UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to_________________
Commission file number 000-19636
HEALTHCARE IMAGING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3119929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Schulz Drive, Red Bank, New Jersey 07701
(Address of principal executive offices) (Zip Code)
(908) 224-9292
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 14, 1996
Common Stock, $.01 par value 4,961,974 shares
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
Three and nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Changes in Stockholders
Equity - For the nine months ended September 30, 1996 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
ASSETS 1996 1995
Current assets:
Cash and cash equivalents $ 1,439,110 $ 281,416
Accounts receivable - net 3,903,045 3,713,531
Prepaid expenses and other 205,987 217,762
Due from officer 231,904 -
------- ---------
Total current assets 5,780,046 4,212,709
--------- ---------
Property, plant and equipment - net 4,591,862 5,272,215
--------- ---------
Other assets:
Goodwill - net 143,433 157,314
Due from officer - 231,904
Other 216,254 132,557
------- -------
359,687 521,775
------- -------
Total assets $10,731,595 $10,006,699
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 897,062 $ 765,258
Current portion of capital lease
obligations and long-term debt
(of which $1,061,685 in 1996
and $933,818 in 1995 is owed to
DVI Financial Services, Inc., a
related party) 1,082,860 1,001,414
Reserve for restructuring costs 756,560 1,285,790
Income taxes payable 7,021 -
----- ---------
Total current liabilities 2,743,503 3,052,462
--------- ---------
Non-current liabilities:
Capital lease obligations and long-term
debt (of which $2,387,924 in 1996 and
$2,969,275 in 1995 is owed to DVI
Financial Services, Inc., a related party) 2,428,479 2,973,752
Reserve for restructuring costs 534,330 301,693
------- -------
2,962,809 3,275,445
--------- ---------
Minority interests 438,467 455,916
------- -------
Stockholders' equity:
Convertible preferred stock,
$.10 par value; 1,000,000 shares
authorized, 660,000 shares outstanding
at September 30, 1996 66,000 -
Common stock, $.01 par value;
50,000,000 shares authorized,
4,961,974 shares outstanding at
September 30, 1996 and 4,711,974 shares
outstanding at December 31, 1995 49,620 47,120
Additional paid-in capital 11,841,050 8,902,805
Accumulated deficit (6,636,788) (5,727,049)
Unearned compensation (733,066) -
-------- ---------
4,586,816 3,222,876
--------- ---------
Total liabilities and stockholders' equity $10,731,595 $10,006,699
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues: $2,425,043 $2,330,279 $7,062,991 $7,204,293
---------- ---------- ---------- ----------
Operating Expenses:
Salaries 689,075 666,396 1,984,724 2,034,282
Other operating
expenses 648,934 621,036 1,852,793 1,868,463
Films and supplies 152,776 138,221 402,849 395,126
Equipment mainte-
nance and repairs 153,097 166,914 497,366 593,467
Professional fees 106,922 58,510 362,625 209,600
Depreciation and
amortization 357,302 427,362 1,124,247 1,326,052
Interest 116,537 135,783 357,461 506,368
Loss on sale of equipment - 191,181 - 191,181
------- ------- --------- -------
2,224,643 2,405,403 6,582,065 7,124,539
--------- --------- --------- ---------
Income (loss) before
non-cash compensation
charge, minority
interests in joint
ventures and income
taxes 200,400 (75,124) 480,926 79,754
Non-cash compensation
charge (368,994) - (1,075,425) -
Minority interests in
joint ventures (91,250) (99,003) (276,240) (273,817)
------- ------- -------- --------
Operating loss before
income taxes (259,844) (174,127) (870,739) (194,063)
Income tax provision 11,311 15,226 39,000 108,721
------ ------ ------ -------
Net loss $(271,155) $(189,353) $(909,739) $(302,784)
========= ========= ========= =========
Weighted average common
shares outstanding 4,711,974 4,711,974 4,711,974 4,711,974
========= ========= ========= =========
Net loss per common share $(.06) $(.04) $(.19) $(.06)
===== ===== ===== =====
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
"HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES"
Consolidated Statement of Changes in Stockholders' Equity
"For the Nine Months Ended September 30, 1996"
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid In Accumulated Unearned Stockholders
Shares Amount Shares Amount Capital (Deficit) Compensation Equity
------ ------ ------ ------ ------- --------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 0 0 4,711,974 $47,120 $8,902,805 $(5,727,049) 0 $3,222,876
Proceeds from sale of Preferred
Stock, net of expenses of 660,000 $66,000 0 0 1,132,254 0 0 1,198,254
$151,746
Issuance of Restricted Stock
Grant 0 0 250,000 2,500 466,244 0 $(468,744) 0
Unearned compensation in
connection with stock option grants 0 0 0 0 1,339,747 0 (1,339,747) 0
Amortization of unearned
compensation for stock options
and restricted stock grants 0 0 0 0 0 0 1,075,425 1,075,425
Net loss for the nine months
ended September 30, 1996 0 0 0 0 0 (909,739) 0 (909,739)
------ ----- ------ ------ ------ --------- ------ ---------
BALANCE, September 30, 1996 660,000 $66,000 4,961,974 $49,620 $11,841,050 $(6,636,788) $(733,066) $4,586,816
======= ======= ========= ======= =========== =========== ========= ==========
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(909,739) $(302,784)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 1,124,247 1,326,052
Amortization of non-cash compensation 1,075,425 -
Loss on sale of equipment - 191,181
Minority interests in joint ventures 276,240 273,817
Deferred income taxes - 2,000
Allowance for doubtful accounts
receivable 131,000 553,000
Changes in assets and liabilities:
Accounts receivable (320,514) 510,405
Prepaid expenses and other 11,775 11,468
Accounts payable and accrued expenses 131,804 (11,391)
Income taxes payable 7,021 (4,810)
Other assets (108,449) 1,641
-------- -----
Net cash provided by operating activities 1,418,810 2,550,579
--------- ---------
Cash flows from investing activities:
Proceeds received from sale of equipment - 525,000
Purchases of property, plant and
equipment (98,627) (51,489)
------- -------
Net cash (used in) provided by investing
activities (98,627) 473,511
------- -------
Cash flows from financing activities:
Net proceeds received from the sale
of Series C Preferred Stock 1,198,254 -
Distributions to limited partners
of joint ventures (293,689) (201,116)
Payments on note payable (52,530) (52,349)
Payments on capital lease obligations (717,931) (1,440,574)
Proceeds received on sublease for
restructured operations 386,173 575,000
Payments against reserve for restructuring
costs (682,766) (1,811,424)
-------- ----------
Net cash used in financing activities (162,489) (2,930,463)
-------- ----------
Increase in cash and cash equivalents 1,157,694 93,627
Cash and cash equivalents at beginning
of period 281,416 235,260
------- -------
Cash and cash equivalents at end
of period $1,439,110 $328,887
========== ========
6
<PAGE>
HEALTHCARE IMAGING SERVICES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Nine Months Ended
September 30,
1996 1995
---- ----
Supplemental Cash Flow Information:
- -----------------------------------
Interest paid during the period $362,811 $628,756
======== ========
Income taxes paid during the period $44,690 $82,969
======= =======
Supplemental Schedule of Noncash Investing
and Financing Activities:
Increase in capital leases principally
for medical equipment $306,634 $ -
======== ========
Refinancing of certain capital lease
obligations $ - $ 69,746
======== ========
See accompanying notes to consolidated financial statements.
7
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
Note 1. - Basis of Presentation
- -------------------------------
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary
to present fairly the Company's financial position as of September
30, 1996 and the statements of operations and cash flows for the
periods ended September 30, 1996 and 1995. Certain information and
footnote disclosures normally included in annual financial
statements have been omitted from the accompanying interim
consolidated financial statements.
The results of operations for the nine months ended September
30, 1996 are not necessarily indicative of the results of
operations expected for the year ending December 31, 1996 or any
other period. The consolidated financial statements included
herein should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, as
amended by the Company's Form 10-K/A-2, which are on file at the
Securities and Exchange Commission.
Note 2. - Private Placement
- ---------------------------
On February 9, 1996, the Company sold, in a private placement,
600,000 shares of its Series C Convertible Preferred Stock, par
value $0.10 per share (the "Series C Preferred Stock"), for $2.25
per share resulting in net proceeds to the Company of $1,198,254.
In connection with the private placement, the Company issued 60,000
shares of Series C Preferred Stock to the placement agent, Biltmore
Securities, Inc. (the "Placement Agent"), as its placement agent
fee. At its 1996 Annual Meeting of Stockholders held on May 2,
1996 (the "Meeting"), the Company obtained all requisite
stockholder approvals to enable the holders of the Series C
Preferred Stock to convert each share of Series C Preferred Stock
into seven shares of Common Stock. In addition, the Company also
obtained stockholder approval for, among other things, an increase
in its authorized Common Stock from 9 million to 50 million shares
(the "Certificate Amendment"). The holders of the Series C
Preferred Stock are not able to sell, transfer, assign or otherwise
dispose of the shares of Series C Preferred Stock (or the shares of
Common Stock issuable upon conversion of the Series C Preferred
Stock), in whole or in part, until August 9, 1997 without the
Placement Agent's prior consent.
The issuance of 660,000 shares of Series C Preferred Stock
involves a significant change in the equity ownership of the
Company (such shares are convertible into an aggregate of 4,620,000
shares of Common Stock, representing approximately 48.2% of the
Company's outstanding Common Stock). The change in ownership
interests will significantly restrict the Company's ability to
utilize net tax operating loss carryforwards ("NOL's") which
amounted to approximately $5,100,000 as of December 31, 1995. As
a result, the annual limitation on the use of such NOL's is
approximately $560,000, which can be used to offset taxable income,
if any.
8
<PAGE>
Note 3. -Stock Options and Restricted Stock Grant
- -------------------------------------------------
As consideration for the execution of a one-year consulting
agreement between the Placement Agent and the Company, the Company
granted on, January 30, 1996, to the Placement Agent, stock options
(the "Placement Agent Options") exercisable to purchase an
aggregate of 750,000 shares of Common Stock over a five-year period
at a cash exercise price of $0.75 per share. In addition, such
consulting agreement provides that the Placement Agent will receive
from the Company 750,000 shares of Common Stock upon consummation
by the Company by January 30, 1997 of an acquisition of, or other
business combination with, a company (or companies) with assets of
at least $2.5 million (the "Acquisition"). In connection with the
issuance of the Placement Agent Options, the Company recorded a
non-cash compensation charge of $685,800 which is being amortized
over the term of the consulting agreement.
On January 30, 1996, the Company granted stock options (the
"Former Directors Options") to each of two former directors of the
Company immediately exercisable to purchase 50,000 shares of Common
Stock over a five-year period at an exercise price of $0.75 per
share. In connection with the issuance of the Former Directors
Options, the Company recorded a non-cash compensation charge of
$91,441 in the quarter ended March 31, 1996.
As of February 1, 1996, the Company amended its employment
agreement with its Chairman of the Board, President and Chief
Executive Officer (the "CEO"). Pursuant to such amendment, the
agreement's original expiration date of October 22, 1996 was
extended to October 22, 1997 and during such extension, the CEO's
annual base compensation has been reduced from $200,000 to $100,000.
In addition, stock options that the CEO held to purchase an
aggregate of 270,000 shares of Common Stock at exercise prices
ranging from $1.50 to $5.00 per share (the "CEO Old Options") were
terminated and the Company granted the CEO options, exercisable
until February 1, 2001, to purchase an aggregate of 500,000 shares
of Common Stock at an exercise price of $0.75 per share (the "CEO
New Options"). In connection with the issuance of the CEO New
Options, the Company recorded a non-cash compensation charge of
$562,506 which is being amortized over the twenty-one months ending
October 31, 1997. Furthermore, the CEO received a restricted stock
grant of 250,000 shares of Common Stock (the "CEO Restricted Stock
Grant"). The restrictions related to the CEO Restricted Stock
Grant will lapse upon consummation by the Company of an Acquisition
meeting certain standards. In connection with the issuance of the CEO
Restricted Stock Grant, the Company recorded a non-cash
compensation charge of $468,744 which is being amortized over the
twelve-month contingency period ending January 30, 1997. To the extent
the Company does not consummate an Aquisition meeting the specified
standards by January 30, 1997, the CEO Restricted Stock Grant will be
forfeited and the previously recorded non-cash compensation charge will be
reversed accordingly.
Note 4. - Warrants
- ------------------
As of September 30, 1996, the Company had 1,250,130 Common
Stock Purchase Warrants ("Initial Warrants") and 255,200 Class B
Common Stock Purchase Warrants ("Class B Warrants") outstanding.
As a result of the sale of the 600,000 shares of Series C Preferred
Stock and the receipt of certain stockholder approvals relating to
such sale and certain other issuances of securities, the exercise
9
<PAGE>
price of each outstanding Initial Warrant and Class B Warrant was
reduced from $7.00 to $3.75 per share and the aggregate number of
shares of Common Stock issuable upon exercise of all such warrants
was increased from 1,505,330 to 2,809,949. The reduction in the
exercise price and the increase in the number of shares issuable
upon exercise results from the anti-dilution provisions of the
Initial Warrants and Class B Warrants. All of the Initial Warrants
and Class B Warrants expired pursuant to their terms on November
12, 1996.
Note 5. Stock Option Plans
- --------------------------
On February 13, 1996, the Board of Directors adopted, subject
to stockholder approval (which was obtained at the Meeting), the
HealthCare Imaging Services, Inc. 1996 Stock Option Plan for Non-
Employee Directors (the "1996 Directors' Plan"). The 1996
Directors' Plan replaced the existing 1991 Directors' Stock Option
Plan for Non-Employee Directors. Under the 1996 Directors Plan,
non-qualified stock options exercisable to purchase an aggregate of
25,000 shares of Common Stock were granted on February 13, 1996 to
each of the three then current non-employee directors of the
Company at an exercise price of $1.6875 per share. In addition, on
May 2, 1996 non-qualified stock options exercisable to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of
$2.09375 were granted to each of the three newly elected non-
employee directors of the Company. Stock options awarded under the
1996 Directors' Plan vest in increments of 40% after the sixth
month, 80% after the eighteenth month and 100% after the thirtieth
month anniversary of the date of the grant. No stock options under
the 1996 Directors' Plan may be granted after May 1, 2006. Stock
options are non-transferable during the life of the option holder.
On February 13, 1996, the Board of Directors approved, subject
to stockholder approval (which was obtained at the Meeting), an
amendment to the Company's 1991 Stock Option Plan (the "1991
Plan") whereby the number of shares of Common Stock that may be
subject to options awarded to any participant pursuant to the 1991
Plan would be increased from an aggregate of 200,000 for the term
of such plan to 250,000 shares in any given calendar year.
Note 6. - Contingency
- ---------------------
In October 1995, the Company was notified by the New Jersey
Division of Taxation ("NJDT") of a proposed sales and use tax
assessment of approximately $887,000. The Company provided
additional information to the NJDT which substantially reduced the
proposed assessment to $214,280. Additionally, in February 1996,
the Company was notified by the New York State Department of
Taxation and Finance ("NYDT") regarding the commencement of a sales
and use tax examination. On May 31, 1996, the Company paid the New
Jersey sales and use tax assessment of $214,280 under a conditional
agreement with the NJDT. Such agreement acknowledged that the
State of New Jersey has not yet reached an agreement with the State
of New York to assure that New York will give full credit (under
the interstate agreement between New Jersey and New York) for sales
tax paid to the State of New Jersey. The NJDT has agreed that New
Jersey will continue to deal directly with New York to assure that
the Company receives full credit under the interstate taxation
agreement for the New Jersey sales tax paid against any New York
10
<PAGE>
State sales tax deficiency arising from items deemed taxable by
both states. In the event that the credit is not available to the
Company, the NJDT has agreed that New Jersey would remit directly
to New York the sales tax previously paid by the Company regarding
such taxable items in question. In October 1996, the NYDT
completed its sales and use tax examination and notified the
Company of its proposed assessment of approximately $200,000, which
amount takes into consideration the application of certain
available credits described above. The Company is currently in the
process of providing additional information to the NYDT which could
reduce the aforementioned NYDT sales and use tax assessment.
Management believes that the ultimate resolution of these matters,
beyond the amounts already provided for, will not have a material
impact on the Company's financial condition or results of
operations although no assurances can be provided.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
- ------------------------------------------------------------
Condition and Results of Operations
- -----------------------------------
This Quarterly Report contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995 including, without limitation, statements regarding the
sufficiency of the Company's liquidity and sources of capital.
These forward-looking statements are subject to certain risks,
uncertainties and other factors which could cause actual results to
differ materially. Additional information regarding factors that
could potentially affect the Company or its financial results may
be included in the Company's filings with the Securities and
Exchange Commission.
For the Nine Months Ended September 30, 1996 vs. September 30, 1995
- -------------------------------------------------------------------
For the nine months ended September 30, 1996, revenues were
$7,062,991 as compared to $7,204,293 for the nine months ended
September 30, 1995, a decrease of approximately $141,000. This
decrease is primarily due to (1) the elimination of operating
revenues from the Company's lithotripsy operations (approximately
$420,000) as a result of the sale of the lithotripsy unit on August
31, 1995 and (2) decreased revenues from the Company's Edgewater
MRI facility (approximately $198,000), due to increased competition
resulting in fewer procedures being performed, all of which were
partially offset by increased revenues (approximately $477,000)
from the Company's other MRI facilities due to the increased number
of procedures being performed.
For the nine months ended September 30, 1996, operating
expenses were $7,657,490 as compared to $7,124,539 for the nine
months ended September 30, 1995, an increase of approximately
$533,000. This increase was primarily due to the amortization of
non-cash compensation charges (approximately $1,075,000) resulting
from the grant of (i) stock options to two of the Company's former
directors, (ii) stock options and a restricted stock award to the
Company's Chairman of the Board, President and Chief Executive
Officer (the "CEO") and (iii) stock options to Biltmore Securities,
Inc. (the "Placement Agent Options") pursuant to a consulting
agreement (for a further discussion regarding the stock option
grants refer to Note 3 of the accompanying financial statements).
The Company's operating expenses before amortization of the non-
cash compensation charges decreased approximately $542,000,
primarily due to the elimination of operating expenses
(approximately $700,000) relating to the Company's former
lithotripsy operation. Equipment maintenance and repairs decreased
approximately $96,000, primarily due to the termination of a
maintenance agreement relating to the disposed lithotripsy unit.
Professional fees increased approximately $153,000, partially due
to the preparation of the proxy statement for the Company's 1996
Annual Meeting of Stockholders held on May 2, 1996 (the "Meeting")
and the New Jersey and New York state sales tax examinations
referred to in Note 6 of the accompanying financial statements.
Depreciation and amortization decreased approximately $202,000,
primarily due to the elimination of depreciation expense for the
lithotripsy unit. Interest expense decreased approximately
$149,000, primarily due to the elimination of interest expense
relating to the disposed lithotripsy unit and the refinancing of
certain equipment leases as of September 30, 1995 at lower interest
rates.
12
<PAGE>
During the nine months ended September 30, 1996, as a
corporate general partner, the Company recorded an additional
$127,185 of losses attributable to the limited partnership
interests in the Philadelphia, Pennsylvania joint venture (the
"Philadelphia MRI facility") in excess of the limited partners'
capital accounts.
The operating results for the nine months ended September 30, 1996 and
1995 were substantially affected by the Philadelphia MRI facility which incurred
losses of $317,963 and $277,139, respectively. The Company recently expanded its
advertising and marketing efforts on behalf of the Philadelphia MRI facility.
This resulted in a significantly reduced loss for the quarter ended September
30, 1996 ($66,722) as compared to September 30, 1995 ($116,117). However, to the
extent that the Philadelphia MRI facility does not achieve and maintain
profitability, the Company may have to take certain actions to restructure or
divest itself of such operation. The Company has commenced negotiations with the
present limited partners as to the restructuring of such joint venture. However,
there can be no assurances with respect to the timing and magnitude of a
restructuring charge, if any, relating to the Philadelphia MRI facility.
For the Three Months Ended September 30, 1996 vs. September 30, 1995
- --------------------------------------------------------------------
For the three months ended September 30, 1996, revenues were
$2,425,043 as compared to $2,330,279 for the three months ended
September 30, 1995, an increase of approximately $95,000. This
increase is primarily due to (1) increased revenues from the
Company's Brooklyn and Philadelphia MRI facilities (approximately
$155,000 and $67,000, respectively) primarily due to expanded
advertising and marketing efforts resulting in an increased number
of MRI procedures being performed and (2) increased revenues from
the Company's Ocean Township, New Jersey multi-modality imaging
center (approximately $38,000) due to an increased number of MRI,
ultrasound, mammography and x-ray procedures being performed, all
of which were partially offset by the elimination of operating
revenues from the Company's lithotripsy operation (approximately
$126,000) as a result of the sale of the lithotripsy unit on August
31, 1995 and decreased revenues from the Company's Edgewater MRI
facility (approximately $47,000) due to increased competition
resulting in fewer procedures being performed.
For the three months ended September 30, 1996, operating
expenses were $2,593,637 as compared to $2,405,403 for the three
months ended September 30, 1995, an increase of approximately
$188,000. This increase was primarily due to the amortization of
non-cash compensation charges (approximately $369,000) resulting
from the grant of (i) stock options to two of the Company's former
directors, (ii) stock options and a restricted stock award to the
CEO and (iii) the Placement Agent Options (for a further discussion
regarding the stock option grants refer to Note 3 of the
accompanying financial statements). The Company's operating
expenses before amortization of the non-cash compensation charges
decreased approximately $181,000, primarily due to the elimination
of operating expenses relating to the Company's former lithotripsy
operation. Films and supplies increased approximately $15,000,
13
<PAGE>
primarily due to the increased number of MRI procedures currently
being performed. Professional fees increased approximately
$48,000, primarily due to the costs incurred in connection with the
preparation of the proxy statement for the Meeting and the New
Jersey and New York state sales tax examinations referred to in
Note 6 of the accompanying financial statements. Depreciation and
amortization decreased approximately $70,000, primarily due to the
elimination of depreciation expense for the lithotripsy unit.
Interest expense decreased approximately $19,000, primarily due to
the refinancing of certain equipment leases as of September 30,
1995 at lower interest rates.
During the three months ended September 30, 1996, as a
corporate general partner, the Company recorded an additional
$26,689 of losses attributable to the limited partnership interests
in the Philadelphia, MRI facility in excess of the limited
partners' capital accounts.
The operating results for the three months ended September 30,
1996 and 1995 were substantially affected by the Philadelphia MRI
facility which incurred losses of $66,722 and $116,117,
respectively. The Company recently expanded its advertising and
marketing efforts on behalf of the Philadelphia MRI facility. This
resulted in a significantly reduced loss for the quarter ended
September 30, 1996 as compared to September 30, 1995. However, to
the extent that the Philadelphia MRI facility does not achieve and
maintain profitability, the Company may have to take certain
actions to restructure or divest itself of such operation. The
Company has commenced negotiations with the present limited
partners as to the restructuring of such joint venture. However,
there can be no assurances with respect to the timing and magnitude
of a restructuring charge, if any, relating to the Philadelphia MRI
facility.
Liquidity and Capital Resources of the Company
- ----------------------------------------------
On February 9, 1996, the Company sold, in a private placement,
600,000 shares of Series C Preferred Stock, for $2.25 per share
resulting in net proceeds to the Company of $1,198,254. In
connection with the private placement, the Company issued 60,000
shares of Series C Preferred Stock to the Placement Agent as its
placement agent fee. At the Meeting, the Company obtained all
requisite stockholder approvals to enable the holders of the Series
C Preferred Stock to convert each share of Series C Preferred Stock
into seven shares of Common Stock. In addition, the Company also
obtained stockholder approval for, among other things, an increase
in its authorized Common Stock from 9 million to 50 million shares
(the "Certificate Amendment"). The holders of the Series C
Preferred Stock are not able to sell, transfer, assign or otherwise
dispose of the shares of Series C Preferred Stock (or the shares of
Common Stock issuable upon conversion of the Series C Preferred
Stock), in whole or in part, until August 9, 1997 without the
Placement Agent's prior consent.
The sale of the Series C Preferred Stock was effected to
enable the Company to meet the requirements for continued listing
on The Nasdaq National Market as well as to provide capital for
general corporate purposes, including possible acquisitions of (i)
14
<PAGE>
businesses which are complementary to the Company, (ii) other
healthcare related businesses or (iii) non-healthcare related
businesses. The Company is now in compliance with the requirements
for continued listing on The Nasdaq National Market.
The issuance of 660,000 shares of Series C Preferred Stock
involves a significant change in the equity ownership of the
Company (such shares are convertible into an aggregate of 4,620,000
shares of Common Stock, representing approximately 48.2% of the
Company's outstanding Common Stock). The change in ownership
interests will significantly restrict the Company's ability to
utilize net tax operating loss carryforwards ("NOL's") which
amounted to approximately $5,100,000 as of December 31, 1995. As
a result, the annual limitation on the use of such NOL's is
approximately $560,000, which can be used to offset taxable income,
if any.
As consideration for the execution of a one-year consulting
agreement between the Placement Agent and the Company, the Company
granted on, January 30, 1996, to the Placement Agent, stock options
(the "Placement Agent Options") exercisable to purchase an
aggregate of 750,000 shares of Common Stock over a five-year period
at a cash exercise price of $0.75 per share. In addition, such
consulting agreement provides that the Placement Agent will receive
from the Company 750,000 shares of Common Stock upon consummation
by the Company by January 30, 1997 of an acquisition of, or other
business combination with, a company (or companies) with assets of
at least $2.5 million (the "Acquisition"). In connection with the
issuance of the Placement Agent Options, the Company recorded a
non-cash compensation charge of $685,800 which is being amortized
over the term of the consulting agreement.
On January 30, 1996, the Company granted stock options (the
"Former Directors Options") to each of two former directors of the
Company immediately exercisable to purchase 50,000 shares of Common
Stock over a five-year period at an exercise price of $0.75 per
share. In connection with the issuance of the Former Directors
Options, the Company recorded a non-cash compensation charge of
$91,441 in the quarter ended March 31, 1996.
As of February 1, 1996, the Company amended its employment
agreement with its Chairman of the Board, President and Chief
Executive Officer (the "CEO"). Pursuant to such amendment, the
agreement's original expiration date of October 22, 1996 was
extended to October 22, 1997 and during such extension, the CEO's
annual base compensation has been reduced from $200,000 to $100,000.
In addition, stock options that the CEO held to purchase an
aggregate of 270,000 shares of Common Stock at exercise prices
ranging from $1.50 to $5.00 per share (the "CEO Old Options") were
terminated and the Company granted the CEO options, exercisable
until February 1, 2001, to purchase an aggregate of 500,000 shares
of Common Stock at an exercise price of $0.75 per share (the "CEO
New Options"). In connection with the issuance of the CEO New
Options, the Company recorded a non-cash compensation charge of
$562,506 which is being amortized over the twenty-one months ending
October 31, 1997. Furthermore, the CEO received a restricted stock
grant of 250,000 shares of Common Stock (the "CEO Restricted Stock
Grant"). The restrictions related to the CEO Restricted Stock
Grant will lapse upon consummation by the Company of an Acquisition
meeting certain standards. In connection with the issuance of the CEO
Restricted Stock Grant, the Company recorded a non-cash
compensation charge of $468,744 which is being amortized over the
twelve-month contingency period ending January 30, 1997. To the extent
the Company does not consummate an Aquisition meeting the specified
standards by January 30, 1997, the CEO Restricted Stock Grant will be
forfeited and the previously recorded non-cash compensation charge will be
reversed accordingly.
On February 13, 1996, the Board of Directors adopted, subject
to stockholder approval (which was obtained at the Meeting), the
HealthCare Imaging Services, Inc. 1996 Stock Option Plan for Non-
Employee Directors (the "1996 Directors' Plan"). The 1996
Directors' Plan replaced the existing 1991 Directors' Stock Option
Plan for Non-Employee Directors. Under the 1996 Directors Plan,
non-qualified stock options exercisable to purchase an aggregate of
25,000 shares of Common Stock were granted on February 13, 1996 to
each of the three then current non-employee directors of the
Company at an exercise price of $1.6875 per share. In addition, on
May 2, 1996 non-qualified stock options exercisable to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of
$2.09375 were granted to each of the three newly elected non-
employee directors of the Company. Stock options awarded under the
1996 Directors' Plan vest in increments of 40% after the sixth
month, 80% after the eighteenth month and 100% after the thirtieth
month anniversary of the date of the grant. No stock options under
the 1996 Directors' Plan may be granted after May 1, 2006. Stock
options are non-transferable during the life of the option holder.
On February 13, 1996, the Board of Directors approved, subject
to stockholder approval (which was obtained at the Meeting), an
amendment to the Company's 1991 Stock Option Plan (the "1991
Plan") whereby the number of shares of Common Stock that may be
subject to options awarded to any participant pursuant to the 1991
Plan would be increased from an aggregate of 200,000 for the term
of such plan to 250,000 shares in any given calendar year.
As of September 30, 1996, the Company had 1,250,130 Common
Stock Purchase Warrants ("Initial Warrants") and 255,200 Class B
Common Stock Purchase Warrants ("Class B Warrants") outstanding.
As a result of the sale of the 600,000 shares of Series C Preferred
Stock and the receipt of certain stockholder approvals relating to
such sale and certain other issuances of securities, the exercise
price of each outstanding Initial Warrant and Class B Warrant was
reduced from $7.00 to $3.75 per share and the aggregate number of
shares of Common Stock issuable upon exercise of all such warrants
was increased from 1,505,330 to 2,809,949. The reduction in the
exercise price and the increase in the number of shares issuable
upon exercise results from the anti-dilution provisions of the
Initial Warrants and Class B Warrants. All of the Initial Warrants
and Class B Warrants expired pursuant to their terms on November
12, 1996.
As of September 30, 1996, the Company had a cash balance of
$1,439,110, current assets of $5,780,046 and working capital of
$3,036,543. Cash flows provided by operating activities were
$1,418,810 for the nine months ended September 30, 1996, which
consisted primarily of the net loss of $909,739 which was offset by
non-cash charges for depreciation and amortization of $1,124,247,
amortization of non-cash compensation of $1,075,425 and minority
interests in joint ventures of $276,240. Other significant
16
<PAGE>
components of cash flows provided by operating activities include
an increase in accounts receivable of $320,514 due to an increase
in the number of procedures being performed, an increase in other
assets of $108,449 primarily due to costs incurred for potential
new business arrangements and an increase in accounts payable and
accrued expenses of $131,804 primarily due to an extension of the
period during which vendors are paid. Cash flows used in investing
activities were $98,627 primarily for the purchases of property,
plant and equipment. Cash flows used in financing activities were
$162,489, which consisted primarily of proceeds received in
February 1996 from the Series C Preferred Stock private placement
of $1,198,254 and proceeds received from the sublease of the
restructured mobile MRI operations and the Maiden Choice MRI
equipment of $386,173, partially offset by payments on capital
lease obligations of $717,931, repayments against reserves for
restructuring costs of $682,766 and distributions to limited
partners of joint ventures of $293,689.
The Company's Philadelphia MRI facility, which has been
operating since November 1992, continues to operate at a loss. In
order to support the operations of this facility, the Company has
made and continues to make working capital loans to this joint
venture. As of September 30, 1996, the amount of the working
capital loans made to this joint venture was approximately
$1,997,000. In order to become profitable, this joint venture must
attain a certain volume of business and it is uncertain whether
such volume will ever be attained. The Company cannot at this time
determine when, or if, these working capital loans will be repaid.
To the extent that the Philadelphia MRI facility does not become
profitable, the Company may take certain actions to restructure or
divest itself of such operations. The Company has commenced
negotiations with the present limited partners as to the
restructuring of such joint venture. However, there can be no
assurances with respect to the timing and magnitude of a
restructuring charge, if any, relating to the Philadelphia MRI
facility.
The Company entered into an arrangement, effective September
1, 1994, pursuant to which it is operating solely as a sublessor of
its mobile MRI equipment rather than as an operator of such
equipment. Mark R. Vernon, the President and a significant
stockholder of Omni Medical Imaging, Inc. (the "sublessee") is a
former officer of the Company and is the brother of the Company's
CEO. The other stockholders of the sublessee include certain
former customers of the Company with whom the Company had
agreements for the use of the mobile MRI equipment. The total
monthly sublease payments due to the Company are secured by the
accounts receivable due to the sublessee by certain of the
sublessee's mobile MRI customers.
In February 1996, the Company terminated the master agreement
and repossessed the three mobile MRI units from the sublessee as a
result of the failure of the sublessee and certain of its customers
to satisfy their payment obligations to the Company. In an attempt
to satisfy the past due amounts owed to the Company, the sublessee
and its customers provided the Company with cash and additional
patient receivable claims to partially offset the amounts owed to
the Company. The additional patient receivable claims were to
supplement the amounts previously submitted to the Company to
satisfy prior past due indebtedness from the sublessee and its
customers. After receiving cash and additional patient receivable
17
<PAGE>
claims, the Company returned the mobile MRI units to the sublessee.
Effective July 27, 1996, the Company again repossessed the
three mobile MRI units from the sublessee due to its continued
failure to bring current its 1995 and 1996 monthly payment
obligations to the Company. In the aggregate, the sublessee owed
the Company approximately $540,000 at September 30, 1996. This
indebtedness is collateralized by certain accounts receivable of
the sublessee. The Company is currently pursuing the collection of
such accounts receivable and has entered into an agreement with the
sublessee and its two other major creditors relating to the
collection of the sublessee's other accounts receivable and the
distribution among such parties of the collection proceeds. The
Company cannot currently estimate how much of the sublessee's
accounts receivable will be collected, although the Company
believes a significant portion of the sublessee's debt to the
Company ultimately will be repaid. However, there can be no
assurance that the sublessees accounts receivable will be
successfully collected or the Company will otherwise be paid. In
establishing the reserve for restructuring costs, management
provided for estimated losses relating to the potential non-payment
of sublease income. Accordingly, no additional reserve is deemed
necessary by management at this time.
In August 1996, the Company entered into a lease purchase
agreement with respect to a sale of one of the Company's mobile MRI
units. The lease purchase agreement provided for a $20,000 down
payment upon execution of the agreement, 11 monthly installments of
$5,000 each which commenced October 1, 1996 and a final payment of
$35,000 due in September 1997. The Company is also seeking
opportunities to sell one of the two remaining mobile MRI units.
The sale of a mobile MRI unit, if any, would result in a further
reduction in the Company's capital lease obligations and additional
cash savings to the Company. However, there can be no assurance
that any such sale will be consummated.
In November 1996, the Company entered into a joint venture
arrangement with Practice Management Corporation or an affiliate
thereof to provide on-site MRI services to Meadowlands Hospital
Medical Center. It is anticipated that the site will commence
operations on or about January 1, 1997 and will provide state-of-
the-art MRI services on a full-time basis with one of the Company's
mobile MRI systems, which was previously utilized by the Company's
former mobile MRI unit sublessee. The Company estimates that
initial costs to be incurred by the Company in establishing the
facility in Secaucus, New Jersey will range between $150,000 and
$225,000. Subsequent to the start-up phase, the Company believes
that the joint venture will operate at a profit and increase cash
flows. The Company believes that the start-up phase will last six
to nine months, although there can be no assurances that it will
not be a longer period.
The nature of the Company's operations require significant
capital expenditures which have historically been financed through
the issuance of debt and capital leases, proceeds received from the
Company's initial public offering in November 1991, and the
exercise of warrants. Continued expansion, if any, of the
Company's business will require substantial cash resources and will
have an impact on the Company's liquidity. Also, such expansions,
if any, will require the purchase of additional MRI units and
financing sources to fund the purchase of these additional units.
Historically, the Company has been able to obtain financing for its
medical equipment through a significant stockholder, DVI Financial
18
<PAGE>
Services ("DFS"). In December 1995, DFS' two representatives on
the Company's Board of Directors resigned and in April 1996 DFS
sold its 800,000 shares of Common Stock (representing approximately
17% of the outstanding Common Stock). Nonetheless, the Company
believes it will continue to be able to locate financing sources
for its future equipment needs.
The Company believes that cash provided by the Company's
operating activities will be sufficient to meet its anticipated
cash requirements for its present operations for at least the next
twelve months. The proceeds received from the sale of the Series
C Preferred Stock will further supplement the Company's ability to
meet its future cash needs. If for any reason the Company's
estimates prove inaccurate, the Company is prepared to adopt
additional expense reduction measures in addition to those already
implemented, although there can be no assurance that any such
expense reduction measures will be successful.
19
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Items 1 through 5 have been omitted because the related
information is either inapplicable or has been previously reported.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule.
(b) The Company has not filed any reports on Form 8-K during
the quarter ended September 30, 1996.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HEALTHCARE IMAGING SERVICES, INC.
(Registrant)
/s/ ELLIOTT H. VERNON
---------------------
DATE: November 14, 1996
Elliott H. Vernon,
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: November 14, 1996 /s/ SCOTT P. MCGRORY
- ----------------------- --------------------
Scott P. McGrory,
Vice President - Controller
(Principal Financial and
Accounting Officer)
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