HEALTHCARE IMAGING SERVICES INC
10-Q/A, 1996-06-26
MEDICAL LABORATORIES
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                                  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
<PAGE>



               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



<TABLE> <S> <C>

<ARTICLE> 5
       
<S>                                 <C>
<PERIOD-TYPE>                      3-MOS
<FISCAL-YEAR-END>                              DEC-31-1996
<PERIOD-END>                                   MAR-31-1996
<CASH>                                         $ 1,500,240
<SECURITIES>                                             0
<RECEIVABLES>                                    3,865,567
<ALLOWANCES>                                             0
<INVENTORY>                                              0
<CURRENT-ASSETS>                                 5,872,172
<PP&E>                                          10,369,864
<DEPRECIATION>                                   5,338,911
<TOTAL-ASSETS>                                  11,182,892
<CURRENT-LIABILITIES>                            3,177,897
<BONDS>                                                  0
                                    0
                                         66,000
<COMMON>                                            49,620
<OTHER-SE>                                       4,376,623
<TOTAL-LIABILITY-AND-EQUITY>                    11,182,892
<SALES>                                                  0
<TOTAL-REVENUES>                                 2,354,892
<CGS>                                                    0
<TOTAL-COSTS>                                    2,524,077
<OTHER-EXPENSES>                                         0
<LOSS-PROVISION>                                         0
<INTEREST-EXPENSE>                                       0
<INCOME-PRETAX>                                   (254,624)
<INCOME-TAX>                                        11,700
<INCOME-CONTINUING>                                      0
<DISCONTINUED>                                           0
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                      (266,324)
<EPS-PRIMARY>                                         (.06)
<EPS-DILUTED>                                            0

        

</TABLE>


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