------------------------------------------
NUMBER PRICE PER SHARE
---------------------- --------------------
<S> <C> <C>
Balance--Decembr 31, 1995 34,188 $1.66-$4.09
Granted 6,741 $7.94
Exercised (23,100) $1.66-$4.09
Expired (2,100) $4.09
----------------------
Balance--December 31, 1996 15,729 $1.66-$7.94
Exercised (15,729) $1.66-$7.94
----------------------
Balance--September 29, 1997 --
======================
</TABLE>
In compliance with SFAS 123, the Company has elected to provide the pro forma
disclosure. As such, the net income (loss) for the year ended December 31, 1998,
for the periods ended December 31, 1997 and August 4, 1997, and for the year
ended December 31, 1996 adjusted to reflect pro forma amounts are indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD AUGUST 5 TO PERIOD JANUARY 1 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 4, 1997 DECEMBER 31, 1996
------------------- -------------------- ----------------------- -----------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Net income (loss):
As reported $3,999,263 $ (126,205) $1,732,094 $2,410,861
Pro forma 3,897,263 (171,205) 1,714,094 2,017,861
</TABLE>
-23-
<PAGE>
7. STOCK OPTION PLANS (CONTINUED)
The fair value of stock options granted during the year ended December 31, 1998
and the period ended December 31, 1997 was estimated, exclusive of a volatility
assumption, which results in a minimum value. The fair value of stock options
granted during the period ended August 4, 1997 and the year ended December 31,
1996 was estimated on the date of grant using the Black-Scholes option-pricing
model. The weighted-average fair values and related assumptions were:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD AUGUST 5 TO PERIOD JANUARY 1 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 4, 1997 DECEMBER 31, 1996
------------------- -------------------- ----------------------- -----------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Weighted-average fair value $102,000 $45,000 $18,000 $393,000
Expected volatility -- -- 22% 33%
Risk-free interest rate 4.68% 6.8% 7.00% 7.05%
Expected lives 3 years 3 years 3 years 3 years
</TABLE>
Dividend yield for all grants was assumed to be insignificant.
The effect on the year ended December 31, 1998, the periods ended December 31,
1997 and August 4, 1997 and for the year ended December 31, 1996 of applying
SFAS 123 for providing pro forma disclosures are not likely to be representative
of the effects on pro forma net income for future years because the number of
option grants and the fair values assigned to the grants could differ.
8. BENEFIT PLANS
The Company maintains an annual bonus plan for key executives and employees
which is based primarily upon the pretax earnings of the Company. The Company
expensed approximately $969,000 for the year ended December 31, 1998, $349,000
and $605,000 for the periods ended December 31, 1997 and August 4, 1997,
respectively, and $584,000 for the year ended December 31, 1996 related to this
plan.
The Company maintains and administers an employee savings plan for all employees
pursuant to Internal Revenue Code Section 401(k). The plan provides for
discretionary contributions as determined by the Company's Board of Directors.
The Company contributed approximately $76,000 for the year ended December 31,
1998, $19,000 and $26,000 for the periods ended December 31, 1997 and August 4,
1997, respectively, and $34,000 for the year ended December 31, 1996.
9. RELATED PARTY TRANSACTIONS
On August 5, 1997, the Company entered into a ten-year management consulting
agreement with Apollo pursuant to which Apollo is to receive a fee of $250,000
per year. The Company recorded expense of approximately $250,000 and $100,000
related to this consulting agreement for the year ended December 31, 1998 and
the period ended December 31, 1997, respectively.
-24-
<PAGE>
9. RELATED PARTY TRANSACTIONS (CONTINUED)
A certain director of the Predecessor was a director of, consultant to and
shareholder of DVI Inc., the parent of DVI Financial Services Inc. ("DVI"). This
director resigned as a director of the Company in conjunction with the purchase
transaction described in Note 1. During 1996, the Predecessor financed the
acquisition of a new mobile MRI System with DVI. The Predecessor and DVI entered
into a 60-month capital lease financing approximately $1.5 million at an
interest rate of approximately 9.5%. Total payments to DVI during the period
January 1, 1997 to August 4, 1997 and the year ended December 31, 1996 with
respect to capital lease obligations were approximately $223,000 and $100,000,
respectively, including $77,000 and $36,000, respectively, of interest expense
associated with such capital leases.
A former shareholder/director of the Predecessor was also a consultant to the
Predecessor, and the Predecessor had entered into a five-year consulting
agreement with him through November 1996 pursuant to which he was to receive a
fee of $75,000 per year. On March 27, 1996, the Predecessor prepaid the
remaining $50,000 due under the Consulting Agreement and terminated the
Consultant Agreement. Fees paid to this former shareholder/director totaled
approximately $75,000 for 1996.
10. COMMITMENTS AND CONTINGENCIES
The leases for the Company's principal facilities expire in April 2001 and
November 2002. Rent expense for the principal facilities was $180,000 for the
year ended December 31, 1998, $37,000 and $51,000 for the periods ended December
31, 1997 and August 4, 1997, respectively, and $76,000 for the year ended
December 31, 1996. Future minimum lease payments under these leases are as
follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM LEASE
PAYMENTS
------------------------
<S> <C>
Year ended December 31:
1999 $183,000
2000 186,000
2001 120,000
2002 79,000
------------------------
$568,000
========================
</TABLE>
Pursuant to the mobile MRI System maintenance contracts, which begin upon
expiration of the manufacturer's warranty period of generally 12 to 18 months
and which contracts expire at various dates through the year 2003, the Company
is currently obligated to pay approximately $257,000 per month for maintenance
of equipment. The Company recognized expense related to mobile MRI System
maintenance of approximately $2,279,000 for the year ended December 31, 1998,
approximately $668,000 and $746,000 for the periods ended December 31, 1997 and
August 4, 1997, respectively, and approximately $1,111,000 for the year ended
December 31, 1996.
-25-
<PAGE>
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During July 1998, the Company entered into a diagnostic imaging application
software purchase agreement with a MRI System vendor. The agreement requires
the Company to purchase a certain amount of application software options over
a three-year period beginning July 1, 1998. The total amount of the purchase
commitment is approximately $1,018,000 payable, at a minimum, in quarterly
installments. At the end of the agreement, if the Company has selected less
than the required amount of software options, the Company is entitled to use
the determined value of the difference to acquire other commercially
available products or services from the vendor within two years of the
contract termination.
In November 1992, the Predecessor issued a letter-of-credit in the amount of
$198,500 pursuant to a lease transaction related to its freestanding
full-service diagnostic imaging center. In exchange for restructuring the
terms of the debt of this center, the Predecessor increased the outstanding
letter-of-credit to an aggregate $400,000. On June 30, 1995, the Predecessor
completed the sale of substantially all of the assets of this center.
Although the buyer assumed all future operating liabilities of the center,
the Company remained obligated on the related capital lease obligations.
During September 1997, the outstanding debt of approximately $526,000 related
to this center was paid off by a third party and the lessor subsequently
terminated the $400,000 letter-of-credit (see Note 4).
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1998, the Company incurred approximately
$334,000 of indebtedness under a financing arrangement to purchase diagnostic
imaging equipment. The Company did not enter into any capital lease arrangements
during the year ended December 31, 1998; however, several capital lease
arrangements were assumed as part of the acquisitions described in Note 13. The
Predecessor entered into various capital leases or financing arrangements
(including new MRI Systems and MRI System upgrades) of approximately $3,100,000
during the period ended August 4, 1997 and $15,135,000 during the year ended
December 31, 1996. These amounts were recorded as long-term debt and obligations
under capital leases and as diagnostic imaging equipment.
On January 2, 1998, the Company refinanced approximately $843,000 of short- and
long-term debt related to the MAI and DMG acquisition as described in Note 13. A
borrowing on the Company's revolving credit facility was used to refinance this
debt. In connection with the purchase transaction described in Note 1, the
Company refinanced various capital leases and long-term debt of approximately
$20 million during the period August 5, 1997 to December 31, 1997. The
Predecessor did not refinance any capital leases or long-term debt during the
period January 1, 1997 to August 4, 1997; however, the Predecessor did refinance
capital lease obligations of approximately $2,474,000 during the year ended
December 31, 1996.
Interest paid totaled $5,998,000 for the year ended December 31, 1998,
$1,760,000 and $1,238,000 for the periods ended December 31, 1997 and August 4,
1997, respectively, and $2,062,000 for the year ended December 31, 1996.
Income taxes paid totaled $435,000 for the year ended December 31, 1998, $4,000,
and $19,000 for the periods ended December 31, 1997 and August 4, 1997,
respectively, and $240,000 for the year ended December 31, 1996.
-26-
<PAGE>
11. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
Noncash investing and financing activities for the year ended December 31, 1998
include $100,000 of a bonus for a former MAI officer and current Company
employee that was converted into options to acquire shares of Holding common
stock. During the period ended December 31, 1997, certain options to acquire
shares of common stock of the Predecessor held by officers and employees of the
Predecessor were converted into options to acquire shares of Holding common
stock. The aggregate value of the options to acquire the Predecessor common
stock that were converted approximated $1.35 million for the period ended
December 31, 1997.
On January 2, 1998, the Company purchased all of the common stock of Mid
American Imaging, Inc. and Dimensions Medical Group, Inc., and related assets
for cash consideration of approximately $10,418,000. In conjunction with the
acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 16,282,000
Cash paid for common stock (10,418,000)
--------------------
Liabilities assumed $ 5,864,000
====================
</TABLE>
On August 17, 1998, the Company purchased all of the common stock of RIA
Management Services, Inc. ("RIA") for cash consideration of approximately
$2,135,000. In conjunction with the acquisition, liabilities were assumed
as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 3,366,000
Cash paid for common stock (2,135,000)
--------------------
Liabilities assumed $ 1,231,000
====================
</TABLE>
12. COMMON STOCK DIVIDENDS
On January 14, 1997, the Predecessor issued 247,130 common shares in accordance
with a 7% common stock dividend for all shareholders of record on January 10,
1997. The December 31, 1996 financial statements have been adjusted to reflect
this transaction as of that date. In accordance with the Predecessor's Warrant
Agreement, the Predecessor's publicly traded warrants were recapitalized to
reflect the common stock dividend. As a result, each warrant certificate
entitled the holder to purchase 1.1235 shares of stock for $7.00. In July 1995,
the Predecessor issued a similar 5% common stock dividend. Such publicly traded
warrants expired on March 4, 1997.
-27-
<PAGE>
13. ACQUISITIONS
On January 2, 1998, Canton Holding Corp., a wholly owned subsidiary of the
Company, acquired all of the outstanding common stock of MAI and DMG. The
acquisition was accounted for as a purchase and, accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed. The
purchase price consisted of approximately $10.4 million in cash plus the
assumption of approximately $5.1 million in financing arrangements. The
goodwill recorded as a result of this acquisition was approximately $10
million, which is being amortized using the straight-line method over 20
years. The acquisition was primarily funded by an $11.5 million borrowing on
the Company's revolving credit facility that was also used to refinance
approximately $843,000 of existing MAI and DMG indebtedness. The results of
operations of MAI and DMG are included with the results of the Company
beginning January 2, 1998. Under the terms of the acquisition agreement,
$1,725,000 of the purchase price was placed in escrow to cover certain
purchase price adjustments, indemnity obligations and recourse for certain
indebtedness obligations.
On August 17, 1998, the Company acquired all of the outstanding common stock
of RIA. The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed.
The purchase price consisted of approximately $2.1 million in cash plus the
assumption of approximately $1.1 million in financing arrangements. The
goodwill recorded as a result of this acquisition was approximately $2
million, which is being amortized using the straight-line method over 20
years. The acquisition was primarily funded from operating cash on hand and a
$1 million borrowing on the Company's revolving credit facility. The results
of operations of RIA are included with the results of the Company beginning
August 17, 1998. Under the terms of the acquisition agreement, $150,000 of
the purchase price was placed in escrow to cover certain indemnity
obligations.
The unaudited pro forma information below presents combined results of
operations as if the MAI, DMG and RIA acquisitions had occurred at the beginning
of the year ended December 31, 1998, the period August 5 to December 31, 1997
and the period January 1 to August 4, 1997. The unaudited pro forma information
is not necessarily indicative of the results of operations of the combined
company had the acquisitions actually occurred at the beginning of the periods
presented, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD AUGUST 5 TO PERIOD JANUARY 1 TO
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 4, 1997
---------------------------------------------------------------------
(PREDECESSOR)
<S> <C> <C> <C>
Revenues $46,190,000 $16,683,000 $21,216,000
Net income (loss) $ 4,147,000 $ (94,000) $ 1,774,000
</TABLE>
-28-
<PAGE>
14. SALES TAX REFUND
During September 1996, the Company received formal notification of a state sales
tax refund of approximately $300,000, net of expenses. The refund is the result
of sales tax paid to a certain state over a period of time which the Company
determined (by obtaining a private letter ruling from the state) was actually
exempt from such tax. Payment of the refund was received in January 1997.
-29-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998 *
----------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,229,370 $ 1,402,398
Accounts receivable - net of allowance for doubtful accounts 5,101,117 4,833,538
Other current assets 555,850 551,959
----------------- ------------------
Total current assets 6,886,337 6,787,895
Property and equipment, at cost 51,898,915 48,852,882
Less accumulated depreciation and amortization (9,609,592) (7,848,337)
----------------- ------------------
Property and equipment, net 42,289,323 41,004,545
Debt issuance costs, net of accumulated amortization 1,805,556 1,909,722
Goodwill, net of accumulated amortization 60,093,750 60,908,775
Deposits and other assets 1,205,696 1,155,534
----------------- ------------------
Total assets $112,280,662 $111,766,471
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,029,941 $ 708,519
Accrued wages and related taxes 120,960 347,037
Current portion of long-term debt and capital
lease obligations 2,270,301 2,488,632
Other current liabilities 1,943,725 2,165,612
----------------- ------------------
Total current liabilities 5,364,927 5,709,800
Deferred tax liability 2,047,254 1,228,254
Long-term debt and capital lease obligations - less current portion 65,080,661 65,945,359
Common stock 3,356 3,356
Additional paid-in capital 35,006,644 35,006,644
Retained earnings 4,777,820 3,873,058
----------------- ------------------
Total liabilities and stockholders' equity $112,280,662 $111,766,471
================= ==================
</TABLE>
* Derived from audited financial statements.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-30-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Revenues $ 11,939,018 $ 10,384,216
Costs and Expenses:
Operating expenses 4,615,864 3,487,891
Depreciation and amortization 2,602,680 2,373,604
Selling, general and administrative 1,383,875 1,295,799
Stock option compensation - 100,000
Interest expense, net of interest income 1,374,837 1,624,956
-------------------- ---------------------
Total costs and expenses 9,977,256 8,882,250
-------------------- ---------------------
Income before income taxes 1,961,762 1,501,966
Provision for income taxes 1,057,000 870,000
-------------------- ---------------------
Net income $ 904,762 $ 631,966
==================== =====================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-31-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 904,762 $ 631,966
Adjustments to reconcile net income to net cash provided by operating
activities:
Stock option compensation - 100,000
Depreciation and amortization 2,602,680 2,373,604
Amortization of debt issuance costs 104,166 104,166
Deferred taxes 819,000 674,000
Other (29,696) 5,403
Changes in certain operating assets and liabilities:
Accounts and notes receivable (267,579) (448,505)
Other current assets (10,651) (147,842)
Accounts payable and other (357,554) 60,709
Accrued wages and related taxes (226,077) (3,476)
----------------- -----------------
Net cash provided by operating activities 3,539,051 3,350,025
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (2,605,308) (2,735,576)
Payment for purchase of acquired entities, net of cash acquired - (10,452,151)
Other (29,984) (78,743)
----------------- -----------------
Net cash used in investing activities (2,635,292) (13,266,470)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility 1,000,000 12,470,000
Refinancing of short and long-term debt - (842,667)
Principal payments under revolving credit facility (1,400,000) (1,000,000)
Principal payments under term loan credit facility (125,000) (125,000)
Principal payments under long-term debt and capital leases (551,787) (553,079)
----------------- -----------------
Net cash (used in) provided by financing activities (1,076,787) 9,949,254
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (173,028) 32,809
Cash and cash equivalents - beginning of period 1,402,398 1,456,626
----------------- -----------------
Cash and cash equivalents - end of period $ 1,229,370 $ 1,489,435
================= =================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-32-
<PAGE>
SMT Health Services Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by SMT Health Services Inc. (the "Company") in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the Company, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1999, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999.
The provision for income taxes for the three month period ended March 31,
1999 is higher than the statutory federal rate primarily as a result of
non-deductible goodwill amortization expense.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 130, REPORTING COMPREHENSIVE INCOME, which
establishes standards for reporting and displaying comprehensive income and
its components in the financial statements. For the three months ended March
31, 1999, the Company did not have any components of comprehensive income or
other comprehensive income as defined in SFAS 130.
2. ACQUISITIONS
On January 2, 1998, Canton Holding Corp., a wholly owned subsidiary of the
Company, acquired all of the outstanding common stock of Mid American
Imaging, Inc. ("MAI") and Dimensions Medical Group, Inc. ("DMG"). The
acquisition was accounted for as a purchase and accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed. The
purchase price consisted of approximately $10.4 million in cash plus the
assumption of approximately $5.1 million in financing arrangements. The
goodwill recorded as a result of this acquisition was approximately $10
million, which is being amortized using the straight-line method over 20
years. The acquisition was primarily funded by an $11.5 million borrowing on
the Company's revolving credit facility that was also used to refinance
approximately $843,000 of existing MAI and DMG indebtedness. The results of
operations of MAI and DMG are included with the results of the Company
beginning January 2, 1998. Under the terms of the acquisition agreement,
$1,725,000 of the purchase price was placed in escrow to cover certain
purchase price adjustments, indemnity obligations and recourse for certain
indebtedness obligations.
On August 17, 1998, the Company acquired all of the outstanding common stock
of RIA Management Services, Inc. ("RIA"). The acquisition was accounted for
as a purchase and, accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed. The purchase price consisted of
approximately $2.1 million in cash plus the assumption of approximately $1.1
million in financing arrangements. The goodwill recorded as a result of this
acquisition was approximately $2 million, which is being amortized using the
straight-line method over 20 years. The acquisition was primarily funded from
operating cash on hand and a $1 million borrowing on the Company's revolving
credit facility. The results of operations of RIA are included with the
results of the Company beginning August 17, 1998. Under the terms of the
acquisition agreement, $150,000 of the purchase price was placed in escrow to
cover certain indemnity obligations.
-33-
<PAGE>
Item 7(b). Pro Forma Financial Information
Pro forma financial information that would be required
pursuant to Article 11 of Regulation S-X.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information gives effect to Alliance Imaging, Inc.'s ("Alliance") acquisition
("SMT acquisition") of all the outstanding common stock of Three Rivers
Holding Corp. ("Holding"), the parent corporation of SMT Health Services Inc.
("SMT"), in a stock-for-stock merger. At the time of the merger, Holding was
wholly owned by affiliates of Apollo Management L.P. ("Apollo"), which held
approximately 82.6% of Alliance's outstanding common stock. Accordingly, the
merger has been accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests. This requires the
assets, liabilities and operating results of Alliance and SMT to be combined,
using the historical amounts of each combining entity, prospectively from the
date when both entities were under Apollo's control, which was December 18,
1997. As the operating results of SMT from December 18, 1997 through December
31, 1997 are not significant as compared to the operating results of Alliance
for the year ended December 31, 1997, Alliance has chosen December 31, 1997
to be the effective date for giving accounting recognition to the combination.
The following unaudited pro forma condensed combined balance sheet
as of March 31, 1999, has been prepared as if the acquisition had occurred on
March 31, 1999.
The following unaudited pro forma condensed combined statement of
income for the three months ended March 31, 1999, has been prepared as if the
acquisition had occurred on January 1, 1999.
The following unaudited pro forma condensed combined statement of
income for the year ended December 31, 1998 has been prepared as if the
acquisition had occurred on January 1, 1998.
The unaudited pro forma condensed combined financial information is
based on the consolidated financial statements of Alliance giving effect to
the SMT acquisition under the assumptions and adjustments outlined in the
accompanying notes to unaudited pro forma condensed combined balance sheet
and statements of income. Such pro forma adjustments are based upon available
information and upon certain assumptions that the Company's management
believes are reasonable under the circumstances. The unaudited pro forma
condensed combined balance sheet and statements of income are provided for
comparative purposes only and do not purport to represent the results that
would have been obtained had the SMT acquisition occurred on the date
indicated or that may be achieved in the future.
The unaudited pro forma condensed combined balance sheet and
statements of income and accompanying notes should be read in conjunction
with the consolidated financial statements of Alliance contained in
Alliance's Annual Report on Form 10-K for the year ended December 31, 1998
and its Quarterly Report on Form 10-Q for the three months ended March 31,
1999; and SMT's audited consolidated financial statements for the year ended
December 31, 1998 and SMT's unaudited condensed consolidated financial
statements for the three months ended March 31, 1999 included in this Form
8-K/A.
-34-
<PAGE>
Alliance Imaging, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Historical Historical
ASSETS Alliance SMT Adjustments Pro Forma
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and short-term investments $ 5,535 $ 1,229 $ - $ 6,764
Accounts receivable, net of allowance for
doubtful accounts 48,659 5,101 - 53,760
Deferred income taxes 3,679 - - 3,679
Prepaid expenses 2,780 - - 2,780
Other receivables and other current assets 515 556 - 1,071
------------- ------------- ------------ ------------
Total current assets 61,168 6,886 - 68,054
Equipment, at cost 297,466 51,899 - 349,365
Less accumulated depreciation (87,943) (9,610) - (97,553)
------------- ------------- ------------ ------------
209,523 42,289 - 251,812
Goodwill 108,087 60,094 - 168,181
Other intangibles 74,336 - - 74,336
Deferred financing costs 12,322 1,806 - 14,128
Deposits and other assets 11,309 1,206 - 12,515
------------- ------------- ------------ ------------
Total assets $ 476,745 $ 112,281 $ - $ 589,026
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,246 $ 1,030 $ - $ 4,276
Accrued compensation and related expenses 5,174 121 - 5,295
Other accrued liabilities 23,550 1,944 - 25,494
Current portion of long-term debt 17,678 2,270 - 19,948
------------- ------------- ------------ ------------
Total current liabilities 49,648 5,365 - 55,013
Long-term debt, net of current portion 451,618 65,081 - 516,699
Other liabilities 627 - - 627
Deferred income taxes 38,390 2,047 - 40,437
Redeemable preferred stock 17,269 - - 17,269
Common stock 41 3 (3) (a) 57
16 (c)
Additional paid-in (deficit) capital (59,672) 35,007 (35,007) (a) (24,804)
34,868 (d)
Retained (deficit) earnings (21,176) 4,778 126 (b) (16,272)
------------- ------------- ------------ ------------
Total liabilities and stockholders' equity $ 476,745 $ 112,281 $ - $ 589,026
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
-35-
<PAGE>
Alliance Imaging, Inc.
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
March 31, 1999
(in thousands)
( a ) Represents elimination of SMT's common stock of $3 and additional paid-in
capital of $35,007 as of March 31, 1999.
( b ) Represents elimination of SMT's accumulated deficit of $126 as of
December 31, 1997 (the effective date that both SMT and Alliance
were under Apollo's control).
( c ) Assumes 1,644 Alliance shares, $0.01 par value, issued for the
336 outstanding SMT shares $ 16
-------------
-------------
( d ) SMT total assets as of March 31, 1999 $ 112,281
SMT total liabilities as of March 31, 1999 (72,493)
-------------
SMT net assets as of March 31, 1999 39,788
SMT retained earnings from December 31, 1997 to
March 31, 1999 (4,904)
Amount assigned to common stock per (c) above (16)
-------------
Amount assigned to additional paid-in capital $ 34,868
-------------
-------------
-36-
<PAGE>
Alliance Imaging, Inc.
Unaudited Pro Forma Condensed Combined Statement of Income
Three Months Ended March 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Historical
Alliance SMT Adjustments Pro Forma
---------- ----------- ----------- -----------
<S> C> <C> <C> <C>
Revenues $64,381 $ 11,939 $ (579) (a) $75,741
Cost and expenses:
Operating expenses, excluding depreciation 31,635 4,616 (579) (a) 35,672
Depreciation expense 9,246 1,767 - 11,013
Selling, general and administrative expenses 6,331 1,383 - 7,714
Amortization expense, primarily goodwill 2,772 836 - 3,608
Interest expense, net of interest income 10,241 1,375 - 11,616
Transaction related costs 419 - - 419
------- ---------- ------ -------
Total costs and expenses 60,644 9,977 (579) 70,042
Income before income taxes 3,737 1,962 - 5,699
Provision for income taxes 1,738 1,057 - 2,795
------- ---------- ------ -------
Net income 1,999 905 - 2,904
Less: Preferred stock dividends and financing
fee accretion 596 - - 596
------- ---------- ------ -------
Income applicable to common stock $ 1,403 $ 905 $ - $ 2,308
------- ---------- ------ -------
------- ---------- ------ -------
Earnings per common share:
Basic $ 0.34 $ 0.40
------- -------
------- -------
Diluted $ 0.32 $ 0.38
------- -------
------- -------
Weighted average shares outstanding:
Basic 4,073 1,644 (b) 5,717
------- ------ -------
------- ------ -------
Diluted 4,324 1,698 (c) 6,022
------- ------ -------
------- ------ -------
</TABLE>
<TABLE>
<S> <C>
(a) Elimination of intercompany assignment fee revenue and expenses.
(b) Weighted average shares of SMT common stock from January 1, 1999 to March 31, 1999 335.6
Multiplied by conversion ratio of 4.9 4.9
-------
Equivalent weighted average shares of Alliance common stock 1,644
-------
-------
(c) Weighted average shares of SMT common stock from January 1, 1999 to March 31, 1999 335.6
Add: dilutive effect of employee stock options 10.9
-------
Diluted weighted average shares of SMT common stock 346.5
Multiplied by conversion ratio of 4.9 4.9
-------
Equivalent diluted weighted average shares of Alliance common stock 1,698
-------
-------
</TABLE>
-37-
<PAGE>
Alliance Imaging, Inc.
Unaudited Pro Forma Condensed Combined Statement of Income
Year Ended December 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Historical
Alliance SMT Adjustments Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 199,401 $ 45,049 $ (1,153) (a) $ 243,297
Cost and expenses:
Operating expenses, excluding depreciation 97,187 15,841 (1,153) (a) 111,875
Depreciation expense 26,961 6,532 - 33,493
Selling, general and administrative expenses 19,095 5,351 - 24,446
Amortization expense, primarily goodwill 8,010 3,279 - 11,289
Interest expense, net of interest income 35,488 6,284 - 41,772
Transaction related costs 2,818 - - 2,818
--------- -------- --------- --------
Total costs and expenses 189,559 37,287 (1,153) 225,693
Income before income taxes and extraordinary loss 9,842 7,762 - 17,604
Provision for income taxes 4,973 3,763 - 8,736
--------- -------- --------- --------
Income before extraordinary loss 4,869 3,999 - 8,868
Less: Preferred stock dividends and financing
fee accretion 2,186 - - 2,186
--------- -------- --------- --------
Income before extraordinary loss applicable to
common stock $ 2,683 $ 3,999 $ - $ 6,682
--------- -------- --------- --------
--------- -------- --------- --------
Earnings per common share before extraordinary loss:
Basic $ 0.66 $ 1.17
---------- -------
---------- -------
Diluted $ 0.63 $ 1.13
---------- -------
---------- -------
Weighted average shares outstanding:
Basic 4,067 1,644 (b) 5,711
---------- --------- --------
---------- --------- --------
Diluted 4,238 1,683 (c) 5,921
---------- --------- --------
---------- --------- --------
</TABLE>
<TABLE>
<S> <C>
(a) Elimination of intercompany assignment fee revenue and expenses.
(b) Weighted average shares of SMT common stock from January 1, 1998 to December 31, 1998 335.6
Multiplied by conversion ratio of 4.9 4.9
-----
Equivalent weighted average shares of Alliance common stock 1,644
-----
-----
(c) Weighted average shares of SMT common stock from January 1, 1998 to December 31, 1998 335.6
Add: dilutive effect of employee stock options 7.8
-----
Diluted weighted average shares of SMT common stock 343.4
Multiplied by conversion ratio of 4.9 4.9
-----
Equivalent diluted weighted average shares of Alliance common stock 1,683
-----
-----
</TABLE>
-38-
<PAGE>
Alliance Imaging, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(in thousands)
In May 1999, in connection with the SMT Merger, Alliance amended and restated
its senior bank credit facility to add a new $70,000 tranche D term loan
facility which was used to fund: repayment of SMT's existing indebtedness -
$62,044: payment on Alliance's revolving loan facility - $6,000; transaction
costs charged to expense - $851; deferred debt financing fees - $650; and an
increase in Alliance's cash balance of $455. Assuming the new $70,000 tranche
D term loan facility had been entered into January 1, 1998 and January 1,
1999, interest expense would have been reduced by $830 and $66 for the year
ended December 31, 1998 and the three months ended March 31, 1999,
respectively.
Additionally, as a result of the new $70,000 tranche D term loan facility,
Alliance recorded an extraordinary loss of $2,280 (net of taxes of $1,458)
associated with the write-off of unamortized deferred financing costs of
$1,736 on SMT's existing indebtedness and $2,002 on Alliance's tranche C term
loan facility.
In connection with the SMT merger, Alliance established a severance accrual
of $1,895, an office lease termination accrual of $230, and a fixed asset
disposal reserve of $241. All of the preceding amounts were charged to
transaction related costs in May 1999.
-39-
<PAGE>
Item 7(c). Index of Exhibits
<TABLE>
<CAPTION>
NUMBER REFERENCE
- ------ -------------------------------------------------------------------
<S> <C>
2 Agreement and Plan of Merger dated April 14, 1999, between Alliance
and Three Rivers Holding Corp.(1)
23.1 Consent of Ernst & Young LLP (3)
23.2 Consent of KPMG LLP (3)
99.1 Fairness Opinion of J.P. Morgan Securities Inc. dated April 14,
1999 (2)
99.2 Press Release dated April 14, 1999 (1)
99.3 Press Release dated May 14, 1999 (2)
99.4 Amended and Restated Credit Agreement dated May 13, 1999 among
Alliance, Various Lending Institutions, Salomon Brothers Holding
Company Inc. and Bankers Trust Company (2)
99.5 Fifth Supplemental Indenture between Alliance, various subsidiaries
of Alliance and IBJ Whitehall Bank & Trust Company dated May 13,
1999 (2)
99.6 Amendment No. 1 dated May 13, 1999 to the Registration Rights Agreement
dated December 18, 1997 between Alliance and Newport (2)
</TABLE>
- --------------------
(1) Incorporated by reference from the Registrants Form 8-K filed on
April 16, 1999.
(2) Incorporated by reference from the Registrants Form 8-K filed on May 24,
1999.
(3) Filed herewith.
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
ALLIANCE IMAGING, INC.
By: /s/ KENNETH S. ORD
----------------------------
Kenneth S. Ord
Executive Vice President and
Chief Financial Officer
Date: July 19, 1999
-41-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-22333) pertaining to the 1991 Amended and Restated Stock
Option Plan and the Long Term Executive Incentive Plan of Alliance Imaging,
Inc. of our report dated February 19, 1999, with respect to the consolidated
financial statements of SMT Health Services Inc. and Subsidiaries for the
year ended December 31, 1998, for the period August 5, 1997 to December 31,
1997, and for the period January 1, 1997 to August 4, 1997 included in the
Current Report on Form 8-K/A dated May 13, 1999.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
July 19, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
SMT Health Services Inc.
We consent to the incorporation by reference in the Registration Statement
(No. 333-22333) on Form S-8 of Alliance Imaging, Inc. of our report dated
January 31, 1997, with respect to the consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year ended December
31, 1996, which report appears in the Form 8-K/A of Alliance Imaging, Inc.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
July 14, 1999
