UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to_________________
Commission file number 000-19636
HEALTHCARE IMAGING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3119929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Schulz Drive, Middletown, New Jersey 07701
(Address of principal executive offices) (Zip Code)
(908) 224-9292
(Registrants 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 issuers
classes of common stock, as of the latest practicable date.
Class Outstanding at August 14, 1996
----- ------------------------------
Common Stock, $.01 par value 4,961,974 shares
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
Three and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Changes in Stockholders
Equity - For the six months ended June 30, 1996 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
This Quarterly Report may include forward-looking statements that may or may
not materialize. Additional information on factors that could potentially
affect the Companys financial results may be found in the Companys other
filings with the Securities and Exchange Commission.
2
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
ASSETS 1996 1995
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 1,193,217 $ 281,416
Accounts receivable - net 3,761,469 3,713,531
Prepaid expenses and other 322,226 217,762
Due from officer 231,904 -
------- --------
Total current assets 5,508,816 4,212,709
--------- ---------
Property, plant and equipment - net 4,856,235 5,272,215
--------- ---------
Other assets:
Deferred costs - net 27,769 35,259
Goodwill - net 148,059 157,314
Due from officer - 231,904
Other 99,574 97,298
------ ------
Total other assets 275,402 521,775
------- -------
Total assets $10,640,453 $10,006,699
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 767,042 $ 765,258
Current portion of capital lease
obligations and long-term debt
(of which $1,036,158 in 1996
and $933,818 in 1995 is owed to
DVI Financial Services, Inc., a
related party) 1,061,960 1,001,414
Reserve for restructuring costs 559,711 1,285,790
Income taxes payable 7,651 -
--------- ---------
Total current liabilities 2,396,364 3,052,462
--------- ---------
Non-current liabilities:
Capital lease obligations and long-term
debt (of which $2,661,753 in 1996 and
$2,969,275 in 1995 is owed to DVI
Financial Services, Inc., a related
party) 2,661,753 2,973,752
Reserve for restructuring costs 632,792 301,693
------- -------
Total noncurrent liabilities 3,294,545 3,275,445
--------- ---------
Minority interests 460,567 455,916
------- -------
Stockholders' equity:
Convertible preferred stock,
$.10 par value; 1,000,000 shares
authorized, 660,000 shares outstanding
at June 30, 1996 66,000 -
Common stock, $.01 par value;
50,000,000 shares authorized,
4,961,974 shares outstanding at
June 30, 1996 and 4,711,974 shares
outstanding at December 31, 1995 49,620 47,120
Additional paid-in capital 11,841,050 8,902,805
Accumulated deficit (6,365,633) (5,727,049)
Unearned compensation (1,102,060) -
---------- ---------
Total stockholders equity 4,488,977 3,222,876
--------- ---------
Total liabilities and stockholders'
equity $10,640,453 $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
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues: $2,283,056 $2,511,183 $4,637,948 $4,874,014
---------- ---------- ---------- ----------
Operating Expenses:
Salaries 629,580 693,505 1,295,649 1,367,886
Other operating
expenses 618,306 627,588 1,203,859 1,247,427
Films and supplies 114,261 126,218 250,073 256,905
Equipment mainte-
nance and repairs 168,220 221,801 344,269 426,553
Professional fees 135,694 73,230 255,703 151,090
Depreciation and
amortization 385,470 451,593 766,945 898,690
Interest 119,251 138,759 240,924 370,585
------- ------- ------- -------
2,170,782 2,332,694 4,357,422 4,719,136
--------- --------- --------- ---------
Income before non-cash
compensation charge,
minority interests in
joint ventures and
income taxes 112,274 178,489 280,526 154,878
Non-cash compensation
charge (368,994) - (706,431) -
Minority interests in
joint ventures (99,551) (106,498) (184,990) (174,814)
------- -------- -------- --------
Operating (loss) income
before income taxes (356,271) 71,991 (610,895) (19,936)
Income tax provision 15,989 45,495 27,689 93,495
------ ------ ------ ------
Net (loss) income $(372,260) $26,496 $(638,584) $(113,431)
========= ======= ========= =========
Weighted average common
shares outstanding 4,711,974 4,711,974 4,711,974 4,711,974
========= ========= ========= =========
Net (loss) income per
common share $(.08) $.01 $(.14) $(.02)
===== ==== ===== =====
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid In Accumulated Unearned Stockholders
Shares Amount Shares Amount Capital (Deficit) Compensation Equity
------ ----- ----- ------ ------- --------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 0 0 4,711,974 $47,120 $8,902,805 $(5,727,049) 0 $3,222,876
Proceeds from sale of Preferred
Stock, net of expenses of 660,000 $66,000 0 0 1,132,254 0 0 1,198,254
$151,746
Issuance of Restricted Stock
Grant 0 0 250,000 2,500 466,244 0 $(468,744) 0
Unearned compensation in
connection with stock 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 0 706,431 706,431
Net loss for the six months
ended June 30, 1996 0 0 0 0 0 (638,584) 0 (638,584)
------ ------ ------- ------- -------- --------- -------- ---------
BALANCE, JUNE 30, 1996 660,000 $66,000 4,961,974 $49,620 $11,841,050 $(6,365,633) $(1,102,060) $4,488,977
======= ======= ========= ======= =========== =========== =========== ==========
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(638,584) $(113,431)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 766,945 898,690
Amortization of non-cash compensation 706,431 -
Minority interests in joint ventures 184,990 174,814
Deferred income taxes - (5,000)
Allowance for doubtful accounts
receivable 25,000 348,000
Changes in assets and liabilities:
Accounts receivable (72,938) 491,375
Prepaid expenses and other (104,464) (72,248)
Deferred costs (10,707) (26,013)
Accounts payable and accrued expenses 1,784 92,096
Income taxes payable 7,651 17,209
Other assets (2,276) 20,303
------ ------
Net cash provided by operating activities 863,832 1,825,795
------- ---------
Cash flows from investing activities:
Purchases of property, plant and
equipment (73,484) (17,391)
------- -------
Cash flows from financing activities:
Net proceeds received from the sale
of Series C Preferred Stock 1,198,254 -
Distributions to limited partners
of joint ventures (180,339) (137,624)
Payments on note payable (38,979) (34,344)
Payments on capital lease obligations (462,503) (844,509)
Proceeds received on sublease for
restructured operations 200,423 430,000
Payments on reserve for restructuring
costs (595,403) (1,275,219)
-------- ----------
Net cash provided by (used in) financing
activities 121,453 (1,861,696)
------- ----------
Increase (decrease) in cash and cash
equivalents 911,801 (53,292)
Cash and cash equivalents at beginning
of period 281,416 235,260
------- -------
Cash and cash equivalents at end
of period $1,193,217 $181,968
========== ========
6
<PAGE>
HEALTHCARE IMAGING SERVICES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Six Months Ended
June 30,
1996 1995
---- ----
Supplemental Cash Flow Information:
Interest paid during the period $245,225 $327,319
======== ========
Income taxes paid during the period $32,750 $69,456
======= =======
Supplemental Schedule of Noncash Investing
and Financing Activities:
Capital leases principally for
medical equipment $250,029 $ -
======== ========
See accompanying notes to consolidated financial statements.
7
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996
Note 1. - Basis of Presentation
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary
to present fairly the Companys financial position as of June 30,
1996 and the statements of operations and cash flows for the
periods ended June 30, 1996 and 1995. Certain information and
footnote disclosures normally included in annual financial
statements have been omitted from the accompanying interim
consolidated financial statements.
The results of operations for the six months ended June 30,
1996 are not necessarily indicative of the results of operations
expected for the year ending December 31, 1996 or any other period.
The consolidated financial statements included herein should be
read in conjunction with the consolidated financial statements and
notes thereto contained in the Companys Annual Report on Form 10-K
for the year ended December 31, 1995, as amended by the Companys
Form 10-K/A-2, which are on file at the Securities and Exchange
Commission.
Note 2. - Private Placement
On February 9, 1996, the Company sold, in a private placement,
600,000 shares of its Series C Convertible Preferred Stock, par
value $0.10 per share (the "Series C Preferred Stock"), for $2.25
per share resulting in net proceeds to the Company of $1,198,254.
In connection with the private placement, the Company issued 60,000
shares of Series C Preferred Stock to the placement agent, Biltmore
Securities, Inc. (the "Placement Agent"), as its placement agent
fee. At its 1996 Annual Meeting of Stockholders held on May 2,
1996 (the Meeting), the Company obtained all requisite
stockholder approvals to enable the holders of the Series C
Preferred Stock to convert each share of Series C Preferred Stock
into seven shares of Common Stock. In addition, the Company also
obtained stockholder approval for, among other things, an increase
in its authorized Common Stock from 9 million to 50 million shares
(the "Certificate Amendment"). The holders of the Series C
Preferred Stock are not able to sell, transfer, assign or otherwise
dispose of the shares of Series C Preferred Stock (or the shares of
Common Stock issuable upon conversion of the Series C Preferred
Stock), in whole or in part, until August 9, 1997 without the
Placement Agents prior consent.
The issuance of 660,000 shares of Series C Preferred Stock
involves a significant change in the equity ownership of the
Company (such shares are convertible into an aggregate of 4,620,000
shares of Common Stock, representing approximately 48.2% of the
Companys outstanding Common Stock). The change in ownership
interests will have a significant effect on the timing and
availability of certain net tax operating loss carryforwards
(NOLs) which amounted to approximately $5,100,000 as of December
31, 1995. As a result, the annual federal limitation of such NOLs
will be approximately $560,000.
8
<PAGE>
Note 3. -Stock Options and Restricted Stock Grant
As consideration for the execution of a one-year consulting
agreement between the Placement Agent and the Company, the Company
granted on January 30, 1996 to the Placement Agent, stock options
(the "Placement Agent Options") exercisable to purchase an
aggregate of 750,000 shares of Common Stock over a five-year period
at a cash exercise price of $0.75 per share. In addition, such
consulting agreement provides that the Placement Agent will receive
from the Company 750,000 shares of Common Stock upon consummation
by the Company by January 30, 1997 of an acquisition of, or other
business combination with, a company (or companies) with assets of
at least $2.5 million (the "Acquisition"). In connection with the
issuance of the Placement Agent Options, the Company has recorded
a non-cash compensation charge of $685,800 which is being
amortized over the term of the consulting agreement.
On January 30, 1996, the Company granted stock options (the
"Former Directors Options") to each of two former directors of the
Company immediately exercisable to purchase 50,000 shares of Common
Stock over a five-year period at an exercise price of $0.75 per
share. In connection with the issuance of the Former Directors
Options, the Company has recorded a non-cash compensation charge of
$91,441 in the quarter ended March 31, 1996.
As of February 1, 1996, the Company amended its employment
agreement with its Chairman of the Board, President and Chief
Executive Officer (the "CEO"). Pursuant to such amendment, the
agreement's original expiration date of October 22, 1996 was
extended to October 22, 1997 and during such extension the CEOs
annual base compensation will be reduced from $200,000 to $100,000.
In addition, stock options that the CEO held to purchase an
aggregate of 270,000 shares of Common Stock at exercise prices
ranging from $1.50 to $5.00 per share (the "CEO Old Options") were
terminated and the Company granted the CEO options, exercisable
until February 1, 2001, to purchase an aggregate of 500,000 shares
of Common Stock at an exercise price of $0.75 per share (the "CEO
New Options"). In connection with the issuance of the CEO New
Options, the Company has recorded a non-cash compensation charge of
$562,506 which is being amortized over the twenty-one months ending
October 31, 1997. Furthermore, the CEO received a restricted stock
grant of 250,000 shares of Common Stock (the "CEO Restricted Stock
Grant"). The restrictions related to CEO Restricted Stock Grant
will lapse upon consummation by the Company of an Acquisition.
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
has recorded a non-cash compensation charge of $468,744 which is
being amortized over the twelve-month contingency period ending
January 30, 1997.
Note 4. - Warrants
As of June 30, 1996, the Company had 1,250,130 Common Stock
Purchase Warrants ("Initial Warrants") and 255,200 Class B Common
Stock Purchase Warrants ("Class B Warrants") outstanding. 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
9
<PAGE>
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 sale of the 600,000 shares of Series C
Preferred Stock and the receipt at the Meeting of certain
stockholder approvals relating to such sale and certain other
issuances of securities, the exercise price of each outstanding
Initial Warrant and Class B Warrant was reduced from $7.00 to $3.75
per share and the aggregate number of shares of Common Stock
issuable upon exercise of all such warrants was increased from
1,505,330 to 2,809,949. The reduction in the exercise price and
the increase in the number of shares issuable upon exercise results
from the anti-dilution provisions of the Initial Warrant and Class
B Warrants. These warrants will expire on November 12, 1996.
Note 5. Stock Option Plans
On February 13, 1996, the Board of Directors adopted, subject
to stockholder approval (which was obtained at the Meeting), the
HealthCare Imaging Services, Inc. 1996 Stock Option Plan for Non-
Employee Directors (the "1996 Directors' Plan"). The 1996
Directors' Plan replaced the existing 1991 Directors' Stock Option
Plan for Non-Employee Directors. Under the 1996 Directors Plan,
non-qualified stock options exercisable to purchase an aggregate of
25,000 shares of Common Stock were granted on February 13, 1996 to
each of the three then current non-employee directors of the
Company at an exercise price of $1.6875 per share. In addition, on
May 2, 1996 non-qualified stock options exercisable to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of
$2.09375 were granted to each of the three newly elected non-
employee directors of the Company. Stock options awarded under the
1996 Directors' Plan vest in increments of 40% after the sixth
month, 80% after the eighteenth month and 100% after the thirtieth
month anniversary of the date of the grant. No stock options under
the 1996 Directors' Plan may be granted after May 1, 2006. Stock
options are non-transferable during the life of the option holder.
On February 13, 1996, the Board of Directors approved, subject
to stockholder approval (which was obtained at the Meeting), an
amendment to the Companys 1991 Stock Option Plan (the "1991
Plan") whereby the number of shares of Common Stock that may be
subject to options awarded to any participant pursuant to the 1991
Plan would be increased from an aggregate of 200,000 for the term
of such plan to 250,000 shares in any given calendar year.
Note 6. - Contingency
In October 1995, the Company was notified by the New Jersey
Division of Taxation ("NJDT") of a proposed sales and use tax
assessment of approximately $887,000. The Company provided
additional information to the NJDT which substantially reduced the
proposed assessment to $214,280. Additionally, in February 1996,
the Company was notified by the New York State Department of
Taxation and Finance regarding the commencement of a sales and use
tax examination. On May 31, 1996, the Company paid the New Jersey
sales and use tax assessment of $214,280 under a conditional
agreement with the NJDT. Such agreement acknowledged that the
State of New Jersey has not yet reached an agreement with the State
10
<PAGE>
of New York to assure that New York will give full credit (under
the interstate agreement between New Jersey and New York) for sales
tax paid to the State of New Jersey. The NJDT has agreed that New
Jersey will continue to deal directly with New York to assure that
the Company receives full credit under the interstate taxation
agreement for the New Jersey sales tax paid against any New York
State sales tax deficiency arising from items deemed taxable by
both states. In the event that the credit is not available to the
Company, the NJDT has agreed that New Jersey would remit directly
to New York the sales tax previously paid by the Company regarding
such taxable items in question. Management believes that the
ultimate resolution of these matters, beyond the amounts already
provided for, will not have a material impact on the Companys
financial condition or results of operations although no assurances
can be provided.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the Six Months Ended June 30, 1996 vs. June 30, 1995
For the six months ended June 30, 1996, revenues were
$4,637,948 as compared to $4,874,014 for the six months ended June
30, 1995, a decrease of approximately $236,000. This decrease is
primarily due to (1) the elimination of operating revenues from the
Companys lithotripsy operations (approximately $294,000) as a
result of the sale of the lithotripsy unit on August 31, 1995 and
(2) decreased revenues from the Companys Edgewater and
Philadelphia MRI facilities (approximately $151,000 and $117,000,
respectively) due to increased competition resulting in fewer
procedures being performed, all of which were partially offset by
increased revenues (approximately $326,000) from the Companys
other MRI facilities due to the increased number of procedures
being performed.
For the six months ended June 30, 1996, operating expenses
were $5,063,853 as compared to $4,719,136 for the six months ended
June 30, 1995, an increase of approximately $345,000. This
increase was primarily due to the amortization of non-cash
compensation charges (approximately $706,000) resulting from the
grant of (i) stock options to two of the Companys former
directors, (ii) stock options and a restricted stock award to the
Companys Chairman of the Board, President and Chief Executive
Officer (the "CEO") and (iii) stock options to Biltmore
Securities, Inc. (the "Placement Agent") pursuant to a consulting
agreement (for a further discussion regarding the stock option
grants refer to Note 3 of the accompanying financial statements).
The Companys operating expenses before amortization of the non-
cash compensation charges decreased approximately $362,000,
primarily due to the elimination of operating expenses
(approximately $373,000) relating to the Companys disposed
lithotripsy operations. Equipment maintenance and repairs
decreased approximately $82,000, primarily due to the termination
of a maintenance agreement relating to the disposed lithotripsy
unit. Professional fees increased approximately $105,000,
partially due to the preparation of the proxy statement for the
Companys 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
$132,000, primarily due to the elimination of depreciation expense
for the lithotripsy unit. Interest expense decreased approximately
$130,000, 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.
During the six months ended June 30, 1996, as a corporate
general partner, the Company recorded an additional $100,496 of
losses attributable to the limited partnership interest in the
Philadelphia, Pennsylvania joint venture (the Philadelphia MRI
facility) in excess of the limited partners capital accounts.
The operating results for the six months ended June 30, 1996
and 1995 were substantially affected by the Philadelphia MRI
12
<PAGE>
facility which incurred losses of $251,241 and $161,022,
respectively. To the extent that the Philadelphia MRI facility
does not become profitable, the Company may have to take certain
actions to restructure or divest itself of such operation. The
Company has commenced negotiations with the present limited
partners as to the restructuring of such joint venture. However,
there can be no assurances with respect to the timing and magnitude
of a restructuring charge, if any, relating to the Philadelphia MRI
facility.
For the Three Months Ended June 30, 1996 vs. June 30, 1995
For the three months ended June 30, 1996, revenues were
$2,283,056 as compared to $2,511,183 for the three months ended
June 30, 1995, a decrease of approximately $228,000. This decrease
is primarily due to (1) the elimination of operating revenues from
the Companys lithotripsy operations (approximately $158,000) as a
result of the sale of the lithotripsy unit on August 31, 1995 and
(2) decreased revenues from the Companys Brooklyn, Edgewater and
Philadelphia MRI facilities (approximately $43,000, $78,000 and
$85,000, respectively) due to increased competition resulting in
fewer procedures being performed, all of which were partially
offset by increased revenues (approximately $136,000) from the
Companys other MRI facilities due to the increased number of
procedures being performed.
For the three months ended June 30, 1996, operating expenses
were $2,539,776 as compared to $2,332,694 for the three months
ended June 30, 1995, an increase of approximately $207,000. This
increase was primarily due to the amortization of non-cash
compensation charges (approximately $369,000) resulting from the
grant of (i) stock options to two of the Companys former
directors, (ii) stock options and a restricted stock award to the
CEO and (iii) stock options to the Placement Agent pursuant to a
consulting agreement (for a further discussion regarding the stock
option grants refer to Note 3 of the accompanying financial
statements). The Companys operating expenses before amortization
of the non-cash compensation charges decreased approximately
$162,000, primarily due to the elimination of operating expenses
relating to the Companys disposed lithotripsy operations.
Equipment maintenance and repairs decreased approximately $54,000,
primarily due to the termination of a maintenance agreement
relating to the disposed lithotripsy unit. Professional fees
increased approximately $62,000, primarily due to the costs
incurred in connection with the preparation of the proxy statement
for the Meeting and the New Jersey and New York state sales tax
examinations referred to in Note 6 of the accompanying financial
statements. Depreciation and amortization decreased approximately
$66,000, primarily due to the elimination of depreciation expense
for the lithotripsy unit. Interest expense decreased approximately
$20,000, primarily due to the refinancing of certain equipment
leases as of September 30, 1995 at lower interest rates.
During the three months ended June 30, 1996, as a corporate
general partner, the Company recorded an additional $47,307 of
losses attributable to the limited partnership interest in the
Philadelphia, MRI facility in excess of the limited partners'
capital accounts.
13
<PAGE>
The operating results for the three months ended June 30, 1996
and 1995 were substantially affected by the Philadelphia MRI
facility which incurred losses of $118,268 and $79,486,
respectively. To the extent that the Philadelphia MRI facility
does not become profitable, the Company may have to take certain
actions to restructure or divest itself of such operation. The
Company has commenced negotiations with the present limited
partners as to the restructuring of such joint venture. However,
there can be no assurances with respect to the timing and magnitude
of a restructuring charge, if any, relating to the Philadelphia MRI
facility.
Liquidity and Capital Resources of the Company
On February 9, 1996, the Company sold, in a private placement,
600,000 shares of Series C Preferred Stock, for $2.25 per share
resulting in net proceeds to the Company of $1,198,254. In
connection with the private placement, the Company issued 60,000
shares of Series C Preferred Stock to the Placement Agent as its
placement agent fee. At the Meeting, the Company obtained all
requisite stockholder approvals to enable the holders of the Series
C Preferred Stock to convert each share of Series C Preferred Stock
into seven shares of Common Stock. In addition, the Company also
obtained stockholder approval for, among other things, an increase
in its authorized Common Stock from 9 million to 50 million shares
(the "Certificate Amendment"). The holders of the Series C
Preferred Stock are not able to sell, transfer, assign or otherwise
dispose of the shares of Series C Preferred Stock (or the shares of
Common Stock issuable upon conversion of the Series C Preferred
Stock), in whole or in part, until August 9, 1997 without the
Placement Agents 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. The Company is now in compliance with the requirements
for continued listing on The Nasdaq National Market.
The issuance of 660,000 shares of Series C Preferred Stock
involves a significant change in the equity ownership of the
Company (such shares are convertible into an aggregate of 4,620,000
shares of Common Stock, representing approximately 48.2% of the
Companys outstanding Common Stock). The change in ownership
interests will have a significant effect on the timing and
availability of certain net tax operating loss carryforwards
(NOLs) which amounted to approximately $5,100,000 as of December
31, 1995. As a result, the annual federal limitation of such NOLs
will be approximately $560,000.
As consideration for the execution of a one-year consulting
agreement between the Placement Agent and the Company, the Company
granted on January 30, 1996 to the Placement Agent, stock options
(the "Placement Agent Options") exercisable to purchase an
aggregate of 750,000 shares of Common Stock over a five-year period
at a cash exercise price of $0.75 per share. In addition, such
14
<PAGE>
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 is being
amortized over the term of the consulting agreement.
On January 30, 1996, the Company granted stock options (the
"Former Directors Options") to each of two former directors of the
Company immediately exercisable to purchase 50,000 shares of Common
Stock over a five-year period at an exercise price of $0.75 per
share. In connection with the issuance of the Former Directors
Options, the Company has recorded a non-cash compensation charge of
$91,441 in the quarter ended March 31, 1996.
As of February 1, 1996, the Company amended its employment
agreement with its Chairman of the Board, President and Chief
Executive Officer (the "CEO"). Pursuant to such amendment, the
agreement's original expiration date of October 22, 1996 was
extended to October 22, 1997 and during such extension the CEOs
annual base compensation will be reduced from $200,000 to $100,000.
In addition, stock options that the CEO held to purchase an
aggregate of 270,000 shares of Common Stock at exercise prices
ranging from $1.50 to $5.00 per share (the "CEO Old Options") were
terminated and the Company granted the CEO options, exercisable
until February 1, 2001, to purchase an aggregate of 500,000 shares
of Common Stock at an exercise price of $0.75 per share (the "CEO
New Options"). In connection with the issuance of the CEO New
Options, the Company has recorded a non-cash compensation charge of
$562,506 which is being amortized over the twenty-one months ending
October 31, 1997. Furthermore, the CEO received a restricted stock
grant of 250,000 shares of Common Stock (the "CEO Restricted Stock
Grant"). The restrictions related to CEO Restricted Stock Grant
will lapse upon consummation by the Company of an Acquisition.
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
has recorded a non-cash compensation charge of $468,744 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 (which was obtained at the Meeting), the
HealthCare Imaging Services, Inc. 1996 Stock Option Plan for Non-
Employee Directors (the "1996 Directors' Plan"). The 1996
Directors' Plan replaced the existing 1991 Directors' Stock Option
Plan for Non-Employee Directors. Under the 1996 Directors Plan,
non-qualified stock options exercisable to purchase an aggregate of
25,000 shares of Common Stock were granted on February 13, 1996 to
each of the three then current non-employee directors of the
Company at an exercise price of $1.6875 per share. In addition, on
May 2, 1996 non-qualified stock options exercisable to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of
$2.09375 were granted to each of the three newly elected non-
employee directors of the Company. Stock options awarded under the
1996 Directors' Plan vest in increments of 40% after the sixth
month, 80% after the eighteenth month and 100% after the thirtieth
15
<PAGE>
month anniversary of the date of the grant. No stock options under
the 1996 Directors' Plan may be granted after May 1, 2006. Stock
options are non-transferable during the life of the option holder.
On February 13, 1996, the Board of Directors approved, subject
to stockholder approval (which was obtained at the Meeting), an
amendment to the Companys 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 June 30, 1996, the Company had 1,250,130 Common Stock
Purchase Warrants ("Initial Warrants") and 255,200 Class B Common
Stock Purchase Warrants ("Class B Warrants") outstanding. 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 sale of the 600,000 shares of Series C
Preferred Stock and the receipt at the Meeting of certain
stockholder approvals relating to such sale and certain other
issuances of securities, the exercise price of each outstanding
Initial Warrant and Class B Warrant was reduced from $7.00 to $3.75
per share and the aggregate number of shares of Common Stock
issuable upon exercise of all such warrants was increased from
1,505,330 to 2,809,949. The reduction in the exercise price and
the increase in the number of shares issuable upon exercise results
from the anti-dilution provisions of the Initial Warrants and Class
B Warrants. These warrants will expire on November 12, 1996.
As of June 30, 1996, the Company had a cash balance of
$1,193,217, current assets of $5,508,816 and working capital of
$3,112,452. Cash flows provided by operating activities were
$863,832 for the six months ended June 30, 1996, which consisted
primarily of the net loss of $638,584 which was offset by non-cash
charges for depreciation and amortization of $766,945, amortization
of non-cash compensation of $706,431 and minority interests in
joint ventures of $184,990. Other significant components of cash
flows provided by operating activities included an increase in
accounts receivable of $72,938 and an increase in prepaid expenses
and other of $104,464 partially due to the Brooklyn MRI facility
real estate taxes which were paid in advance. Cash flows used in
investing activities were $73,484 primarily for the purchases of
property, plant and equipment. Cash flows provided by financing
activities were $121,453, 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 $200,423, partially offset by payments on capital
lease obligations of $462,503, repayments on the reserves for
restructuring costs of $595,403 and distributions to limited
partners of joint ventures of $180,339.
The Companys Philadelphia MRI facility, which has been
operating since November 1992, continues to operate at a loss. In
16
<PAGE>
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 June 30, 1996, the amount of the working capital
loans made to this joint venture was approximately $1,902,000. In
order to become profitable, this joint venture must attain a
certain volume of business and it is uncertain whether such volume
will ever be attained. The Company cannot at this time determine
when, or if, these working capital loans will be repaid. To the
extent that the Philadelphia MRI facility does not become
profitable, the Company may take certain actions to restructure or
divest itself of such operations. The Company has commenced
negotiations with the present limited partners as to the
restructuring of such joint venture. However, there can be no
assurances with respect to the timing and magnitude of a
restructuring charge, if any, relating to the Philadelphia MRI
facility.
The Company entered into an arrangement, effective September
1, 1994, pursuant to which it is operating solely as a sublessor of
its mobile MRI equipment rather than as an operator of such
equipment. Mark R. Vernon, the President and a significant
stockholder of Omni Medical Imaging, Inc. (the sublessee) is a
former officer of the Company and is the brother of the Companys
CEO. The other stockholders of the sublessee include certain
former customers of the Company with whom the Company had
agreements for the use of the mobile MRI equipment. The total
monthly sublease payments due to the Company are secured by the
accounts receivable due to the sublessee by certain of the
sublessees mobile MRI customers. This sublease 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 the
sublease, thereby resulting in significant cash savings to the
Company.
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 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 under which the sublessee is obligated to pay the
maintenance for the subleased mobile MRI units. The Company, due
to the sublessees failure to remain current with its 1995 monthly
payment obligations, notified the sublessee that it was 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
sublessees 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 attributable to such mobile MRI unit
and the sales proceeds. In establishing the reserve for
restructuring costs, management provided for estimated losses
relating to the potential 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 charge was deemed
necessary by management in connection with such sale. 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.
17
<PAGE>
In February 1996, the Company terminated the master agreement
and repossessed the mobile MRI units from the sublessee as a result
of the failure of the sublessee and certain of its customers to
satisfy their payment obligations to the Company. In an attempt to
satisfy the past due amounts owed to the Company, the sublessee and
its customers provided the Company with cash and additional patient
receivable claims to partially offset the amounts owed to the
Company. The additional patient receivable claims are to
supplement the amounts previously submitted to the Company to
satisfy prior past due indebtedness from the sublessee and its
customers. After receiving cash and additional patient receivable
claims, the Company returned the mobile MRI units to the sublessee.
For the six months ended June 30, 1996, the Company was entitled to
receive approximately $305,000 from the sublessee in rental income
of which it received $160,000 resulting in past due amounts for
such period of approximately $145,000. In the aggregate, the
sublessee owed the Company approximately $507,000 at June 30, 1996.
Effective July 27, 1996, the Company again repossessed the
mobile MRI units from the sublessee due to its continued failure to
bring current its 1995 and 1996 monthly payment obligations to the
Company. The repayment of a portion of the $507,000 owed to the
Company at June 30, 1996, is collateralized by certain accounts
receivable of the sublessee. The Company is currently pursuing the
collection of such accounts receivable. In addition, the Company
is seeking to finalize an agreement with the sublessee and its two
other major creditors relating to the collection of the sublessees
other accounts receivable and the distribution among such parties
of the collection proceeds. Under such agreement, the Company
would endeavor to collect the sublessees accounts receivable and
would receive a fee therefor. The Company cannot currently
estimate how much of the sublessees accounts receivable will be
collected, although the Company believes a significant portion of
the sublessees debt to the Company ultimately will be repaid.
However, there can be no assurance that such agreement will be
consummated or that the sublessees accounts receivable will be
successfully collected or the Company will otherwise be paid. In
establishing the reserve for restructuring costs, management
provided for estimated losses relating to the potential non-payment
of sublease income. Accordingly, no additional restructuring
charge is deemed necessary by management. The Company is seeking
opportunities to sell two of the three mobile MRI units and is
currently contemplating alternative uses for the third mobile MRI
unit. The sale of a mobile MRI unit, if any, would result in a
further reduction in the Companys capital lease obligations and
additional cash savings to the Company. However, there can be no
assurance that any such sale will be consummated.
The nature of the Companys operations require significant
capital expenditures which have historically been financed through
the issuance of debt and capital leases, proceeds received from the
Companys initial public offering in November 1991, and the
exercise of warrants. Continued expansion, if any, of the
Companys business will require substantial cash resources and will
have an impact on the Companys 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"). In December 1995, DFS two representatives on
the Companys Board of Directors resigned and in April 1996 DFS
sold its 800,000 shares of Common Stock (representing approximately
17% of the outstanding Common Stock).
18
<PAGE>
The Company believes that cash to be provided by the Companys
operating activities will be sufficient to meet its anticipated
cash requirements for its present operations for at least the next
twelve months. The proceeds received from the sale of the Series
C Preferred Stock and the proceeds to be received from the exercise
of Initial Warrants and Class B Warrants, if any, will further
supplement the Companys ability to meet its future cash needs.
The Company has already implemented certain expense reduction
programs to reduce its operating costs and continues to assess
other cost reduction measures. If for any reason the Companys
estimates prove inaccurate, the Company is prepared to adopt
additional expense reduction measures in addition to those already
implemented, although there can be no assurance that any such
expense reduction measures will be successful.
19
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 5 have been omitted because the related
information is either inapplicable or has been previously reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.(iv) - Certificate of Amendment of the
Certificate of Incorporation of HealthCare Imaging
Services, Inc.
Exhibit 10.38 - Amendment No. 2 to HealthCare Imaging
Services, Inc. 1991 Stock Option Plan.
Exhibit 27 - Financial Data Schedule.
(b) During the second quarter of fiscal 1996, the Company
filed the following Current Report on Form 8-K with the
Securities and Exchange Commission:
Pursuant to Item 5, on May 13, 1996, the Company filed a Form
8-K relating to its issuance on May 8, 1996 of a press release
regarding the outcome of its 1996 Annual Meeting of
Stockholders held on May 2, 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HEALTHCARE IMAGING SERVICES, INC.
(Registrant)
/s/ ELLIOTT H. VERNON
---------------------
DATE: August 14, 1996
Elliott H. Vernon,
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ MICHAEL J. RUTKIN
---------------------
DATE: August 14, 1996
Michael J. Rutkin,
Chief Operating Officer
(Acting Principal Financial and
Accounting Officer)
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HEALTHCARE IMAGING SERVICES, INC.
(Pursuant to Section 242 of the General Corporation Law of the State of
Delaware)
It is hereby certified that:
1. The name of the corporation is Healthcare Imaging Services, Inc. (the
"Corporation"). The Certificate of Incorporation of the Corporation was
originally filed with the Secretary of State of the State of Delaware on July
25, 1991.
2. The Board of Directors of the Corporation duly adopted a resolution
proposing and declaring it advisable that Section 1 of Article FOURTH of the
Certificate of Incorporation of the Corporation be amended in its entirety to
read as follows:
"Section 1. Authorized Capitalization. The total number of shares of stock
which the Corporation shall have authority to issue is fifty-one million
(51,000,000), of which fifty million (50,000,000) shares shall be common stock,
par value $.01 per share ("Common Stock"), and one million (1,000,000) shares
shall be preferred stock, par value $.10 per share ("Preferred Stock")."
3. This amendment to the Certificate of Incorporation was duly adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of Delaware.
4. This amendment to the Certificate of Incorporation shall be effective on
and as of the date of filing of this Certificate of Amendment with
the office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed in its name by its President and attested to by its Secretary this 6th
day of May, 1996 and the statements contained herein are affirmed as true under
penalties of perjury statements contained herein are affirmed as true under
penalties of perjury.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
-------------------------
Elliott H. Vernon, President
ATTEST:
By: /s/ Michael J. Rutkin
----------------------
Michael J. Rutkin, Secretary
-2-
<PAGE>
AMENDMENT NO. 2 TO
HEALTHCARE IMAGING SERVICES, INC.
1991 STOCK OPTION PLAN
The first sentence of Section 4(a)(i) of the HealthCare Imaging Services,
Inc. 1991 Stock Option Plan is hereby amended and restated in its entirety to
read as follows:
"Limitation on Number of Shares. Options
issuable under the Plan are limited such that (x) the
maximum aggregate number of Shares which may be
issued pursuant to, or by reason of, Options is
700,000 and (y) in any given calender year a
participant may not be awarded Options to purchase
more than 250,000 Shares."
This Amendment No. 2 was approved by the Stockholders of HealthCare Imaging
Services, Inc. on May 2, 1996.
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> $ 1,193,217
<SECURITIES> 0
<RECEIVABLES> 3,761,469
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<CURRENT-ASSETS> 5,508,816
<PP&E> 10,546,692
<DEPRECIATION> 5,690,457
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<CURRENT-LIABILITIES> 2,396,364
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0
66,000
<COMMON> 49,620
<OTHER-SE> 4,373,357
<TOTAL-LIABILITY-AND-EQUITY> 10,640,453
<SALES> 0
<TOTAL-REVENUES> 4,637,948
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