UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to_________________
Commission file number 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, Middletown, 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 May 15, 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 -
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
Three months ended March 31, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders Equity
For the three months ended March 31, 1996 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
This Quarterly Report may include forward looking statements that may or may
not materialize. Additional information on factors that could potentially affect
the Company's financial results may be found in the Company's filings with
the Securities and Exchange Commission.
2
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
ASSETS 1996 1995
- ------ ------------ -----------
Current assets:
Cash and cash equivalents $ 1,500,240 $ 281,416
Accounts receivable net 3,865,567 3,713,531
Prepaid expenses and other 274,461 217,762
Due from officer 231,904 -
----------- -----------
Total current assets 5,872,172 4,212,709
----------- -----------
Property, plant and equipment net 5,030,953 5,272,215
----------- -----------
Other assets:
Deferred costs - net 29,782 35,259
Goodwill - net 152,687 157,314
Due from officer - 231,904
Other 97,298 97,298
---------- ----------
Total other assets 279,767 521,775
----------- -----------
Total assets $11,182,892 $10,006,699
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,040,534 $ 765,258
Current portion of capital lease
obligations and long-term debt (of
which $977,124 in 1996 and $933,818 in
1995 is owed to DVI Financial Services,
Inc., a related party) 1,025,596 1,001,414
Reserve for restructuring costs 1,107,077 1,285,790
Income taxes payable 4,690 -
---------- -----------
Total current liabilities 3,177,897 3,052,462
---------- -----------
Non-current liabilities:
Capital lease obligations and long-term
debt (of which $2,802,838 in 1996 and
$2,969,275 in 1995 is owed to DVI
Financial Services, Inc., a
related party) 2,803,719 2,973,752
Reserve for restructuring costs 216,555 301,693
----------- ----------
Total noncurrent liabilities 3,020,274 3,275,445
----------- ----------
Minority interest 492,478 455,916
----------- ----------
Stockholders' equity:
Convertible preferred stock,
$.10 par value; 1,000,000 shares
authorized, 660,000 shares outstanding
at March 31, 1996 66,000 -
Common stock, $.01 par value;
50,000,000 shares authorized,
4,961,974 shares outstanding at
March 31, 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 (5,993,373) (5,727,049)
Unearned compensation (1,471,054) -
------------ ------------
Total stockholders' equity 4,492,243 3,222,876
------------ ------------
Total liabilities and
stockholders' equity $11,182,892 $10,006,699
=========== ===========
See accompanying notes to consolidated financial statements.
3
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
March 31,
1996 1995
Revenues $2,354,892 $2,362,831
---------- ----------
Operating Expenses:
Salaries 666,069 674,381
Other operating expenses 585,553 619,839
Films and supplies 135,812 130,687
Equipment maintenance and repairs 176,049 204,752
Professional fees 120,009 77,860
Depreciation and amortization 381,475 447,097
Interest 121,673 231,826
------- -------
2,186,640 2,386,442
--------- ---------
Income (loss) before non cash
compensation charge, minority
interests in joint ventures
and income taxes 168,252 (23,611)
------- --------
Non cash compensation charge (337,437) -
Minority interests
in joint ventures (85,439) (68,316)
-------- --------
Operating loss before
income taxes (254,624) (91,927)
Income tax
provision 11,700 48,000
-------- --------
Net loss $(266,324) $(139,927)
========== ==========
Weighted average
common shares
outstanding 4,711,974 4,711,974
========= =========
Net loss per
common share $(.06) $(.03)
====== ======
See accompanying notes to consolidated financial statements.
4
<PAGE>
"HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES"
Consolidated Statement of Changes in Stockholders' Equity
"For the Three Months Ended March 31, 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
Net loss for the three months 0 0 0 0 0 $(266,324) 0 $(266,324)
Proceeds from private placement,
net of expenses of $151,746 660,000 $66,000 0 0 $1,132,254 0 0 $1,198,254
Issuance of Restricted Stock
Grant 0 0 250,000 $2,500 $466,244 0 $(468,744) 0
Unearned compensation on the
issuance of stock options 0 0 0 0 $1,339,747 0 $(1,339,747) 0
Amortization of unearned
compensation for stock options
and restricted stock grant 0 0 0 0 0 0 $337,437 $337,437
BALANCE, MARCH 31, 1996 660,000 $66,000 4,961,974 $49,620 $11,841,050 $(5,993,373) $(1,471,054) $4,492,243
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
1996 1995
Cash flows from operating activities:
Net loss $(266,324) $(139,927)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 381,475 447,097
Amortization of non-cash compensation 337,437 -
Minority interests in joint ventures 85,439 68,316
Deferred income taxes - (4,000)
Allowance for doubtful accounts
receivable (81,000) 192,000
Changes in assets and liabilities:
Accounts receivable (71,036) 216,257
Prepaid expenses and other (56,699) (38,686)
Deferred costs (6,167) (19,953)
Accounts payable and accrued expenses 275,276 217,816
Income taxes payable 4,690 30,975
Other assets - (2,973)
------- --------
Net cash provided by operating activities 603,091 966,922
------- -------
Cash flows from investing activities:
Purchases of property, plant and
equipment (23,242) (2,393)
-------- -------
Cash flows from financing activities:
Proceeds from private
placement net 1,198,254 -
Distributions to limited partners
of joint ventures (48,877) (53,402)
Payments on note payable (19,181) (16,900)
Payments on capital lease obligations (227,370) (443,391)
Proceeds received on sublease for
restructured operations 92,423 230,000
Payments on reserve for restructuring
costs (356,274) (682,067)
--------- ---------
Net cash provided by (used in) financing
activities 638,975 (965,760)
-------- ---------
Increase (decrease) in cash and cash
equivalents 1,218,824 (1,231)
Cash and cash equivalents at beginning
of period 281,416 235,260
-------- --------
Cash and cash equivalents at end of period $1,500,240 $234,029
========== ========
5
<PAGE>
HEALTHCARE IMAGING SERVICES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Three Months Ended
March 31,
1996 1995
Supplemental Cash Flow Information:
Interest paid during the period $124,192 $192,743
======== ========
Income taxes paid during the period $7,010 $5,226
====== ======
Supplemental Schedule of Noncash Investing
and Financing Activities:
Capital leases principally for
medical equipment $100,700
========
See accompanying notes to consolidated financial statements.
6
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 March 31, 1996 and the statements of
operations and cash flows for the periods ended March 31, 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 three months ended March 31, 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. - Adoption of Recently Issued Accounting Principles
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock Based
Compensation which was adopted January 1, 1996 by the Company for certain non
employee stock grants. The Company continues to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
Note 3. - Private Placement
On February 9, 1996, the Company sold, pursuant to 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 such 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 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. At such meeting 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 the
potential for a significant change in the equity ownership of the Company
because such shares may be converted into an aggregate of 4,620,000 shares of
Common Stock, which represents approximately 48.2% of the outstanding Common
Stock. The potential changes in ownership interests may have a significant
impact on the Company's ability to utilize all of its net tax operating loss
carryforwards. Management is currently in the process of determining the
limitations, if any, on the Company's ability to utilize its net tax operating
loss.
7
<PAGE>
Note 4. - Issuances of Certain Stock Options and a Restricted Stock Grant
In connection with the execution of a one year consulting agreement between
the Placement Agent and the Company, the Company granted, as of 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 has
recorded a non cash compensation charge of $685,800 which will be amortized over
a 12 month period which commenced February 1, 1996.
As of 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
a cash exercise price of $0.75 per share. In connection with the issuance of the
Former Directors Options, the Company has recorded a non cash compensation
charge of $91,441 all of which was amortized during 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 employment agreement's expiration date of
October 22, 1996 was extended to October 22, 1997 and during such one-year
extension the CEO's annual base compensation will be reduced from $200,000 to
$100,000. Upon execution of such amendment, stock options that the CEO held as
of such date exercisable to purchase an aggregate of 270,000 shares of Common
Stock (the "CEO Old Options") were terminated, and the Company granted to the
CEO stock options exercisable until February 1, 2001 to purchase an aggregate of
500,000 shares of Common Stock at a cash exercise price of $0.75 per share (the
"CEO New Options"). The grant of the CEO New Options was subject to stockholder
ratification and approval which was obtained at the Meeting. 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. As additional compensation, upon execution of
such amendment, the CEO received from the Company a restricted stock grant of
250,000 shares of Common Stock (the "CEO Restricted Stock Grant"). The
restrictions thereon will lapse upon consummation by the Company of an
"qualifying acquisition" (as defined), however, if an acquisition is not
consummated by January 30, 1997 the CEO Restricted Stock Grant will be
forfeited. In connection with the issuance of the CEO Restricted Stock Grant,
the Company will record a non cash compensation charge of $468,750 which is
being amortized over the twelve month contingency period ending January 30,
1997.
Note 5. - Warrants
As of March 31, 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. From November 14, 1994 until January 29, 1996,
the Company reduced the exercise price for each Initial Warrant from $7.00 to
$4.00 per share. From December 21, 1994 until January 29, 1996, the Company
reduced the exercise price for each Class B Warrant from $7.00 to $4.00 per
share. On January 30, 1996, the exercise price of the Initial Warrants and Class
B Warrants increased to $7.00 per share.
As a result of the aforementioned stockholder approval of the Certificate
Amendment and the issuance of the Series C Preferred Stock, stockholder
ratification and approval of the grant of certain stock options and restricted
stock to the Company's Chairman, President and Chief Executive Officer and the
grant of certain options to the Placement Agent and former directors of the
Company and pursuant to the anti-dilution provisions of the Initial Warrants and
Class B Warrants, as of May 2, 1996 the exercise price of each Initial Warrant
and Class B Warrant outstanding was reduced to $3.75 per share and the aggregate
number of shares of Common Stock issuable upon exercise of such warrants was
increased to 2,809,949 shares.
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 is in the process of providing additional information to
the NJDT which management believes will substantially reduce the proposed
assessment. Additionally, in February 1996, the Company was notified by the New
York State Department of Taxation and Finance regarding the commencement of a
sales and use tax examination. 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the Three Months Ended March 31, 1996 vs. March 31, 1995
For the three months ended March 31, 1996, revenues were $2,354,892 as
compared to $2,362,831 for the three months ended March 31, 1995, a decrease of
approximately $8,000. This decrease is primarily due to (1) the elimination of
operating revenues from the Company's former lithotripsy operations
(approximately $136,000) as a result of the sale of the lithotripsy unit and
ancillary equipment to an unaffiliated third party on August 31, 1995 and (2)
decreased revenues from the Company's Edgewater and Philadelphia fixed site MRI
facilities (approximately $105,000) due to increased competition resulting in
fewer procedures being performed, all of which were substantially offset by
increased revenues (approximately $222,000) from the Company's other fixed site
MRI facilities due to the increased number of procedures being performed at
those facilities.
For the three months ended March 31, 1996, operating expenses were
$2,524,077 as compared to $2,386,442 for the three months ended March 31, 1995,
an increase of approximately $138,000. This increase was primarily due to the
recording of a non-cash compensation charge (approximately $337,000) resulting
from the issuance 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 (iii) stock options to Biltmore
Securities, Inc. (the "Placement Agent") pursuant to a consulting agreement. The
Company's operating expenses before recording the non-cash compensation charge
decreased approximately $200,000, primarily due to the elimination of operating
expenses (approximately $210,000) from the Company's lithotripsy operations as a
result of the sale of the lithotripsy unit and ancillary equipment on August 31,
1995. Equipment maintenance and repairs decreased approximately $29,000,
primarily due to the termination of a maintenance agreement relating to the
disposed lithotripsy unit (approximately $32,000). Professional fees increased
approximately $42,000, primarily due to the costs incurred in connection with
the Company's private placement in February 1996 of its Series C Convertible
Preferred Stock, par value $0.10 per share (the "Series C Preferred Stock"), and
other related matters, 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 $66,000, primarily due to the elimination of depreciation expense
for the lithotripsy unit and ancillary equipment. Interest expense decreased
approximately $110,000, 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.
9
<PAGE>
During the three months ended March 31, 1996, as a corporate general
partner, the Company recorded an additional $53,189 of losses attributable to
the limited partnership interest in the Philadelphia, Pennsylvania joint venture
in excess of the limited partners' capital accounts.
The operating results for the three months ended March 31, 1996 and 1995
were substantially affected by the Philadelphia MRI facility which incurred
losses of $132,973 and $81,536, respectively. The Company's Philadelphia,
Pennsylvania joint venture has been incurring significant net losses. To the
extent that the Philadelphia MRI facility does not become profitable, the
Company may have to take certain actions to restructure or divest such
operation. 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, pursuant to 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 such 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. At such meeting 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) businesses which are complementary to the Company, (ii)
other healthcare related businesses or (iii) non healthcare related businesses.
In November 1995, the Company was advised by The Nasdaq Stock Market, Inc
("Nasdaq") that because the Common Stock's bid price was below $1.00 per share
and, in the alternative, because the market value of publicly-held shares of
Common Stock was below $3 million and the Company's net tangible assets were
10
<PAGE>
below $4 million, Nasdaq was considering delisting the Common Stock from The
Nasdaq National Market. In addition, the Company was later informed that because
it did not hold an annual meeting of stockholders during 1995, which is a
requirement to maintain a listing on The Nasdaq National Market, the Common
Stock was also subject to delisting. The Company made written submissions to
Nasdaq, as well as an appearance at a hearing on January 11, 1996, to explain
its proposals for satisfying the listing requirements of The Nasdaq National
Market. Nasdaq subsequently notified the Company that, subject to possible
review, it would grant the Company exceptions to the bid price and stockholder
meeting requirements provided that on or before February 15, 1996 (i) the
Company submit a public filing with the Securities and Exchange Commission
("SEC") and Nasdaq containing certain pro forma information reflecting the
consummation of the sale of the Series C Preferred Stock and (ii) the Company
file a preliminary draft of a Proxy Statement with respect to the Meeting with
the SEC. The Company complied with such requirements. Nasdaq subsequently
informed the Company that such exceptions were extended until May 4, 1996. The
Company believes that it is now in compliance with such exceptions.
The issuance of 660,000 shares of Series C Preferred Stock involves the
potential for a significant change in the equity ownership of the Company since
(as a result of the above referenced stockholder approvals) such shares may be
converted into an aggregate of 4,620,000 shares of Common Stock, which
represents approximately 48.2% of the outstanding Common Stock. The potential
changes in ownership interests may have a significant impact on the Company's
ability to utilize all of its net tax operating loss carryforwards. Management
is currently in the process of determining the limitations, if any, on the
Company's ability to utilize its net tax operating loss.
In connection with the execution of a one year consulting agreement between
the Placement Agent and the Company, the Company granted, as of 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 has
recorded a non cash compensation charge of $685,800 which will be amortized over
a 12 month period which commenced February 1, 1996.
11
<PAGE>
As of 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
a cash exercise price of $0.75 per share. In connection with the issuance of the
Former Directors Options, the Company has recorded a non cash compensation
charge of $91,441 all of which was amortized during 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 employment agreement's expiration date of
October 22, 1996 was extended to October 22, 1997 and during such one-year
extension the CEO's annual base compensation will be reduced from $200,000 to
$100,000. Upon execution of such amendment, stock options that the CEO held as
of such date exercisable to purchase an aggregate of 270,000 shares of Common
Stock (the "CEO Old Options") were terminated, and the Company granted to the
CEO stock options exercisable until February 1, 2001 to purchase an aggregate of
500,000 shares of Common Stock at a cash exercise price of $0.75 per share (the
"CEO New Options"). The grant of the CEO New Options was subject to stockholder
ratification and approval which was obtained at the Meeting. 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. As additional compensation, upon execution of
such amendment, the CEO received from the Company a restricted stock grant of
250,000 shares of Common Stock (the "CEO Restricted Stock Grant"). The
restrictions thereon will lapse upon consummation by the Company of an
"qualifying acquisition" (as defined), however, if an acquisition is not
consummated by January 30, 1997 the CEO Restricted Stock Grant will be
forfeited. In connection with the issuance of the CEO Restricted Stock Grant,
the Company recorded a non cash compensation charge of $468,750 which is
being amortized over the twelve month contingency period ending January 30,
1997.
On February 13, 1996, the Board of Directors adopted, subject to
stockholder approval, 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 (the "1991 Directors' Plan"). 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
12
<PAGE>
existing non-employee directors of the Company at an exercise price of $1.6875
per share and non-qualified stock options exercisable to purchase an aggregate
of 25,000 shares of Common Stock automatically will be granted to newly elected
or appointed non-employee directors of the Company at an exercise price equal to
the fair market value of such shares on the date of the grant. 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 given at the Meeting) an amendment (the "1991
Plan 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 March 31, 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. From November 14, 1994 until January 29, 1996,
the Company reduced the exercise price for each Initial Warrant from $7.00 to
$4.00 per share. From December 21, 1994 until January 29, 1996, the Company
reduced the exercise price for each Class B Warrant from $7.00 to $4.00 per
share. On January 30, 1996, the exercise price of the Initial Warrants and Class
B Warrants increased to $7.00 per share.
As a result of the aforementioned stockholder approval of the Certificate
Amendment and the issuance of the Series C Preferred Stock, stockholder
ratification and approval of the CEO New Options and CEO Restricted Stock Grant
and the grant of the Placement Agent Options and the Former Directors Options
and pursuant to the anti-dilution provisions of the Initial Warrants and Class B
Warrants, as of May 2, 1996 the exercise price of each Initial Warrant and Class
B Warrant outstanding was reduced to $3.75 per share and the aggregate number of
shares of Common Stock issuable upon exercise of such warrants was increased to
2,809,949 shares.
As of March 31, 1996, the Company had a cash balance of $1,500,240, current
assets of $5,872,172 and working capital of $2,694,275. Cash flows provided by
operating activities were $603,091 for the three months ended March 31, 1996,
which consisted primarily of depreciation and amortization of $381,475,
amortization of non cash compensation of $337,437 resulting from the issuance of
certain stock options and a restricted stock grant issued to the Placement
Agent, former directors and the CEO and minority interests in joint ventures of
$85,439, all of which were partially offset by a net loss of $266,324 and a
decrease in the allowances for doubtful accounts receivable of $81,000
attributed to better collections from former customers of the Company with
respect to mobile MRI operations. Other significant components of cash flows
provided by operating activities included an increase in accounts receivable of
$71,036 primarily due to an increase in the number of procedures being performed
13
<PAGE>
at certain of the Company's MRI facilities and an increase in accounts payable
and accrued expenses of $275,276 primarily due to the timing of payments being
made to certain vendors. Cash flows provided by financing activities were
$638,975, 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 $92,423, partially offset by payments on capital
lease obligations of $227,370, repayments on the reserves for restructuring
costs of $356,274 and distributions to limited partners of joint ventures of
$48,877.
The Company's Philadelphia, Pennsylvania joint venture 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 March 31, 1996, the
amount of the working capital loans made to this joint venture was approximately
$1,801,000. 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 such operations.
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 the sublessee of the Company's mobile
MRI equipment is a former officer of the Company and is the brother of the 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
collateralized by the accounts receivable due to the sublessee by the
sublessee's mobile MRI customers. This subblease arrangement enabled the Company
to eliminate all operating costs associated with the operation of its mobile MRI
units, except for debt service, and provides for the receipt of lease payments
under such sublease arrangement, thereby resulting in significant cash savings.
Effective May 1, 1995, the sublease agreement was amended to provide for
monthly payments to the Company in the amount of $76,373 per month for the next
14
<PAGE>
40 months which excludes maintenance of $38,627 per month originally paid
directly by the Company. The sublessee entered into a maintenance agreement with
an unrelated third party and began paying the equipment maintenance directly for
the subleased mobile MRI units. The Company, due to the sublessee's failure to
remain current with its 1995 monthly payment obligations, notified the sublessee
that it is in default of the sublease agreement. As a result, after assessing
the sublease business arrangement, the Company sold one of its mobile MRI units
for $625,000 in December 1995, which in turn reduced the sublessee's monthly
payment obligation to the Company from $76,373 to $52,582 a month for the
remaining 33 months of the sublease. As a result of the sale of the mobile MRI
unit, the Company incurred a loss of approximately $31,000 representing the
difference between the remaining sublease income attributed to such mobile MRI
unit and the sales proceeds. In establishing the reserve for restructuring
costs, management provided for estimated losses relating to the non payment of
sublease income and/or losses which may be realized in connection with the
disposition of the mobile MRI units. Accordingly, no additional restructuring
charge was deemed necessary by management in connection with such sale. The
Company is seeking opportunities to sell the three remaining mobile MRI units
which, if consummated, would result in a further reduction in the Company's
capital lease obligations and additional cash savings. However, there can be no
assurance that any such sale will be consummated. At December 31, 1995, the
Company was entitled to receive approximately $1,047,000 from the sublessee in
rental income of which it received $685,000 resulting in past due amounts of
approximately $362,000 at December 31, 1995. For the three months ended March
31, 1996, the Company was entitled to receive approximately $147,000 from the
sublessee in rental income of which it received $72,000 resulting in past due
amounts for such period of approximately $75,000.
In February 1996, the Company terminated the master agreement with the
sublessee as a result of the failure of the sublessee and its customers to
satisfy their obligations to the Company. In an attempt to satisfy the past due
amounts owed to the Company, the sublessee and its customers have reached a
preliminary agreement with the Company to provide the Company with cash and
additional patient receivable claims to offset against the amounts they owe to
the Company. The additional patient receivable claims are to supplement the
amounts previously submitted to the Company to satisfy prior past due
indebtedness from the sublessee and its customers. As of April 30, 1996, the
sublessee and its customers provided $75,000 in cash and approximately $504,000
in additional patient receivable claims since the settlement discussions
commenced. The preliminary settlement provides that, among other things, should
a patient receivable claim submitted to the Company be uncollectible, additional
15
<PAGE>
patient receivable claims will be provided to the Company in satisfaction of
outstanding amounts due. Pending the finalization of the settlement agreement,
the Company is subleasing the mobile MRI units to the sublessee on an interim
basis and intends to continue to do so after the agreement is finalized. The
Company may terminate the use by the sublessee and its customers of the mobile
MRI units if the sublessee fails to adhere to the payment terms of the new
agreement.
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 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 Services ("DFS"), which through March 31, 1994 had the exclusive
right, but not the obligation, to provide medical equipment financing. In
December 1995, DFS' two representatives on the Board of Directors resigned and
in April 1996 DFS sold its 800,000 shares of Common Stock of the Company
(representing approximately 17% of the outstanding Common Stock).
The Company is planning for the future and is committed to the medical
community to provide state of the art technology. Three of the Company's MRI
systems have been upgraded to include Fast Spin Echo, allowing faster scan times
and an improvement of the image quality, as well as the improvement of patient
throughput at the facilities utilizing such systems. Likewise, these systems
have been upgraded to include the (quadrature) surface coils needed to provide
superior image quality. The Company continues to strive to understand the
changing medical market and to provide sound decisions regarding the technology
to improve its competitive position.
The Company believes that cash to be provided by the Company's operating
activities will be sufficient to meet its anticipated cash requirements for its
present operations for the next twelve months. The refinancing of certain MRI
equipment leases completed in September 1995, the sale of the lithotripsy
equipment and the sale of one of the Company's mobile MRI units will provide the
Company with annualized reductions in payment obligations. In addition, the
proceeds received from the sale of the Series C Preferred Stock and the proceeds
to be received from the exercise of Initial Warrants and Class B Warrants, if
any, will further supplement the Company's ability to meet its future cash
needs. The Company has already implemented certain expense reduction programs to
reduce its operating costs (including the closing of the Maiden Choice MRI
16
<PAGE>
facility and subsequent leasing of the related equipment, the restructuring of
the mobile MRI operations, the sale of the lithotripsy unit, the sale of one of
the Company's mobile MRI units and the refinancing of certain equipment leases)
and continues to assess other cost reduction measures. 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 provided.
17
<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) During the first quarter of fiscal 1996, the Company
filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission:
(i) Pursuant to Item 5 the Company filed a Form 8-K on
January 29, 1996, a press release issued by it on January
25, 1996 regarding a change in the composition its
Board of Directors.
(ii) Pursuant to Item 5 the Company filed a Form 8-K on
February 12, 1996 a press release issued by it on
February 6, 1996 regarding a proposed private placement
of its convertible preferred stock.
(iii) Pursuant to Item 5 the Company filed a Form 8-K on
February 14, 1996 (as amended by the Company's Form
8-K/A filed with the Commission on March 28, 1996) a
press release issued by it on February 13, 1996
regarding its consummation of a private placement of
convertible preferred stock of the Company. In addition,
the Company filed an Unaudited Pro Forma Consolidated
Condensed Balance Sheet of the Company and Subsidiaries
at December 31, 1995.
18
<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: June 26, 1996 Elliott H. Vernon,
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive
Officer)
/s/ MICHAEL J. RUTKIN
----------------------
DATE: June 26, 1996 Michael J. Rutkin,
Chief Operating Officer
(Acting Principal
Financial and Accounting
Officer)
19
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