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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission
For the fiscal year ended December 31, 1996 File Number: 000-19636
HEALTHCARE IMAGING SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3119929
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Schulz Drive, Red Bank, New Jersey 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 224-9292
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ___
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant based upon the last reported sale price of the Common Stock on
March 26, 1997 was approximately $7,371,000. As of March 26, 1997, there were
4,961,974 shares of Common Stock outstanding.
Documents incorporated by reference: Portions of the Registrant's definitive
proxy statement which the Registrant will file with the Securities and
Exchange Commission within 120 days of the close of its fiscal year ended
December 31, 1996, pursuant to Regulation 14A of the Securities Exchange Act
of 1934, shall be deemed to be incorporated by reference in Part III of this
Annual Report on Form 10-K from the date of filing of such document.
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HEALTHCARE IMAGING SERVICES, INC.
1996 Annual Report on Form 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 28
PART III
(Omitted)
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K 29
Signatures 36
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PART I
ITEM 1. BUSINESS
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Introduction
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HealthCare Imaging Services, Inc. and its subsidiaries (the
"Company") are principally engaged in the business of establishing and
operating fixed-site magnetic resonance imaging ("MRI") centers. MRI involves
the utilization of high strength magnetic fields and applied radio waves to
provide cross sectional images of the anatomy. MRI has become a preferred
diagnostic tool of the medical profession because its images are generally
better defined and more precise than those produced by other diagnostic
imaging tests, without the use of harmful ionizing radiation. As of December
31, 1996, the Company operated five fixed-site MRI centers, including one
multi-modality fixed-site facility providing MRI, mammography, ultrasound and
x-ray services. See "The Company and its Facilities."
One of the Company's five fixed-site MRI centers is an MRI facility
located in Brooklyn, New York which was acquired by the Company in October
1991 and which had been operating (through New York MR Associates, a
predecessor entity) since 1986. The Company also operates (i) a fixed-site MRI
facility in Edgewater, New Jersey (which commenced operations in July 1991 and
was operated as a joint venture prior to July 1, 1994 when such venture was
restructured) and (ii) a multi-modality fixed-site facility in Ocean Township,
New Jersey providing MRI, mammography, ultrasound and x-ray services (which
commenced MRI services in December 1993). The other two fixed-site MRI
facilities are joint ventures in which the Company is the general partner.
These joint ventures operate fixed-site MRI facilities in Wayne, New Jersey
(which commenced operations in April 1992) and in Philadelphia, Pennsylvania,
(which commenced operations in November 1992). See "The Company and its
Facilities." The Company subleases its fixed-site MRI facility located in
Catonsville, Maryland. See "Maiden Choice Facility." The Company also owns two
specially designed mobile MRI units (through July 1996 the Company owned three
mobile MRI units, of which one was sold in August 1996 through a lease
purchase agreement). Both mobile MRI units began operating on or about January
1, 1992. See "Mobile MRI Division."
The Company provides MRI services, directly or through joint ventures
in which the Company (or a subsidiary) is the general partner, to health care
providers which consist primarily of individual physicians and private medical
practices. The Company generally leases its MRI equipment directly or through
such joint ventures to professional practice groups ("Medical Lessees") who,
in turn, make the equipment available to their patients and other health care
providers with whom they or the Company have relationships. A typical Medical
Lessee pays the Company a flat fee on a daily, weekly, or per scan basis for
the use of the equipment and an administrative charge for the use of the
Company's support personnel and support services, such as clerical work,
billing and collection services and performing other associated non-medical
functions. The health care providers utilizing the Company's services have a
need for MRI
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services but typically do not own their own equipment due to insufficient
patient volume, the high cost of owning and operating such equipment or the
lack of expertise in this highly specialized field.
Over the past few years, the Company's results of operations have
been negatively impacted by several developments in the health care field.
Among other things, the trend in the industry towards managed care and HMO
("Health Maintenance Organization") business has resulted in lower
reimbursement rates for the medical procedures performed and an increased
demand for lower health care costs. The Company is addressing this trend by
actively pursuing managed care opportunities and is continuing to assess the
health care industry within which the Company participates in order to adapt
to the changing marketplace.
MRI Technology
Since 1983, when MRI technology was introduced for medical imaging,
this modality has become a powerful tool for diagnostic imaging. MRI provides
clinicians with information pertaining to soft tissue, neurology and
orthopedic applications which otherwise would be unavailable without utilizing
diagnostic equipment having the ability to perform invasive procedures.
MRI uses radio frequencies and high strength magnetic field
technology to produce images in all anatomic planes and of varying thin
sections. This combination permits visualization of small, similar structures
to be evaluated without surgical intervention in most cases to determine
pathology and physiologic deficiencies. Once acquired, these images are viewed
on video screens and stored on x-ray film and optical disc storage for long
term use.
MRI does not use ionizing radiation to provide images, therefore it
has been recognized as a safer modality than CAT scans or conventional x-ray
studies. MRI has proven to be superior to other diagnostic imaging procedures
by providing superior contrast resolution between normal/abnormal structures
and the ability to discern disease in the brain, such as multiple sclerosis.
MRI is also the modality of choice for lesions and tumors in the central
nervous system, as well as for orthopedic applications such as tears of
structures in the joints.
As MRI progresses into the next decade of enhancements, manufacturers
have invested their research efforts into the applications of magnetic
resonance angiography ("MRA"). MRA involves the acquisition of pulse sequences
and computer manipulation of data to compile images which may be viewed on
x-ray film or a monitor and permit complete visualization of anatomy in a 360
degree plane of rotation. The anatomy which is demonstrated is the vascular
structures of the central nervous system and displays the blood flow, or
abnormalities, of the region.
Cine applications permit visualization of multiple scans into a block
so that the heart and cardiac vasculature may be "put into motion" for the
performance of a diagnostic evaluation of cardiac structures.
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Kinematic studies, also known as range of motion ("ROM"), has enabled
MRI providers to demonstrate the joints of the body as if in motion. This
technique requires images to be acquired in various degrees of
flexion/extension, permitting the radiologist to view the full motion phase of
the joint in question. This has been helpful in demonstrating diseases of the
knee, shoulder and spine, as well as viewing the temporomandibular joint as
never seen before due to the dynamics of the scan itself.
Fast spin echo ("FSE") has also had a dramatic impact on MRI. MRI
equipment with FSE has the capability to scan at a faster speed without
compromising quality. This technique provides rapid acquisition of data which
helps to eliminate patient time within the scanner, thereby increasing patient
comfort, patient throughput and ability to visualize pathology more
effectively. In addition to throughput, this enhancement also allows more
anatomy to be covered, therefore increasing the amount of information
available to the radiologist for interpretation.
Manufacturers of MRI systems have identified the need to improve the
quality of the information acquired by the system. This is done with the use
of "surface coils," which act as an antenna to the MRI system. New technology
has introduced quadrature surface coils, which provide a minimum of four times
the signal produced by the system. The advantage of these coils is better
image quality, faster scan times and better information available for the
radiologist for interpretation.
Over the next several years, it is expected that new imaging
techniques and configurations of MRI systems will surface. Breast imaging for
implants and carcinomas is currently under investigation and will soon become
a forerunner in state of the art diagnostic tools for patients. MRA protocols
and research continues to progress in the areas of cardiac and abdominal areas
as well as peripheral (extremity) arterial and venous acquisitions.
Manufacturers have determined the need for mid-field imaging systems as well
as the specialty systems for large and claustrophobic patients, therefore, all
major manufacturers of MRI systems now are in the process of providing "open"
MRI units. Manufacturers have been working on other surface coils, such as
phased array coils and intracavitary coils, to provide higher quality scans
with better diagnostic capabilities for the future.
The Company plans to continue to provide the medical community with
state of the art technology. Currently, three of the Company's MRI systems
have been upgraded to include FSE, allowing faster scan times and an
improvement of the images, as well as the improvement of throughput at the
facilities using such systems. Likewise, these systems have been upgraded to
include the surface coils (quadrature) needed to provide superior image
quality.
The Company and its Facilities
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The Company provides various management services, including billing
and collection services, clerical and bookkeeping services and all
non-physician personnel services, including trained MRI radiological
technologists, to its Medical Lessees. The Company's longest operating
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facility is a fixed-site MRI center located in Brooklyn, New York. The Company
leases its Brooklyn premises from DMR Associates, L.P., a limited partnership
("DMR"), and the MRI equipment at such facility from DVI Financial Services,
Inc., a former significant stockholder of the Company ("DFS"). DMR is owned by
MR General Associates, L.P., as the general partner ("MR Associates"), and
DFS, as a limited partner. MR Associates is in turn owned by the Company's
Chairman of the Board, President and Chief Executive Officer (the "CEO") and
another director of the Company. Pursuant to an arrangement with Kings Medical
Diagnostic Imaging, P.C. ("Kings Medical"), one of the Company's Medical
Lessees, the Company subleases the premises and the necessary MRI equipment to
Kings Medical. In return, Kings Medical pays the Company monthly lease
payments for the use of the facility and equipment, a flat fee per patient
scan and an administrative charge.
The Company also operates fixed-site MRI facilities in Edgewater and
Wayne, New Jersey, and in Philadelphia, Pennsylvania and a multi-modality
fixed-site facility in Ocean Township, New Jersey. The Edgewater facility
commenced operations in July 1991, the Wayne facility commenced operations in
April 1992, the Philadelphia facility commenced operations in November 1992
and the Ocean Township facility commenced operations in December 1993. The
Ocean Township facility and the Edgewater facility (which was operated as a
joint venture prior to July 1, 1994 when such venture was restructured) are
wholly-owned by the Company. Each of the Wayne and Philadelphia joint ventures
are structured similarly. In each joint venture, a wholly-owned subsidiary of
the Company has formed a partnership with certain individual medical
professionals and other individuals (the "Medical Group"). Between 52% and 60%
of each of the partnerships is owned by one of the Company's subsidiaries,
which is the general partner, and the remainder is owned by the Medical Group,
which is the limited partner. The Company has entered into equipment leases
principally with DFS for MRI and related medical equipment and has subleased
such equipment to each partnership. Each partnership makes the MRI equipment
available to the health care providers who utilize its facility in exchange
for a per scan use charge plus an administrative fee for the provision of the
MRI equipment and associated support services, comparable to the support
services provided at the Brooklyn, Edgewater and Ocean Township facilities. In
addition, in order to provide the necessary non-medical support services to
the health care providers who utilize its facility, each partnership has
entered into a management services arrangement with the Company pursuant to
which the Company provides all non-medical services and personnel necessary to
support the provision of the MRI services at the facility in exchange for an
administrative support fee.
Lithotripsy Division
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In May 1992, the Company leased a mobile lithotripsy unit from DFS.
Lithotripsy is a non-invasive procedure for the removal of kidney stones
through the use of directed energy waves which pulverize kidney stones. The
pulverized stone is then eliminated by the urinary system. The lithotripsy
unit is contained in a specialized mobile van which is transportable from
location to location.
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On August 31, 1995, the Company consummated the sale of the
lithotripsy unit and ancillary equipment to an unaffiliated third party. The
sale resulted in the discontinuance of the Company's lithotripsy operations.
The Company pursued the sale due to losses sustained in connection with the
lithotripsy operations since the inception of lithotripsy services in May 1992
and the expectation of continuing losses. For the year ended December 31,
1995, the lithotripsy operations incurred a loss of $369,915 (which includes a
loss on the sale of the lithotripsy unit and ancillary equipment in the amount
of $191,181). The sale enabled the Company to substantially eliminate the
overhead costs associated with its lithotripsy operations, including the
related debt service. The remaining debt service obligation at the date of
sale, which was satisfied with the proceeds from the sale, was approximately
$475,000.
Mobile MRI Division
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The Company entered into an arrangement, effective September 1, 1994,
pursuant to which it operated 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, and a current consultant to, the Company
and 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 Company decided to enter into
this restructuring arrangement due to the competitive pressures associated
with the mobile MRI business and in order to focus its energy and management
expertise on fixed-site imaging sites as well as further diversification in
the health care industry. As a result of the restructuring of its mobile MRI
operations, the Company recorded a restructuring charge in fiscal 1994 in the
amount of $2,375,000.
In December 1995, due to the sublessee's failure to remain current
with its 1995 monthly payment obligations, the Company repossessed and sold
one of its mobile MRI units for $625,000. In February 1996, the Company
terminated its master agreement with the sublessee and repossessed the
remaining three mobile MRI units from the sublessee as a result of the failure
of the sublessee and certain of its customers to satisfy their obligations to
the Company. In an attempt to satisfy the past due amounts, the sublessee and
its customers provided the Company with cash and additional patient receivable
claims to partially offset the amounts owed to the Company. The additional
patient receivable claims were to supplement the amounts previously submitted
to the Company to satisfy prior past due indebtedness. The Company soon after
returned the three mobile MRI units to the sublessee. Effective July 27, 1996,
the Company again repossessed the three mobile MRI units due to the
sublessee's continuing failure to meet its obligations to the Company.
In August 1996, the Company entered into a lease purchase agreement
with respect to the sale of one of the Company's mobile MRI units. The lease
purchase agreement provided for a $20,000 down payment upon execution of the
agreement, 11 monthly installments of $5,000 each which commenced October 1,
1996 and a final payment of $35,000 due in September 1997. From time to time
after the Company repossessed the mobile MRI units in July 1996, the
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Company has used the two remaining mobile MRI units at its Brooklyn, New York
MRI facility.
In November 1996, the Company formed a limited liability company
which it intends to operate as a joint venture with Practice Management
Corporation to provide on-site MRI services to Meadowlands Hospital Medical
Center. The Company will own sixty (60%) percent of this joint venture. It is
anticipated that the site will commence operations on or about April 1, 1997
and will initially provide MRI services utilizing one of the Company's mobile
MRI units. The Company estimates that initial costs to be incurred in
establishing the facility will range between $150,000 and $225,000. The
Company anticipates that most of these amounts will be in the form of working
capital loans by the Company to the joint venture. The Company believes that
the start-up phase will last six to nine months, although there can be no
assurances that it will not be a longer period.
Maiden Choice Facility
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Effective July 22, 1994, the Company's Maiden Choice MRI facility
located in Catonsville, Maryland ceased operations. This facility was closed
due to losses sustained during fiscal 1993 and the six months ended June 30,
1994 in the amounts of $242,579 and $132,381, respectively, and due to the
expectation of continuing losses. This facility was operated by Maiden Choice
Imaging Associates, L.P., a joint venture in which the Company owns sixty
percent (60%) and limited partners own the remaining forty percent (40%). The
Company entered into a sublease arrangement with a radiology group, of which
one of the members was among the limited partners in this joint venture, to
sublease the medical equipment and facility from the Company. This sublease
arrangement commenced April 1, 1995 and provides for sixty (60) monthly
payments of $10,000 commencing June 15, 1995. In addition, the sublessee is
responsible for paying the rent for the office space and for all future
operating costs incurred. The Company, as a result of the closing of the
Maiden Choice MRI facility, recorded a restructuring charge in fiscal 1994 in
the amount of $1,413,000 which is comprised of a loss representing the
estimated difference between the gross sublease receipts and the aggregate
capital lease obligations for the medical equipment of $1,036,000, write-off
on abandonment of leasehold improvements of $247,000 and an accrual for other
costs of $130,000. This restructuring enabled the Company to eliminate all
operating costs associated with the operation of the Maiden Choice MRI
facility, except for debt service, and provides for the receipt of lease
payments under the sublease arrangement thereby resulting in significant cash
savings.
The aggregate restructuring charges during the year ended December
31, 1994 for both the restructuring of the Company's mobile MRI operations and
the closing of the Maiden Choice MRI facility were $3,788,000.
Edgewater Restructuring
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Effective July 1, 1994, the Company consummated the restructuring of
Edgewater Imaging Associates, L.P. ("EIA"). This restructuring was necessary
in order to meet stricter
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interpretations of laws in New Jersey and to comply with the Federal Medicare
and Medicaid "Stark Law." The restructuring resulted in the acquisition by
HealthCare Imaging Services of Edgewater, Inc., a wholly-owned subsidiary of
the Company ("HISE"), of the operating business of EIA (in which HISE
previously owned a sixty percent (60%) interest) in exchange for the issuance
of 382,104 shares of the Company's common stock (having a market value of
approximately $811,971 on the effective date of the restructuring, based on
the per share closing price of the Common Stock of $2.125 as of June 30, 1994)
to the EIA limited partners for the remaining forty percent (40%) interest. At
June 30, 1994, the net book value of the forty percent (40%) of EIA owned by
the EIA limited partners was $753,170. In connection with this transaction,
the Company recorded goodwill of $185,075. The restructured limited
partnership, EIA, continues to own the capital lease for the medical equipment
and the operating lease for the facility's office space which are being
subleased to HISE. The EIA limited partners continue to own a forty percent
(40%) interest in the restructured EIA and HISE continues to own a sixty
percent (60%) interest in the restructured EIA.
Philadelphia Facility
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The Company's Philadelphia, Pennsylvania MRI facility, which has been
operating since November 1992, continues to operate at a loss. The overall
operating results of the Company were substantially affected during the years
ended December 31, 1996 and 1995 due to the operational results of the
Philadelphia MRI facility which incurred losses of $374,969 and $490,042,
respectively. In addition, in order to support the operations of this
facility, the Company has made, and continues to make, working capital loans
to this facility. As of December 31, 1996, the amount of the working capital
loans made to this joint venture was approximately $2,113,000 (of which
approximately $407,000 was loaned during 1996). In order to become profitable,
this facility must attain a certain volume of business and it is uncertain
whether such business level will ever be attained. The Company cannot at this
time determine when or if these working capital loans will be repaid. The
Company recently expanded its advertising and marketing efforts on behalf of
the Philadelphia MRI facility. This resulted in a significantly reduced loss
for the quarter ended December 31, 1996 of $57,006 as compared to the $212,903
loss for the quarter ended December 31, 1995. The Company is in the process of
finalizing documentation with the present limited partners as to its purchase
of their interests in such joint venture which it expects to consummate in
1997. However, there can be no assurance as to the timing of this purchase, if
at all, or as to the timing and magnitude of a restructuring charge, if any,
relating to the Philadelphia MRI facility.
Relationship with Certain Medical Lessees
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As previously noted, the Company generally leases its MRI equipment
(directly or through joint ventures) to Medical Lessees primarily located in
New York, New Jersey and Pennsylvania who, in turn, make the equipment
available to their patients and other health care providers (including
individual physicians, physicians' groups and other health care providers
consisting of managed care organizations, labor unions and self-funded
corporations) with whom they or the
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Company have relationships. For the year ended December 31, 1996, the Company
had five Medical Lessees (Monmouth Diagnostic Imaging, P.A.; Wayne MRI, P.A.;
Edgewater Diagnostic Imaging, P.A.; Kings Medical Diagnostic Imaging, P.C. and
Rittenhouse Square Imaging, L.P.) who accounted for approximately 30%, 21%,
19%, 18% and 12% of total revenues, respectively. For the year ended December
31, 1995, the Company had five Medical Lessees (Monmouth Diagnostic Imaging,
P.A.; Edgewater Diagnostic Imaging, P.A.; Wayne MRI, P.A.; Kings Medical
Diagnostic Imaging, P.C. and Rittenhouse Square Imaging, L.P.) who accounted
for approximately 29%, 21%, 20%, 13% and 12% of total revenues, respectively.
For the year ended December 31, 1994, the Company had four Medical Lessees
(Monmouth Diagnostic Imaging, P.A.; Edgewater Diagnostic Imaging, P.A.; Kings
Medical Diagnostic Imaging, P.C. and Wayne MRI, P.A.) who accounted for
approximately 18%, 17%, 16% and 15% of total revenues, respectively. To the
extent the Company were to lose any of its existing Medical Lessees, the
impact on revenues and net income would not be materially affected because the
Company believes it will be readily able to replace such Medical Lessees.
Many health care providers do not own MRI equipment because of
insufficient patient volume to justify the costs associated with the
acquisition and operation of an MRI unit, as well as because of a strict
regulatory environment and management and marketing considerations. Depending
upon features and options selected, an MRI unit costs between approximately
$800,000 and $1.6 million. Many health care providers cannot afford a capital
investment of this size or cannot utilize the equipment in a cost-effective
manner. Moreover, a health care provider with sufficient patient volume and
resources to purchase an in-house MRI unit may still contract for the use of
the Company's services. Among the reasons for such use of the Company's MRI
units are: avoidance of the risk of technological obsolescence of the
equipment; elimination of the need to recruit and employ qualified
technicians; provision of short-term mobile services to allow the customer to
learn the technology; establishment of a patient base before an in-house unit
is installed; provision of additional coverage when patient demand exceeds
in-house capacity; lack of a suitable interior location; changes in Medicare
reimbursement systems resulting in declining profit margins for many hospitals
and other health care providers, thereby reducing capital available to
purchase new and expensive equipment; and lessening the risks of medical
malpractice suits by utilizing state of the art medical technology and related
services.
Managed Care
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In 1996, based on publicly available data, over 25% of the U.S.
population was enrolled in HMO plans. As the shift continues towards managed
care and away from traditional commercial insurance, the Company has become
more aggressive in contracting with managed care payers. The Company presently
has agreements with approximately 125 managed care payers including HMO's,
Preferred Provider Organizations ("PPO's"), workers compensation groups,
self-funded companies and hospitals. Once agreements are secured with these
groups, targeted mailings are sent to participating physician providers
seeking new referrals. Follow-up visits to these physicians by the Company's
sales personnel has resulted in increased referrals to the Company's MRI
facilities.
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Marketing/Sales
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As of December 31, 1996, the Company employed one full-time
sales/marketing and managed care executive, one full-time director of
marketing and managed care, four full-time sales representatives, two
part-time sales representatives and one administrative marketing assistant.
The Company has also employed other part-time marketing representatives from
time to time. These personnel identify and contact health care providers,
managed care organizations and corporate subscribers which may require the
Company's services. In addition, the Company has entered into excess capacity
arrangements whereby the Company provides the use of its Brooklyn MRI facility
and all ancillary services during "off-hours" to two licensees (one of whom is
Mark R. Vernon). The Company recognizes revenue on a fixed fee per procedure
basis from these licensees. (See Note 10 to the accompanying financial
statements.)
A significant resource for the Company has been existing customer
referrals. Based on historical data, there are over 8,500 physicians who have
referred patients to the Company's five facilities. A significant amount of
these referrals have been generated through the efforts of the Company's sales
and marketing representatives, who directly call on both existing referring
physicians and potential referrers. The Company also employs consumer
advertising, such as local radio spots and print ads, as a marketing tool to
attract not only physicians, but the patient population as well.
Competition
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The health care industry in general, and the market for advanced
diagnostic imaging services in particular, are highly competitive. In addition
to direct competition from other MRI providers, the Company must compete with
larger health care providers as well as private clinics and radiology
practices that own MRI units or other diagnostic imaging equipment and with
equipment manufacturers which sell equipment to health care providers for
in-house installation.
Several competitors operate fixed-site MRI units in New York, New
Jersey and Pennsylvania, the Company's service areas. Moreover, certain of
these competitors have substantially greater financial resources than those of
the Company, which may give them advantages in negotiating equipment
acquisitions, advertising and responding quickly to new demand. The Company
believes that it competes effectively against other fixed-site providers based
on the reputation of the Company and the physicians with whom the Company has
relationships, the location of the Company's facilities, the state of the art
equipment the Company uses, and the ability of the Company to quickly respond
to demand.
MRI competes with less expensive diagnostic imaging devices and
procedures which may provide similar information to the physician. Alternative
diagnostic imaging technologies include CAT scans, nuclear medicine,
radiography/fluoroscopy, ultrasound, mammography and conventional x-ray. The
Company believes that MRI's significant benefits justify the pricing
differential between MRI and other diagnostic imaging modalities.
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Existing health care providers who are customers of the Company may
purchase MRI equipment if their patient volume increases to the point where it
becomes cost effective to own and operate their own MRI equipment. Ownership
and operation of MRI equipment and the provision of related services does not
require proprietary information, trade secrets or similar nonpublic
intellectual property but does require in most states the obtainment of a
Certificate of Need ("CON") and certain other approvals from the state/local
health departments, which CON and approvals may not be granted. Consequently,
there are no significant barriers to entry other than the costs of the
equipment, hiring of qualified technicians and management and, where
applicable, compliance with CON regulations and other regulatory or
legislative constraints.
Equipment
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The MRI equipment currently operated by the Company is located in
fixed-site facilities. All of the diagnostic imaging equipment utilized by the
Company is technologically sophisticated and complex, requires regular
maintenance and is subject to unpredictable malfunctions and breakdowns. The
Company contracts with MRI equipment manufacturers for comprehensive
maintenance programs for its MRI units to minimize downtime (the period of
time equipment is unavailable during scheduled use hours because of
malfunctions). On most equipment, the maintenance contract provides that such
repairs will be performed during regular operating hours. Although the
maintenance contracts provide for inspections and maintenance of the equipment
on a fixed-fee basis, equipment servicing adversely affects revenue generation
by reducing the number of regular operating hours the equipment is available
for use. Additionally, MRI equipment is generally warranted by the equipment
manufacturer for a specified period of time, usually one year from the date of
purchase, during which the Company receives uptime guarantees (a guarantee
that the equipment will function for a specified percentage of scheduled use
hours) from the manufacturer of the MRI units. However, these guarantees are
not expected to substantially compensate the Company for loss of revenue for
downtime, scheduled maintenance and software update (upgrading of the computer
program which aids the generation of the scanned image). The Company also
carries business interruption insurance which provides for $250,000 of
coverage for each fixed-site facility, after 24 hours downtime, for up to one
year to help protect itself from unexpected long-term equipment failures.
Reimbursement
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Many of the Company's customers are health care providers that are
subject to extensive federal and state legislation and regulation relating to
the reimbursement and control of health care costs. As a result of federal
cost-containment legislation currently in effect, hospital inpatients covered
by Medicare are classified into diagnostic related groups ("DRGs") in
accordance with the patient's diagnosis, and reimbursement is limited to
predetermined amounts assigned to particular DRGs based upon the diagnosis of
the ailment of a patient. Generally, free-standing MRI centers that provide
services for hospital in-patients must look to the referring hospital for
payment, which the hospital must take out of its DRG reimbursement. For out-
patients who are not admitted to a hospital, the Medicare approved
reimbursement for single MRI
12
<PAGE>
scans generally range between $465 and $1,224, depending on the type of scan
performed. Revenues associated with Medicare claims accounted for less than
11% of the Company's revenues for the year ended December 31, 1996. Because
Medicare reimbursement for MRI services is limited, it does not necessarily
cover all of the costs of the medical services provided. Therefore, the
physicians who provide professional services at the Company's MRI centers may
be prevented, to the extent they rely on Medicare reimbursement, from using an
MRI profitably after they pay use fees to the Company and other expenses of
operations. However, Medicare billings currently are not a material component
of the Company's revenues.
Currently, DRGs are not applicable to out-patient services that the
licensee-physicians provide to non-Medicare patients at a MRI center. If the
DRG reimbursement method were applied to out-patient services, the Company's
business could be adversely affected since patient reimbursement has an
indirect, but significant, effect on the Company's pricing structure.
When patients are directly billed for services, most of their health
care insurers, including Blue Cross/Blue Shield, reimburse service providers
for 80% to 100% of the physician's charge for MRI scans as long as this fee is
"reasonable and customary" for that geographical area. Any difference is due
from the patient. The health care insurer determines what is considered
"reasonable and customary." However, some insurers have adopted DRG-type
reimbursement schedules and others may be investigating the possibility of
implementing such schedules, but the Company believes that such private
reimbursement schedules are not and will not be as stringent as those under
the Medicare DRG program. Since patient reimbursement affects the levels of
fees the Company can charge the physician-licensee, widespread application of
DRG-type reimbursement schedules could adversely affect the Company's
business. In addition, the Company has entered into many contracts with
managed care organizations which generally provide for lower reimbursement
rates than those received from other insurance carriers.
CON Laws Governing MRI Centers
- ------------------------------
All states in which the Company currently operates or may operate
have laws that may require a CON under certain circumstances to establish an
outpatient diagnostic imaging center using MRI or other imaging equipment. At
the present time, the CON laws of the states of New Jersey, New York and
Maryland pertain to the Company's operations. Effective December 1996, the CON
requirements in the State of Pennsylvania expired, and to date no new CON
requirements have been implemented, but there can be no assurance that new
rules or regulations will not be enacted which may affect or restrict the
Company's operations in Pennsylvania, as well as affect expansion plans in
Pennsylvania, if any.
Although the CON programs vary from state to state, generally such
programs require state approval before acquiring major medical equipment or
establishing new inpatient services, but various exceptions apply. In New
York, for example, the acquisition of MRI equipment to be placed outside of a
hospital which is leased and operated by an independent physician or group of
physicians does not require a CON. Exceptions to the CON requirements in other
states may
13
<PAGE>
include expenditures under $1,000,000 and replacement of existing equipment.
Where a CON is required, approval of the acquisition of MRI equipment may be
tied to the satisfaction of various criteria relative to costs and need for
the services. The CON requirements serve as a barrier to entry in certain
states which the Company services and increases the costs of and delays
certain expansions or renovations or the addition of centers in the areas
covered by such requirements. There can be no assurance that CON regulations
will not be further expanded in certain states, thereby adversely affecting
the Company's ability to expand in such states.
The Company also has to comply with federal certification
requirements. For example, the Ocean Township facility which offers
mammography must be certified by the federal government, which accreditation
was received in January 1997. Further, additional certification requirements
may affect the Company's centers, but such certification generally will follow
specific standards and requirements set forth in public documents. The Company
believes that it has currently obtained all necessary certifications, but the
failure to obtain a necessary approval could have an adverse impact on the
Company's operations.
In addition to the CON programs and the federal certification
described above, the operation of outpatient imaging centers is subject to
other federal and state regulation relating to licensure, standards of
testing, accreditation of certain personnel and compliance with governmental
reimbursement programs. Although the Company believes that currently it has
obtained all such necessary licenses, the failure to obtain a required license
could have a material adverse effect on the Company's business. The Company
believes that diagnostic testing will continue to be subject to intense
regulation at the federal and state levels and cannot predict the scope and
affect thereof nor the cost to the Company of compliance.
Anti-Kickback Laws under Federal Medicare Program
- -------------------------------------------------
The federal Anti-Kickback Act, which is a criminal statute, prohibits
the offering, payment, solicitation or receipt of any form of remuneration in
return for the referral of Medicare or Medicaid patient or patient care
opportunities, or in return for the purchase, lease or order or provision of
any item or service that is covered by Medicare or Medicaid. Violations of the
Anti- Kickback Act are punishable by fines and/or imprisonment. Pursuant to
the Medicare and Medicaid Patient and Program Protection Act of 1987, persons
convicted of violating the Anti- Kickback Act may be excluded from the
Medicare or Medicaid programs. The scrutiny by the federal government of
possible unlawful arrangements between health care providers and referral
sources extends to indirect payments which have the potential of inducing
Medicare and Medicaid referrals, such as situations in which physicians hold
investment interests in companies which benefit from Medicare referrals.
In 1991, the Office of the Inspector General ("OIG") of the
Department of Health and Human Services ("HHS") published safe harbor
regulations that specify the conditions under which certain types of financial
relationships, including investment interests in public companies, management
and personal service contracts and leases of space and equipment, will be
protected
14
<PAGE>
from criminal or civil sanctions under the Anti-Kickback Act if the standards
set forth in the regulation are strictly followed. Although the Company
believes that the financial arrangements involved in the operation of its
imaging centers qualify for protection under the applicable safe harbor
protections, these regulations have been thus far relatively untested in
practice. The OIG has stated that failure to satisfy the conditions of an
applicable safe harbor does not necessarily indicate that the arrangement
violates the Anti-Kickback Act, but such arrangements are not among those that
the safe harbor regulations protect from criminal and civil sanctions. Due to
the broad and sometimes vague nature of these laws and requirements, there can
be no assurance that an enforcement action will not be brought against the
Company or that the Company will not be found to be in violation of these
regulatory provisions. Further, there can be no assurance that new laws or
regulations will not be enacted or existing laws or regulations interpreted or
applied in the future in such a way as to have a material adverse impact on
the Company, or that federal or state governments will not impose additional
restrictions upon all or a portion of the Company's activities which might
adversely affect the Company's business.
Stark Law
- ---------
The federal "Stark Law" which took effect on January 1, 1995 provides
that where a physician has a "financial relationship" with a provider of
"designated health services" (including among other activities, the provision
of MRI and other radiology services which are provided by the Company), the
physician will be prohibited from making a referral of a Medicaid or Medicare
patient to the health care provider, and the provider will be prohibited from
billing Medicare or Medicaid for the designated health services, unless a
statutory exception to the prohibition is applicable. In August 1995,
regulations were issued pursuant to the Stark Law as it existed prior to its
amendment in 1993. The preamble to these regulations indicates that the Health
Care Financing Administration ("HCFA") intends to rely on the language and
interpretations in the regulations when reviewing compliance under the Stark
Law as amended. Submission of a claim that a provider knows or should know is
for services for which payment is prohibited under the amended Stark Law could
result in refunds of any amounts billed, civil money penalties of not more
than $15,000 for each such service billed, and possible exclusion from the
Medicare and Medicaid programs.
The Stark Law provides exceptions from its prohibitions for referrals
which include certain types of employment personal services and leasing
arrangements and contractual relationships. The Company has reviewed the
effects of the amended Stark Law and believes that it complies in all material
respects with the applicable provisions of the Stark Law, although because of
the broad and sometime vague nature of this law and the applicable
regulations, there can be no assurance that an enforcement action will not be
brought against the Company or that the Company will not be found to be in
violation of the Stark Law.
15
<PAGE>
False Claims Act
- ----------------
Several federal laws impose civil and criminal liability for
knowingly presenting or causing to be presented a false or fraudulent claim,
or knowingly making a false statement to obtain governmental approval or
payment for a false claim. Under the False Claims Act, civil damages may
include a penalty of up to three times the government's loss plus $5,000 to
$10,000 per claim. Actions to enforce the False Claims Act may be commenced by
individuals on behalf of the government (known as qui tam suit) and such
private citizens could receive up to thirty percent of the recovery. The
Company carefully monitors its submissions for reimbursement to assure that
they are not false or fraudulent and believes that it is not in violation of
the False Claims Act.
State Laws
- ----------
Many states, including some where the Company operates, have laws
that prohibit certain direct and indirect payments made by health care
providers which are designed to induce referrals. Some states expressly
prohibit referrals by physicians to facilities in which such physicians have a
financial interest. Sanctions for violating the state statutes may include
loss of licensure for the physicians and civil and criminal penalties assessed
against both the referral source or the recipient provider. The Company
continues to review all aspects of its operations, and where necessary has
insured that physicians do not have investment interests in its operations.
The Company believes that it complies in all material respects with
all applicable provisions of the Anti-Kickback Act, the Stark Law and
applicable state laws governing fraud and abuse as well as licensing and
certification, although because of the broad and sometime vague nature of
these laws and requirements, there can be no assurance that an enforcement
action will not be brought against the Company or that the Company will not be
found to be in violation of one or more of these regulatory provisions.
Further, there can be no assurance that new laws or regulations will not be
enacted, or existing laws or regulations interpreted or applied in the future
in such a way as to have a material adverse impact on the Company, or that
federal or state governments will not impose additional restrictions upon the
Company's activities.
During 1995, regulations were issued requiring all MRI technologists
to attend and pass a training program in order to obtain certification to
render MRI services as a technologist. All of the Company's technologists have
or will have attended and taken the necessary tests in order to obtain
certification during 1996.
Employees
- ---------
As of December 31, 1996, the Company had 65 full-time employees,
including 13 trained diagnostic imaging technologists, 1 sales/marketing and
managed care executive, 4 sales representatives, and 47 administrative and
clerical personnel. None of the Company's employees is represented by labor
organizations, and the Company is not aware of any activity seeking such
16
<PAGE>
organization. The Company considers its relationships with its employees to
be good.
ITEM 2. PROPERTIES
- -------------------
The Company leases a fixed-site MRI center of approximately 5,000
square feet in Brooklyn, New York from DMR. The Company leases its corporate
headquarters in Red Bank, New Jersey and leases a separate billing center in
Ocean Township, New Jersey in the same building which contains the Ocean
Township MRI center (approximately 7,400 and 9,200 square feet, respectively).
In Edgewater, Wayne and Philadelphia, the Company, through its joint ventures,
leases space for these fixed-site facilities (approximately 2,000, 700 and
1,900 square feet, respectively). The Company also recently entered into a
lease relating to its proposed joint venture to provide MRI services to the
Meadowlands Hospital Medical Center. Management believes that its corporate
offices and its MRI facilities are suitable for the purposes for which they
are used.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not involved in any pending legal proceedings which in
the opinion of its management may have a material adverse effect on its
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock, par value $.01 per share (the "Common
Stock"), is included in The Nasdaq National Market ("HISS"). The Company's
Common Stock Purchase Warrants (the "Initial Warrants") and Class B Common
Stock Purchase Warrants (the "Class B Warrants") were included in The Nasdaq
National Market until November 12, 1996 and October 12, 1995, respectively, at
which time such securities were deleted therefrom. These warrants expired
pursuant to their terms on November 12, 1996.
The following table sets forth the high and low sales prices for the
Common Stock for the period from January 1, 1994 through March 26, 1997 based
on transaction data as reported by The Nasdaq National Market.
</TABLE>
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1994
----------------------------
First Quarter $ 5-5/8 $ 2-1/2
Second Quarter $ 2-3/4 $ 1-3/4
Third Quarter $ 2-5/8 $ 1-3/4
Fourth Quarter $ 2-1/2 $ 1-3/8
Year Ended December 31, 1995
-----------------------------
First Quarter $ 2-1/2 $1-1/16
Second Quarter $ 2-1/8 $1-1/16
Third Quarter $ 1-7/8 $ 1-3/8
Fourth Quarter $ 1-3/4 $ 11/16
Year Ended December 31, 1996
----------------------------
First Quarter $ 2-3/8 $ 1-1/16
Second Quarter $ 2-5/8 $1-11/16
Third Quarter $ 2-7/16 $1-11/16
Fourth Quarter $ 2 $ 7/8
Year Ending December 31, 1997
-----------------------------
First Quarter (through March 26,
1997) $ 2-1/16 $ 15/16
</TABLE>
18
<PAGE>
As of March 26, 1997, there were 56 holders of record of the Common
Stock. The Company believes that there were approximately 760 beneficial
holders of the Common Stock as of such date.
The Company has paid no dividends on the Common Stock since its
inception. Any future declaration of cash dividends on the Common Stock will
depend upon the Company's earnings, financial condition, capital requirements
and other relevant factors. The Company does not intend to pay cash dividends
on the Common Stock in the foreseeable future but intends to retain its
earnings for use in its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information is provided
for the Company and its predecessor entities.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
- --------------
Revenues $ 9,787,591 $ 9,249,284 $11,398,794 $13,235,567 $11,095,414
(Loss) income before minority
interests and income taxes $ (396,256) $ 33,227 $(5,769,180) $ 52,846 $ 1,771,133
Historical (loss) income $ (861,796) $ (118,430) $(6,053,612) $ (470,925) $ 758,803
Historical (loss) income per
common share $ (0.18) $ (0.03) $ (1.35) $ (0.12) $ 0.21
BALANCE SHEET DATA:
- ------------------
Working Capital $ 2,943,313 $ 1,160,247 $ 658,828 $ 2,731,742 $ 5,000,842
Total assets $10,566,732 $10,006,699 $13,800,753 $23,392,405 $19,514,095
Long-term debt reserves for
restructuring costs and capital
lease obligations $ 2,717,216 $ 3,275,445 $ 4,778,306 $ 9,997,416 $ 8,144,648
Stockholders' equity/partners'
capital $ 5,004,807 $ 3,222,876 $ 3,341,306 $ 6,900,169 $ 7,442,091
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. STATEMENTS IN THIS ANNUAL REPORT THAT ARE NOT HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ANY STATEMENTS CONTAINED HEREIN WHICH ARE
NOT HISTORICAL FACTS OR WHICH CONTAIN THE WORDS "EXPECT", "BELIEVE" OR
"ANTICIPATE", SHALL BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT
LIMITED TO, THE RISK THAT THE COMPANY MAY NOT BE ABLE TO IMPLEMENT ITS GROWTH
STRATEGY IN THE INTENDED MANNER, RISKS ASSOCIATED WITH CURRENTLY UNFORESEEN
COMPETITIVE PRESSURES AND RISKS AFFECTING THE COMPANY'S INDUSTRY SUCH AS
INCREASED HEALTHCARE REGULATION AND THE EFFECTS OF GENERAL ECONOMIC
CONDITIONS. IN ADDITION, THE COMPANY'S BUSINESS, OPERATIONS AND FINANCIAL
CONDITION ARE SUBJECT TO CERTAIN OTHER RISKS WHICH ARE DESCRIBED IN THE
COMPANY'S OTHER REPORTS AND STATEMENTS FILED FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION.
For the Year Ended December 31, 1996 vs. December 31, 1995
- ----------------------------------------------------------
For the year ended December 31, 1996, revenues were $9,787,591 as
compared to $9,249,284 for the year ended December 31, 1995, an increase of
approximately $538,000. This increase was primarily due to (1) increased
revenues from the Company's fixed-site MRI facility located in Brooklyn, New
York (approximately $517,000), (2) increased revenues from the Company's
fixed-site multi-modality imaging facility located in Ocean Township, New
Jersey (approximately $225,000) and (3) increased revenues from the Company's
fixed-site MRI facility located in Wayne, New Jersey (approximately $214,000),
all of which were partially offset by (i) the elimination of operating
revenues from the Company's lithotripsy operations (approximately $427,000) as
a result of the sale of the lithotripsy unit on August 31, 1995 and (ii)
decreased revenues from the Company's fixed-site MRI facility located in
Edgewater, New Jersey (approximately $132,000) due to increased competition
resulting in fewer procedures being performed.
For the year ended December 31, 1996, operating expenses were
$10,183,847 as compared to $9,216,057 for the year ended December 31, 1995, an
increase of approximately $968,000. This increase was primarily due to
non-cash compensation charges (approximately $1,445,000) resulting from the
grant of (i) stock options to two of the Company's former directors, (ii)
stock options and a restricted stock award to the CEO and (iii) stock options
to Biltmore Securities, Inc. (the "Placement Agent") pursuant to a consulting
agreement. See "Overview-Recent Developments." The Company's operating
expenses before the non-cash compensation charges decreased approximately
$478,000, primarily due to the elimination of operating expenses relating to
the Company's former lithotripsy operations (approximately $744,000) and
recoveries on accounts receivable (approximately $392,000) relating to a
provision
20
<PAGE>
for bad debts recorded at the time of the restructuring of the Company's
mobile MRI operations. Other operating expenses increased by approximately
$311,000, primarily due to higher advertising and promotion expense, rent
expense, travel and entertainment expense, patient car service expense,
temporary help expense and typing service expense, most of which were directly
impacted by the increase in patient procedures being performed in 1996.
Equipment maintenance and repairs decreased approximately $82,000, primarily
due to the termination of a maintenance agreement relating to the disposition
of the lithotripsy unit. Professional fees increased approximately $167,000,
primarily due to the preparation of the proxy statement for the Company's 1996
Annual Meeting of Stockholders held May 2, 1996 (the "Meeting"), certain New
Jersey and New York state sales and use tax examinations and various other
matters. Depreciation and amortization decreased approximately $292,000,
primarily due to the elimination of depreciation expense for the lithotripsy
equipment and the MRI unit located at the Company's Edgewater, New Jersey
facility which was fully depreciated in July 1996. Interest expense decreased
approximately $172,000, primarily due to the elimination of interest expense
relating to the disposition of the lithotripsy unit and the refinancing of
certain equipment leases as of September 30, 1995 at lower interest rates.
During the year ended December 31, 1996, as a corporate general
partner, the Company recorded an additional $149,988 of losses attributable to
the limited partnership interests in the Philadelphia, Pennsylvania joint
venture in excess of the limited partners' capital accounts.
The operating results for the year ended December 31, 1996 and 1995
were substantially affected by the Philadelphia MRI facility which incurred
losses of $374,969 and $490,042, respectively. The Company recently expanded
its advertising and marketing efforts on behalf of the Philadelphia MRI
facility. This resulted in a significantly reduced loss for the quarter ended
December 31, 1996 of $57,006 as compared to the $212,903 loss for the quarter
ended December 31, 1995. The Company is in the process of finalizing
documentation with the present limited partners as to its purchase of their
interests in such joint venture which it expects to consummate in 1997.
However, there can be no assurance as to the timing of this purchase, if at
all, or as to the timing and magnitude of a restructuring charge, if any,
relating to the Philadelphia MRI facility.
For the Year Ended December 31, 1995 vs. December 31, 1994
- ----------------------------------------------------------
For the year ended December 31, 1995, revenues were $9,249,284 as
compared to $11,398,794 for the year ended December 31, 1994, a decrease of
approximately $2,150,000. This decrease is primarily due to (1) the
elimination of operating revenues from the Company's former mobile MRI
operations due to the arrangement entered into effective September 1, 1994
whereby the Company began subleasing its mobile MRI equipment rather than
operating such equipment (approximately $2,106,000), (2) the elimination of
operating revenues from the Company's Maiden Choice fixed-site MRI facility,
which ceased operations effective July 22, 1994 (approximately $194,000), (3)
decreased revenues from the Company's Brooklyn fixed-site MRI facility due to
increased competition resulting in fewer procedures being performed
21
<PAGE>
(approximately $563,000) and (4) an increase in existing referrals from
managed care organizations for all facilities resulting in lower reimbursement
rates, all of which were partially offset by (i) increased revenues from the
Company's fixed-site MRI facility located in Ocean Township, New Jersey
(approximately $628,000) which commenced operations as a permanent fixed-site
in December 1993 and (ii) increased revenues from the Company's fixed-site MRI
facility in Wayne, New Jersey (approximately $207,000) which commenced
operations in April 1992. Both of such facilities have steadily increased the
number of MRI procedures since inception.
For the year ended December 31, 1995, operating expenses were
$9,216,057 as compared to $17,167,974 for the year ended December 31, 1994, a
decrease of approximately $7,952,000. This decrease was primarily due to the
restructuring of the Company's mobile MRI operations (approximately
$5,683,000), the closing of the Maiden Choice fixed-site MRI facility
(approximately $1,781,000) in 1994, which was partially offset by the loss
incurred on the sale in 1995 of the lithotripsy unit and ancillary equipment
of $191,181. Salaries decreased by approximately $217,000 due to the
elimination in 1994 of operating expenses for the mobile MRI division and the
Maiden Choice MRI facility. Other operating expenses, films and supplies and
equipment maintenance and repairs decreased approximately $547,000, $149,000
and $414,000, respectively, due to the elimination in 1994 of expenses for the
restructured operations. Consulting and marketing fees decreased approximately
$333,000 primarily due to the termination of certain consulting agreements for
the mobile MRI division (approximately $128,000) and the Brooklyn fixed-site
MRI facility (approximately $218,000), partially offset by the commencement of
a new consulting agreement for the Brooklyn MRI facility effective June 15,
1995 (approximately $55,000). Such agreement was terminated on October 31,
1995. Professional fees decreased approximately $145,000 due to the
elimination of fees incurred for the restructuring of the mobile MRI division
and the Maiden Choice MRI facility. Depreciation and amortization expense and
interest expense decreased approximately $937,000 and $788,000, respectively,
primarily due to the elimination of depreciation and interest expense for the
mobile MRI equipment, the Maiden Choice MRI equipment and leasehold
improvements and the lithotripsy unit and ancillary equipment.
During the year ended December 31, 1995, as a corporate general
partner, the Company recorded an additional $196,017 of losses attributable to
the limited partnership interests in the Philadelphia, Pennsylvania joint
venture in excess of the limited partners' capital accounts.
The operating results for the years ended December 31, 1995 and 1994
were substantially affected by the Philadelphia MRI facility and lithotripsy
operations which incurred losses of $490,042 and $369,915 (of which amount
$191,181 related to the loss on the sale of the lithotripsy unit and ancillary
equipment), respectively, during 1995 and $327,596 and $314,497, respectively,
during 1994. The Company relocated the mammography and ultrasound units
previously located at the Philadelphia, Pennsylvania facility to the Company's
Ocean Township, New Jersey facility. During the years ended December 31, 1995
and 1994, the Philadelphia MRI facility incurred losses of approximately
$50,000 and $57,000, respectively, related to its
22
<PAGE>
mammography and ultrasound operations.
OVERVIEW - RECENT DEVELOPMENTS
- ------------------------------
On February 9, 1996, the Company sold, pursuant to a private
placement, 600,000 shares of 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 as its fee. Each share of Series C Preferred
Stock is convertible into seven shares of Common Stock. At the Meeting, the
Company obtained stockholder approval for, among other things, the issuance of
the Series C Preferred Stock and an increase in its authorized Common Stock
from 9 million to 50 million shares. 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 businesses which are complementary to the Company,
other healthcare related businesses or non-healthcare related businesses. In
December 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
below $4 million, Nasdaq was considering delisting the Common Stock from The
Nasdaq National Market. In addition, the Company was 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 (extended to
April 10, 1996) (i) the Company make 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.
As consideration for the execution of a 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
23
<PAGE>
Company 750,000 shares of Common Stock (the "Placement Agent Shares") upon
consummation by the Company by January 30, 1997, which date was extended to
January 30, 1998, of an acquisition of, or other business combination with, a
company (or companies) with assets of at least $2.5 million (the
"Acquisition"). In connection with the issuance of the Placement Agent
Options, the Company recorded a non-cash compensation change of $685,800 which
is being amortized over the term of the consulting agreement. In January 1997,
the January 30, 1997 expiration date of the consulting agreement was extended
to January 30, 1998.
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 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 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 was 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 were terminated, and the Company granted to the
CEO stock options (subject to stockholder ratification and approval which was
obtained at the Meeting) 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"). In connection with the issuance of the CEO
New Options, the Company recorded a non-cash compensation charge of $562,506
which is being amortized over the twenty-one months ending October 31, 1997.
Furthermore, the CEO received a restricted stock grant (subject to stockholder
ratification and approval which was obtained at the Meeting) of 250,000 shares
of Common Stock (the "CEO Restricted Stock Grant"). The restrictions related
to the CEO Restricted Stock Grant will lapse upon consummation by the Company
of an Acquisition. As in the case of the Placement Agent Shares, the Company
extended the required consummation date of the Acquisition to January 30, 1998
subject to stockholder ratification and approval of this extension which it
intends to solicit at the 1997 Annual Meeting of Stockholders. In connection
with the issuance of the CEO Restricted Stock Grant, the Company recorded a
non-cash compensation charge of $468,744 which is being amortized over the
twelve-month contingency period ended January 30, 1997, which date was
extended (subject to stockholder ratification and approval) until January 30,
1998. To the extent the Company does not consummate an Acquisition meeting the
specified standards by January 30, 1998 (assuming stockholder ratification and
approval of the extension), the CEO Restricted Stock Grant will be forfeited
and the previously recorded non-cash compensation charge will be reversed
accordingly. In January 1997, the term of the employment agreement was further
extended to October 22, 1998 on the same terms and conditions.
24
<PAGE>
As consideration for the execution of a one-year consulting
agreement, as of October 15, 1996, the Company granted to a consultant stock
options (the "Consultant Options") exercisable to purchase an aggregate of
50,000 shares of Common Stock over a five-year period at a cash exercise price
of $1.0625 per share. The Consultant Options vest quarterly in equal
installments over the one-year consulting agreement term. In connection with
the issuance of the Consultant Options, the Company recorded a non-cash
compensation charge of $35,628 which is being amortized over the term of the
consulting agreement.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
- ----------------------------------------------
As of December 31, 1996, the Company had a cash balance of $173,879,
current assets of $5,287,453 and working capital of $2,943,313. Cash flows
provided by operating activities were $1,761,856 for the year ended December
31, 1996, which consisted primarily of depreciation and amortization of
$1,450,074, amortization of non-cash compensation of $1,445,473 and minority
interests in joint ventures of $416,192, which was partially offset by a net
loss of $861,796. Other significant components of cash flows provided by
operating activities included an increase in accounts receivable and advances
to a certain licensee (see Note 10 of the accompanying financial statements)
of $632,022 and $351,401, respectively, primarily due to an increase in
patient procedures being performed at certain of the Company's MRI facilities.
Cash flows used in investing activities were $796,654 which consisted
primarily of investments in marketable securities utilizing a portion of the
proceeds from the sale of the Series C Preferred Stock in February 1996. Cash
flows used in financing activities were $1,072,739 which consisted primarily
of payments on capital lease obligations of $985,084, payments on the reserves
for restructuring costs of $1,306,013 and distributions to limited partners of
joint ventures of $371,539, partially offset by proceeds of $1,198,254 from
the sale of the Series C Preferred Stock and proceeds of $444,173 from the
sublease of the restructured mobile MRI operations and the Maiden Choice MRI
equipment.
The Company's Philadelphia, Pennsylvania MRI facility, which has been
operating since November 1992, continued to operate at a loss through 1996. 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 December
31, 1996, the amount of such working capital loans was approximately
$2,113,000 (of which approximately $407,000 was loaned in 1996). In order to
become profitable, this joint venture must attain a certain volume of business
and it is uncertain whether such business level will ever be attained. The
Company cannot at this time determine when or if these loans will be repaid.
The Company is in the process of finalizing documentation with the present
limited partners as to its purchase of their interests in such joint venture
which it expects to consummate in 1997. However, there can be no assurance as
to the timing of this purchase, if at all, or as to the timing and magnitude
of a restructuring charge, if any, relating to the Philadelphia MRI facility.
25
<PAGE>
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. The New Jersey sales
tax examination was concluded on May 31, 1996 with the Company's payment of
$214,280 to the NJDT under a conditional agreement with the NJDT. Such
agreement acknowledged that the State of New Jersey has not yet reached an
agreement with the State of New York to assure that New York will give full
credit (under the interstate agreement between New Jersey and New York) for
sales tax paid by the Company to the State of New Jersey. The NJDT has agreed
that it will continue to deal directly with New York to assure that the
Company receives full credit under the interstate taxation agreement.
In February 1996, the Company was notified by the New York State
Department of Taxation and Finance ("NYDT") regarding the commencement of a
sales and use tax examination and has received a preliminary assessment for
taxes and interest due of $170,261. The Company is currently awaiting
acknowledgment that certain NYDT sales taxes were previously overpaid and that
the Company is entitled to recoupment thereof. To the extent NYDT accepts the
Company's position relating to the recoupment of overpaid taxes, the sales tax
deficiency may be substantially reduced. Management believes that the ultimate
resolution of these matters, beyond the amounts already reserved therefor,
will not have a material impact on the Company's financial condition or
results of operations.
In August 1996, the Company entered into a lease purchase agreement
with respect to the sale of one of the Company's mobile MRI units. The lease
purchase agreement provided for a $20,000 down payment upon execution of the
agreement, 11 monthly installments of $5,000 each which commenced October 1,
1996 and a final payment of $35,000 due in September 1997.
In November 1996, the Company formed a limited liability company
which it intends to operate as a joint venture with Practice Management
Corporation to provide on-site MRI services to Meadowlands Hospital Medical
Center. The Company will own sixty (60%) percent of this joint venture. It is
anticipated that the site will commence operations on or about April 1, 1997
and will initially provide MRI services utilizing one of the Company's mobile
MRI units. The Company estimates that initial costs to be incurred in
establishing the facility will range between $150,000 and $225,000. The
Company anticipates that most of these amounts will be in the form of working
capital loans by the Company to the joint venture. The Company believes that
the start-up phase will last six to nine months, although there can be no
assurances that it will not be a longer period.
The nature of the Company's operations require significant capital
expenditures which have historically been financed through the issuance of
debt and capital leases, proceeds received from the Company's initial public
offering in November 1991 and sale of the Series C Preferred Stock in February
1996 and the offering and exercise of warrants and stock options. 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
expansion, if any, will require the purchase of
26
<PAGE>
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 its significant stockholder, DFS. In
December 1995, DFS' two representatives on the Company's Board of Directors
resigned and in April 1996 DFS sold its 800,000 shares of Common Stock
(representing approximately 17% of the then outstanding Common Stock).
Nonetheless, the Company believes it will continue to be able to locate
financing sources for its future equipment needs.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with DVI Business Credit, an affiliate of DFS ("DVIBC"), to
provide a revolving line of credit to the Company. The maximum amount
available under such credit facility is $2.0 million, with advances limited to
seventy-five percent (75%) of eligible accounts receivable, as determined by
DVIBC. Borrowings under the revolving line of credit bear interest at the rate
of three percent (3%) over the prime lending rate and are repayable within two
years from the execution of the aforementioned loan and security agreement.
The Company's obligations under the proposed credit facility are
collateralized through a grant to DVIBC of a first security interest in all
eligible accounts receivable, other than those of DFS. The agreement contains
customary affirmative and negative covenants including covenants requiring the
Company to maintain certain financial ratios and minimum levels of working
capital. Borrowings under this facility will be used to fund working capital
needs as well as acquiring businesses which are complementary to the Company.
In addition, the line of credit does not constrict the Company's borrowing
ability as it relates to the acquisition of new equipment from DFS. To date,
the Company has not made any borrowings under this credit facility.
Effective December 1996, the Company agreed to guarantee an
approximately $250,000 loan from DFS to DMR in connection with DMR's
refinancing of an equipment lease related to the Company's Brooklyn, New York
MRI facility. This loan bears interest at 12% per annum and is repayable over
thirty-four (34) months commencing February 15, 1997. See "The Company and its
Facilities."
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
proceeds from the sale of the Series C Preferred Stock and availability under
the revolving line of credit will further supplement the Company's ability to
meet its future cash needs. If for any reason the Company's estimates prove
inaccurate, the Company is prepared to adopt additional expense reduction
measures in addition to those already implemented, although there can be no
assurance that any such expense reduction measures will be successful.
Recently issued accounting standards may effect the Company's
financial statements in the future. See Note 1 of the Notes to the
Consolidated Financial Statements of the Company and its Subsidiaries.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The following consolidated financial statements of the Company and
its subsidiaries are filed on the pages listed below, as part of Part II,
Item 8.
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report F-1
Consolidated balance sheets - December 31,
1996 and 1995 F-2
Consolidated statements of operations -
For the years ended December 31, 1996,
1995 and 1994 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31,
1996, 1995 and 1994 F-4
Consolidated statements of cash flows - For the years ended December
31, 1996, 1995 and
1994 F-5
Notes to consolidated financial statements F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ---------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
28
<PAGE>
PART III
Part III, except for certain information included in Part I, Item 4,
is omitted inasmuch as the Company currently intends to file a definitive
proxy statement with the Securities and Exchange Commission no later than
April 30, 1997, pursuant to Regulation 14A of the Securities Exchange Act of
1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
- ----------------------------------------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
its subsidiaries are filed on the pages below, as part of Part II, Item 8 of
this report:
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report F-1
Consolidated balance sheets - December 31,
1996 and 1995 F-2
Consolidated statements of operations -
For the years ended December 31, 1996,
1995 and 1994 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31, 1996,
1995 and 1994 F-4
Consolidated statements of cash flows - For the
years ended December 31, 1996, 1995 and 1994 F-5
Notes to consolidated financial statements F-7
2. FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts -
For the years ended December 31, 1996, 1995 and 1994 F-22
</TABLE>
29
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
3.1 Certificate of Incorporation of HealthCare Imaging Services, Inc. (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1 Registration No.33-
42091 filed with the Securities and Exchange Commission on August 13, 1991)
3.2 Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock
of HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
3.3 By-Laws of HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on August 13, 1991)
3.4 Certificate of Amendment of the Certificate of Incorporation of HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)
10.1 Master Equipment Lease dated March 29, 1991 by and between DVI Financial Services Inc.
and HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on August 13, 1991)
10.2 Master Equipment Lease between DVI Financial Services Inc. and MR General Associates -
Mobile I dated as of December 31, 1990 (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on August 13, 1991)
10.3 Assignment, Assumption and Consent Agreement relating to the Mobile I Master Equipment
Lease between MR General and HealthCare Imaging Services, Inc. dated as of January 14,
1991 (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed with the Securities and Exchange Commission on
August 13, 1991)
10.4 Consulting Services and License Agreement between New York MR Associates and Kings
Medical Diagnostic Imaging, P.C. dated January 27, 1986 (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1 Registration No. 33-
42091 filed with the Securities and Exchange Commission on August 13, 1991)
10.5 Addendum to Consulting Services and License Agreement dated June 15, 1990 between New
York MR Associates and Kings Medical Diagnostic Imaging, P.C. (Incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1
Registration No. 33-42091 filed with the Securities and Exchange Commission on
August 13, 1991)
30
<PAGE>
10.6 Administrative Management Agreement between NYMR Associates and MR General Associates
dated January 27, 1986 (Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities
and Exchange Commission on August 13, 1991)
10.7 Assignment and Consent Agreement dated as of July 24, 1991 by and among Kings Medical
Diagnostic Imaging, P.C., Kings Plaza Radiology Associates (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on Form S-1 Registration
No. 33-42091 filed with the Securities and Exchange Commission on August 13, 1991)
10.8 Lease between New York MR Associates and King Medical Diagnostic Imaging, P.C. as of
January 27, 1986 for Brooklyn property (Incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 Registration No.33-42091 filed
with the Securities and Exchange Commission on August 13, 1991)
10.9 Assignment and Assumption of Lease dated October 22, 1991 between Kings Medical
Diagnostic Imaging, P.C. and HealthCare Imaging Services, Inc. (Incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement on Form S-1 Registration No. 33-
42901 filed with the Securities and Exchange Commission on November 6, 1991)
10.10 Sublease dated October 22, 1991 between Kings Medical Diagnostic Imaging, P.C. and
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on November 6, 1991)
10.11 Siemens Service Agreement dated March 5, 1991 between Siemens Medical Systems, Inc.
and New York MR Associates (Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities and
Exchange Commission on August 13, 1991)
10.12 Mortgage between New York MR Associates and DVI Financial Services Inc. dated
November 16, 1987 in the principal amount of $685,000 (Incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-1 Registration No. 33-
42091 filed with the Securities and Exchange Commission on August 13, 1991)
10.13 Promissory Note of MR General Associates to Midlantic Bank in the face amount of
$300,000 (Incorporated by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 Registration No. 33-42091 filed with the Securities and Exchange
Commission on August 13, 1991)
31
<PAGE>
10.14 Promissory Note of New York MR Associates to Midlantic Bank in the face amount of
$400,000 and correspondence relating thereto (Incorporated by reference to Exhibit
10.14 to the Company's Registration Statement on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange Commission on August 13, 1991)
10.15 Employment Agreement dated October 22, 1991 between Elliott Vernon and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities
and Exchange Commission on November 6, 1991)*
10.16 Employment Agreement dated January 19, 1993 between Michael J. Rutkin and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994)*
10.17 Employment Agreement dated January 8, 1994 between Calvin M. Sprung and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994)*
10.18 Form of Guaranty, dated October 22, 1991, issued by HealthCare Imaging Services,
Inc. pertaining to a series of Promissory Notes in the aggregate principal amount
of $630,000 issued by DMR Associates, L.P. (Incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1 Registration No.
33-42091 filed with the Securities and Exchange Commission on November 6, 1991)
10.19 HealthCare Imaging Services, Inc. 1991 Stock Option Plan (Incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1 Registration No. 33-
42091 filed with the Securities and Exchange Commission on November 6, 1991)*
10.20 HealthCare Imaging Services, Inc. 1991 Stock Option Plan for Non-Employee Directors
(Incorporated by Reference to Exhibit 10.20 to the Company's 1991 Annual Report on Form
10-K)*
10.21 Consulting Agreement dated October 22, 1991 between Joseph Raymond and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 Registration Commission on October 24, 1991)*
10.22 Promissory Note of HealthCare Imaging Services, Inc. to DMR Associates, L.P. in the face
amount of $123,000 (Incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities
and Exchange Commission on November 6, 1991)
10.23 Registration Rights Agreement dated October 22, 1991 between HealthCare Imaging
Services, Inc. and DVI Financial Services Inc. (Incorporated by reference to Exhibit 10.23
32
<PAGE>
to the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on November 6, 1991)
10.24 Agreement for Purchase and Sale dated October 22, 1991 between DMR Associates, L.P.
and HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on November 6, 1991)
10.25 Purchase Agreement dated as of October 22, 1991 by and among DMR Associates, L.P., HIS
Acquisition, Inc. and DVI Financial Services Inc. (Incorporated by reference to Exhibit 2.2
to the Company's Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on November 6, 1991)
10.26 Merger Agreement dated October 22, 1991 between HealthCare Imaging Services, Inc. and
HIS Acquisition, Inc. (Incorporated by reference to Exhibit 2.3 to the Company's Registration
Statement on Form S-1 Registration No. 33-42091 filed with the Securities and Exchange
Commission on November 6, 1991)
10.27 Unit Purchase Option dated November 19, 1991, between HealthCare Imaging Services, Inc.
and Stratton Oakmont, Inc. (Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with the Securities and
Exchange Commission on November 6, 1991)
10.28 Master Equipment Lease (No. 91-11-0534) dated December 31, 1991 by and between DVI
Financial Services Inc. and HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992)
10.29 Master Equipment Lease (No. 91-11-0535) dated December 31, 1991 by and between DVI
Financial Services Inc. and HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992)
10.30 Master Mobile Lease Agreement dated September 1, 1994 between Universal Diagnostic
Corp., Medibest Imaging Corp., Ocean Diagnostic Radiology, P.C., Eagle Diagnostic
Imaging Corp., Junction Diagnostic Imaging Corp., HealthCare Imaging Services, Inc.
and Omni Medical Imaging, Inc. (Together with certain Exhibits thereto) (Incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994)
33
<PAGE>
10.31 Master Lease Agreement dated March 14, 1995 between HealthCare Imaging Services, Inc.
and Maiden Choice MRI, L.L.C. (Together with certain Exhibits thereto) (Incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994)
10.32 Restructuring Agreement, dated as of July 1, 1994, among Edgewater Imaging Associates,
L.P., HealthCare Imaging Services of Edgewater, Inc., and the certain individuals
signatory thereto (Incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on August 12, 1994)
10.33 Master Equipment Lease dated September 26, 1995 by and between DVI Financial Services
Inc. and HealthCare Imaging Services, Inc. (Together with certain Schedules thereto).
(Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995)
10.34 Placement Agent Agreement dated as of January 22, 1996 by and between Biltmore
Securities, Inc. and HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995)
10.35 Consulting Agreement dated as of January 30, 1996 by and between Biltmore Securities, Inc.
and HealthCare Imaging Services, Inc. (Together with certain Exhibits thereto).
(Incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995)
10.36 Form of Subscription Agreement for the Purchase of Series C Convertible Preferred
Stock of HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit 10.36
to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995)
10.37 Amendment No. 1 dated as of February 1, 1996 to Employment Agreement by and between
Elliott H. Vernon and HealthCare Imaging Services, Inc. (Together with a Stock Option
Agreement, Restricted Stock Award Agreement and Registration Rights Agreement, each
dated as of February 1, 1996 and by and between Mr. Vernon and HealthCare Imaging
Services, Inc., which are exhibits thereto)* (Incorporated by reference to Exhibit
10.37 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995)
10.38 Amendment No. 2 to HealthCare Imaging Services, Inc. 1991 Stock Option Plan
(Incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)*
34
<PAGE>
10.39 HealthCare Imaging Services, Inc. 1996 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 Registration No. 333-8699 filed with the Securities and Exchange Commission on July
24, 1996)*
22.1 Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 22.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995)
23.1 Consent of Independent Auditors, Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
- ------------------------------------------------------------------------------
* Such exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual
Report on Form 10-K pursuant to Item 14(c) of this Annual Report
on Form 10-K.
- ------------------------------------------------------------------------------
(b) REPORTS ON FORM 8-K
Not applicable.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 28, 1997 By: /s/Elliott H. Vernon
--------------------
By: Elliott H. Vernon
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/Elliott H. Vernon Chairman of the March 28, 1997
- -------------------- Board, President and
Elliott H. Vernon Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/Scott P. McGrory Vice President, March 28, 1997
- ------------------- Controller
Scott P. McGrory (Principal
Financial and
Accounting Officer)
/s/George Braff
- -------------------- Director March 28, 1997
George Braff
/s/Jerold L. Fisher Director March 28, 1997
- --------------------
Jerold L. Fisher
/s/Joseph J. Raymond Director March 28, 1997
- ---------------------
Joseph J. Raymond
36
<PAGE>
/s/Shawn A. Freidkin Director March 28, 1997
- ---------------------
Shawn A. Freidkin
/s/Mitchell Hymowitz Director March 28, 1997
- ---------------------
Mitchell Hymowitz
/s/Dominic A. Polimeni Director March 28, 1997
- ---------------------
Dominic A. Polimeni
</TABLE>
37
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
--------
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
--------
INDEX TO EXHIBITS
EXHIBITS
- --------
Page
----
3.1 Certificate of Incorporation of HealthCare
Imaging Services, Inc. (Incorporated by
reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
3.2 Certificate of Designations, Preferences
and Rights of Series C Convertible
Preferred Stock of HealthCare Imaging
Services, Inc. (Incorporated by reference
to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1995)
3.3 By-Laws of HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit
3.2 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on August 13,
1991)
3.4 Certificate of Amendment of the
Certificate of Incorporation of HealthCare
Imaging Services, Inc. (Incorporated by
reference to Exhibit 3.4 to the Company's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996)
10.1 Master Equipment Lease dated March 29,
1991 by and between DVI Financial
Services Inc. and HealthCare Imaging
38
<PAGE>
Services, Inc. (Incorporated by reference
to Exhibit 10.1 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
10.2 Master Equipment Lease between DVI
Financial Services Inc. and MR General
Associates - Mobile I dated as of
December 31, 1990 (Incorporated by
reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
10.3 Assignment, Assumption and Consent
Agreement relating to the Mobile I Master
Equipment Lease between MR General
and HealthCare Imaging Services, Inc.
dated as of January 14, 1991
(Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement
on Form S-1 Registration No.33-42091
filed with the Securities and Exchange
Commission on August 13, 1991)
10.4 Consulting Services and License
Agreement between New York MR
Associates and Kings Medical Diagnostic
Imaging, P.C. dated January 27, 1986
(Incorporated by reference to Exhibit 10.4
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on August 13, 1991)
10.5 Addendum to Consulting Services and
License Agreement dated June 15, 1990
between New York MR Associates and
Kings Medical Diagnostic Imaging, P.C.
(Incorporated by reference to Exhibit 10.5
39
<PAGE>
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on August 13,1991)
10.6 Administrative Management Agreement
between NYMR Associates and MR
General Associates dated January 27,1986
(Incorporated by reference to Exhibit 10.6
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on August 13, 1991)
10.7 Assignment and Consent Agreement dated
as of July 24, 1991 by and among Kings
Medical Diagnostic Imaging, P.C., Kings
Plaza Radiology Associates (Incorporated
by reference to Exhibit 10.7 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on August 13, 1991)
10.8 Lease between New York MR Associates
and King Medical Diagnostic Imaging,
P.C. as of January 27, 1986 for Brooklyn
property (Incorporated by reference to
Exhibit 10.8 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on August 13,
1991)
10.9 Assignment and Assumption of Lease
dated October 22, 1991 between Kings
Medical Diagnostic Imaging, P.C. and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit 10.9
to the Company's Registration Statement
on Form S-1 Registration No. 33-42901
filed with the Securities and Exchange
Commission on November 6, 1991)
40
<PAGE>
10.10 Sublease dated October 22, 1991 between
Kings Medical Diagnostic Imaging, P.C.
and HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.10 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on November 6,
1991)
10.11 Siemens Service Agreement dated March
5, 1991 between Siemens Medical
Systems, Inc. and New York MR
Associates (Incorporated by reference to
Exhibit 10.11 to the Company's Registra
tion Statement on Form S-1 Registration
No. 33-42091 filed with the Securities and
Exchange Commission on August 13,
1991)
10.12 Mortgage between New York MR
Associates and DVI Financial Services Inc.
dated November 16, 1987 in the principal
amount of $685,000 (Incorporated by
reference to Exhibit 10.12 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on August 13, 1991)
10.13 Promissory Note of MR General
Associates to Midlantic Bank in the face
amount of $300,000 (Incorporated by
reference to Exhibit 10.13 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on August 13, 1991)
10.14 Promissory Note of New York MR
Associates to Midlantic Bank in the face
amount of $400,000 and correspondence
relating thereto (Incorporated by reference
41
<PAGE>
to Exhibit 10.14 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
August 13, 1991)
10.15 Employment Agreement dated October 22,
1991 between Elliott Vernon and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.15 to the Company's Registration
Statement on Form S-1 Registration No.
33-42091 filed with the Securities and
Exchange Commission on November 6,
1991)*
10.16 Employment agreement dated January 19,
1993 between Michael J. Rutkin and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1994)*
10.17 Employment agreement dated January 8,
1994 between Calvin M. Sprung and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.17 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1994)*
10.18 Form of Guaranty, dated October 22,
1991, issued by HealthCare Imaging
Services, Inc. pertaining to a series of
Promissory Notes in the aggregate
principal amount of $630,000 issued by
DMR Associates, L.P. (Incorporated by
reference to Exhibit 10.18 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities an Exchange
Commission on November 6, 1991)
42
<PAGE>
10.19 HealthCare Imaging Services, Inc. 1991
Stock Option Plan (Incorporated by
reference to Exhibit 10.19 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on November 6, 1991)*
10.20 HealthCare Imaging Services, Inc. 1991
Stock Option Plan for Non-Employee
Directors (Incorporated by Reference to
Exhibit 10.20 to the Company's 1991
Annual Report on Form 10-K)*
10.21 Consulting Agreement dated October 22,
1991 between Joseph Raymond and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.19 to the Company's Registration
Statement on Form S-1 Registration
Commission on October 24, 1991)*
10.22 Promissory Note of HealthCare Imaging
Services, Inc. to DMR Associates, L.P. in
the face amount of $123,000 (Incorporat
ed by reference to Exhibit 10.22 to the
Company's Registration Statement on
Form S-1 Registration No. 33-42091 filed
with the Securities and Exchange
Commission on November 6, 1991)
10.23 Registration Rights Agreement dated
October 22, 1991 between HealthCare
Imaging Services, Inc. and DVI Financial
Services Inc. (Incorporated by reference to
Exhibit 10.23 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
November 6, 1991)
10.24 Agreement for Purchase and Sale dated
October 22, 1991 between DMR
43
<PAGE>
Associates, L.P. and HealthCare Imaging
Services, Inc. (Incorporated by reference
to Exhibit 2.1 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
November 6, 1991)
10.25 Purchase Agreement dated as of October
22, 1991 by and among DMR Associates,
L.P., HIS Acquisition, Inc. and DVI
Financial Services Inc. (Incorporated by
reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-1
Registration No. 33-42091 filed with the
Securities and Exchange Commission on
November 6, 1991)
10.26 Merger Agreement dated October 22,
1991 between HealthCare Imaging
Services, Inc. and HIS Acquisition, Inc.
(Incorporated by reference to Exhibit 2.3
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on November 6, 1991)
10.27 Unit Purchase Option dated November 19,
1991, between HealthCare Imaging
Services, Inc. and Stratton Oakmont, Inc.
(Incorporated by reference to Exhibit 4.2
to the Company's Registration Statement
on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange
Commission on November 6, 1991)
10.28 Master Equipment Lease (No. 91-11-
0534) dated December 31, 1991 by and
between DVI Financial Services Inc. and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.28 to the Company's Annual Report on
44
<PAGE>
Form 10-K for the fiscal year ended
December 31, 1992)
10.29 Master Equipment Lease (No. 91-11-
0535) dated December 31, 1991 by and
between DVI Financial Services Inc. and
HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit
10.29 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1992)
10.30 Master Mobile Lease Agreement dated
September 1, 1994 between Universal
Diagnostic Corp., Medibest Imaging
Corp., Ocean Diagnostic Radiology, P.C.,
Eagle Diagnostic Imaging Corp., Junction
Diagnostic Imaging Corp., HealthCare
Imaging Services, Inc. and Omni Medical
Imaging, Inc. (Together with certain
Exhibits thereto) (Incorporated by
reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1994)
10.31 Master Lease Agreement dated March 14,
1995 between HealthCare Imaging
Services, Inc. and Maiden Choice MRI,
L.L.C. (Together with certain Exhibits
thereto) (Incorporated by reference to
Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1994)
10.32 Restructuring Agreement, dated as of July
1, 1994, among Edgewater Imaging
Associates, L.P., HealthCare Imaging
Services of Edgewater, Inc., and the
certain individuals signatory thereto
(Incorporated by reference to Exhibit 1 to
the Company's Current Report on Form 8-
45
<PAGE>
K filed with the Securities and Exchange
Commission on August 12, 1994)
10.33 Master Equipment Lease dated September
26, 1995 by and between DVI Financial
Services Inc. and HealthCare Imaging
Services, Inc. (Together with certain
Schedules thereto). (Incorporated by
reference to Exhibit 10.33 to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995)
10.34 Placement Agent Agreement dated as of
January 22, 1996 by and between Biltmore
Securities, Inc. and HealthCare Imaging
Services, Inc. (Incorporated by reference
to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1995)
10.35 Consulting Agreement dated as of January
30, 1996 by and between Biltmore
Securities, Inc. and HealthCare Imaging
Services, Inc. (Together with certain
Exhibits thereto). (Incorporated by
reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995)
10.36 Form of Subscription Agreement for the
Purchase of Series C Convertible Preferred
Stock of HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit
10.36 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1995)
10.37 Amendment No. 1 dated as of February 1,
1996 to Employment Agreement by and
between Elliott H. Vernon and HealthCare
Imaging Services, Inc. (Together with a
46
<PAGE>
Stock Option Agreement, Restricted Stock
Award Agreement and Registration Rights
Agreement, each dated as of February 1,
1996 and by and between Mr. Vernon and
HealthCare Imaging Services, Inc., which
are exhibits thereto)* (Incorporated by
reference to Exhibit 10.37 to the Company's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1995)
10.38 Amendment No. 2 to HealthCare Imaging
Services, Inc. 1991 Stock Option Plan.
(Incorporated by reference to Exhibit
10.38 to the Company's Form 10-Q for the
quarter ended June 30, 1996)
10.39 HealthCare Imaging Services, Inc. 1996
Stock Option Plan for Non-Employee
Directors (Incorporated by reference to
Exhibit 4.1 to the Company's Registration
Statement on Form S-8 Registration No.
333-8699 filed with the Securities and
Exchange Commission on July 24, 1996)*
22.1 Subsidiaries of the Registrant.
(Incorporated by reference to Exhibit 22.1
to the Company's Annual Report on Form
10-K for the fiscal year ended December
31, 1995)
23.1 Consent of Independent Auditors, Deloitte
& Touche LLP
27 Financial Data Schedule
- -------------------------------------------------------------------
* Such exhibit is a management contract or
compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(c) of this Annual
Report on Form 10-K.
- -------------------------------------------------------------------
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
HealthCare Imaging Services, Inc.
Red Bank, New Jersey
We have audited the accompanying consolidated balance sheets of HealthCare
Imaging Services, Inc. and subsidiaries (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in Item 14 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 14, 1997
F-1
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 173,879 $ 281,416
Marketable securities 625,000 -
Accounts receivable - net of allowances for doubtful accounts of $4,318,000
in 1996 and $4,301,000 in 1995 4,328,553 3,713,531
Prepaid expenses and other 160,021 217,762
----------- -----------
Total current assets 5,287,453 4,212,709
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - NET 4,347,745 5,272,215
---------- ----------
OTHER ASSETS:
Advances to licensee 351,401 -
Deferred costs - net of accumulated amortization of $139,997 in 1996 and
$289,088 in 1995 11,218 35,259
Goodwill - net of accumulated amortization of $46,269 in 1996 and $27,761 in 1995 138,806 157,314
Due from officer 176,049 231,904
Other assets 254,060 97,298
----------- -------------
Total other assets 931,534 521,775
----------- ------------
TOTAL ASSETS $10,566,732 $10,006,699
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,083,223 $ 765,258
Current portion of long-term debt and capital lease obligations (of which
$1,084,970 in 1996 and $933,818 in 1995 is owed to DVI Financial Services,
Inc., a former shareholder) 1,102,559 1,001,414
Reserve for restructuring costs 150,054 1,285,790
Income taxes payable 8,304 -
----------- ----------
Total current liabilities 2,344,140 3,052,462
----------- -----------
NONCURRENT LIABILITIES:
Long-term debt and capital lease obligations (of which $2,104,245 in 1996 and
$2,969,275 in 1995 is owed to DVI Financial Services, Inc., a former
shareholder) 2,141,627 2,973,752
Reserve for restructuring costs 575,589 301,693
----------- -----------
Total noncurrent liabilities 2,717,216 3,275,445
----------- -----------
MINORITY INTEREST 500,569 455,916
----------- -----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.10 par value: 1,000,000 shares authorized,
660,000 shares outstanding at December 31, 1996 66,000 -
Common stock, $.01 par value: 50,000,000 shares authorized, 4,961,974
outstanding at December 31, 1996 and 4,711,974 outstanding at December
31, 1995 49,620 47,120
Additional paid-in capital 11,876,678 8,902,805
Accumulated deficit (6,588,845) (5,727,049)
Unearned compensation (398,646) -
----------- -----------
Total stockholders' equity 5,004,807 3,222,876
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,566,732 $10,006,699
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
REVENUES $9,787,591 $9,249,284 $ 11,398,794
---------- ---------- ------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Salaries 2,838,739 2,654,503 2,871,091
Other operating expenses 2,645,275 2,334,470 2,881,627
Provision/(recovery) of bad debts (392,286) - 825,000
Films and supplies 552,067 526,641 675,689
Equipment maintenance and repairs 645,231 727,359 1,141,508
Consulting and marketing fees 72,344 106,650 439,167
Professional fees 457,797 291,156 436,333
Depreciation and amortization 1,450,074 1,742,494 2,679,787
Interest 469,133 641,603 1,429,772
Loss on sale of property, plant and equipment - 191,181 -
Restructuring costs - - 3,788,000
Non-cash compensation charge 1,445,473 - -
------------ ------------------ -------------------
10,183,847 9,216,057 17,167,974
----------- ----------- -----------
(LOSS) INCOME BEFORE MINORITY INTERESTS IN
JOINT VENTURES AND INCOME TAXES (396,256) 33,227 (5,769,180)
MINORITY INTERESTS IN JOINT VENTURES (416,192) (293,924) (439,432)
------------- ------------- --------------
LOSS BEFORE INCOME TAXES (812,448) (260,697) (6,208,612)
INCOME TAX PROVISION (BENEFIT) 49,348 (142,267) (155,000)
------------- ------------- --------------
NET LOSS $ (861,796) $ (118,430) $(6,053,612)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,711,974 4,711,974 4,485,731
=========== =========== ============
NET LOSS PER COMMON SHARE $ (0.18) $ (0.03) $ (1.35)
================ =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Stock Common Stock Additional (Deficit) Total
Paid-in Retained Unearned Stockholders'
Shares Amount Shares Amount Capital Earnings Compensation Equity
------ ------ ------ ------ ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 - - 3,934,670 $ 39,347 $ 6,415,829 $ 444,993 - 6,900,169
Net loss - - - (6,053,612) (6,053,612)
Exercise of Underwriter
Option and
warrants, net - - 395,200 3,952 1,678,826 - 1,682,778
Purchase of 40% interest
in operating business
of Edgewater
Imaging
Associates, L.P. - - 382,104 3,821 808,150 - - 811,971
------- ------- ---------- -------- ----------- ------------- -------------- ------------
BALANCE, DECEMBER 31, 1994 - 4,711,974 47,120 8,902,805 (5,608,619) - 3,341,306
Net loss - - - - - (118,430) - (118,430)
------- ------- ---------- -------- ----------- ------------- -------------- ------------
BALANCE, DECEMBER 31, 1995 4,711,974 47,120 8,902,805 (5,727,049) 3,222,876
Proceeds from sale of
Preferred Stock
net of expenses of
$151,746 660,000 $66,000 - - 1,132,254 - - 1,198,254
Issuance of Restricted
Stock Grant 250,000 2,500 466,244 - $ (468,744) -
Unearned compensation in
connection
with stock option
grants - - - - 1,375,375 - (1,375,375) -
Amortization of unearned
compensation for stock
options and
restricted stock
grants - - - - - 1,445,473 1,445,473
Net loss - - - - - (861,796) - (861,796)
------- ------- ---------- -------- ----------- ------------- -------------- ------------
BALANCE, DECEMBER 31, 1996 660,000 $66,000 4,961,974 $ 49,620 $11,876,678 $ (6,588,845) $ (398,646) $ 5,004,807
======= ======= ========= ======== =========== ============== ============== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (861,796) $ (118,430) $ (6,053,612)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 1,450,074 1,742,494 2,679,787
Amortization of non-cash compensation 1,445,473 - -
Restructuring costs - - 3,788,000
Loss on sale of property, plant and equipment - 191,181 -
Minority interests in joint ventures 416,192 293,924 439,432
Deferred income taxes - (254,194) (176,592)
Provisions for bad debts - - 825,000
Allowance for doubtful accounts 17,000 663,000 1,018,000
Changes in assets and liabilities:
Accounts receivable (632,022) 710,460 193,336
Prepaid expenses and other 57,741 51,760 101,771
Due from officer 55,855 - (8,881)
Goodwill - - (81,946)
Deferred costs (4,767) (28,888) -
Advances to licensee (351,401) - -
Accounts payable and accrued expenses 317,965 (1,362) (401,801)
Income taxes payable 8,304 (19,407) (14,477)
Other assets (156,762) 27,232 32,817
------------ -------------- -------------
Net cash provided by operating activities 1,761,856 3,257,770 2,340,834
------------ -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment - 525,000 -
Purchases of property, plant and equipment (171,654) (93,375) (92,724)
Proceeds from sale of marketable securities 375,000 - -
Purchase of marketable securities (1,000,000) - -
------------ -------------- --------------
Net cash (used in) provided by investing activities (796,654) 431,625 (92,724)
------------ --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from the sale of Series C Preferred Stock 1,198,254 - -
Payments on revolving line of credit - bank - - (500,000)
Payments on capital lease obligations (985,084) (1,665,602) (2,571,237)
Payments on note payable (52,530) (70,933) (62,498)
Proceeds received from sale of property, plant and equipment
included in the reserve for restructured operations - 625,000 -
Proceeds received on sublease for restructured operations 444,173 755,000 265,000
Payments for reserve for restructuring costs (1,306,013) (3,004,180) (735,011)
Exercise of Underwriter Option and warrants, net - - 1,682,778
Distributions to limited partners of joint ventures (371,539) (282,524) (290,682)
------------- --------------- ---------------
Net cash used in financing activities (1,072,739) (3,643,239) (2,211,650)
------------- --------------- ---------------
(DECREASE)/INCREASE IN CASH (107,537) 46,156 36,460
CASH:
Beginning of the year 281,416 235,260 198,800
------------- --------------- ----------------
End of the year $ 173,879 $ 281,416 $ 235,260
============= =============== ================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 477,196 $ 747,501 $1,410,639
============== ============= ==========
Income taxes paid $ 53,756 $ 104,563 $ 145,472
============== ============= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital leases principally for medical equipment $ 306,634
==============
Refinancing of certain capital lease obligations $ 69,746
=============
The Company acquired the operating business of its Edgewater
joint venture ("EIA") (of which the Company previously owned a sixty percent
(60%) interest through a wholly-owned subsidiary) in exchange for the
issuance of 382,104 shares of the Company's common stock (Note 2):
Issuance of common stock $ 811,971
Costs incurred in connection with buyout of the EIA
Limited Partners' interest 126,274
Less EIA Limited Partners' capital accounts $ (753,170)
----------
Goodwill $ 185,075
==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY - The Company is principally engaged in the
business of establishing and operating fixed-site magnetic resonance
imaging ("MRI") centers.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include HealthCare Imaging Services, Inc. and its wholly-owned
subsidiaries, which are corporations usually formed to be the general
partner of the Company's various limited partnership arrangements.
All significant intercompany balances and transactions have been
eliminated in consolidation.
REVENUES - The Company provides MRI services, directly or through
joint ventures in which it (or a subsidiary) is the general partner,
to health care providers, which consist primarily of individual
physicians and private medical practices. The Company generally
leases its MRI equipment (directly or through joint ventures) to
professional practice groups ("Medical Lessees") primarily located in
New York, New Jersey and Pennsylvania who, in turn, make the
equipment available to their patients and other health care providers
with whom they or the Company have relationships. A typical Medical
Lessee pays the Company a flat fee on a daily, weekly, or per scan
basis for the use of the equipment and an administrative charge for
the use of the Company's support personnel and support services, such
as clerical work, billing and collection services and performing
other associated nonmedical functions. Such fees are received when
the Medical Lessees are paid by either their patients or other
third-party payers.
The Company has entered into several Consulting Services and
Licensing Agreements with physicians to provide them with management
and administrative services, and medical equipment for periods
ranging from five (5) to ten (10) years. Under the terms of the
Consulting Services and Licensing Agreements, the Company receives
revenues in the following manner:
PROCEDURE FEES - Procedures revenue represents fees earned
by the Company for each scan performed for the physicians.
Fees are revised each year based upon the Company's
Consulting Services and Licensing Agreements with the
physicians.
ADMINISTRATIVE FEES - Administrative revenue represents fees
earned by the Company for medical support services. This
fee, per the administrative services agreements, fluctuates
annually based upon total revenues and type of services
provided.
MINORITY INTERESTS IN CONSOLIDATED JOINT VENTURES - The Company's
consolidated financial statements include 100% of the assets,
liabilities and results of operations of its operating joint ventures
in which the Company has a majority interest (ranging from 52% to
60%) and exercises unilateral management control including day-to-day
management of operations, strategic planning, equipment financing and
capital transactions, directly or through one of its subsidiaries.
The ownership interests of the limited partners in these joint
ventures are recorded as minority interests.
MARKETABLE SECURITIES - The Company's marketable securities portfolio
is classified as "Available For Sale." Such securities are valued at
fair value with net changes in unrealized holding gains and losses
included as a separate component of shareholders' equity until
realized. Debt and equity securities which are classified as
"Available For Sale" are those which are not actively traded or those
which will not be held to maturity. At December 31, 1996, cost
approximated fair market value and there were no unrealized holding
gains or losses.
F-7
<PAGE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, stated
at cost, are depreciated on a straight-line basis over the estimated
useful lives of the assets. Assets held under capital leases are
stated at the lower of the fair market value or the present value of
the future minimum lease payments. Leasehold improvements are
amortized over the shorter of the life of the lease or the useful
life. The estimated useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Office and computer equipment
and furniture and fixtures 5-8 years
Medical equipment 5-8 years
Leasehold improvements 6-8 years
</TABLE>
GOODWILL - Goodwill is being amortized on a straight-line basis over
ten (10) years.
NET LOSS PER COMMON SHARE - Net loss per common share is computed by
dividing net loss by the number of weighted average common shares
outstanding. Common stock equivalents have been excluded from the
computation because they are anti-dilutive.
INCOME TAXES - The Company accounts for income tax in accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between
the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For financial instruments
including cash, accounts receivable and payable and accruals, it was
assumed that the carrying amount approximated fair value because of
their short maturity. The Company's marketable securities are carried
at fair market value. The fair values of the Company's long-term debt
and capital lease obligations are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The carrying amount and
fair value for the Company's long-term debt and capital lease
obligations are $3,244,186 and $3,332,202 at December 31, 1996,
respectively, and $3,975,166 and $4,131,122 at December 31, 1995,
respectively.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily
of accounts receivables. The Company furnishes services in various
states (primarily in New York, New Jersey and Pennsylvania) on behalf
of professional entities primarily comprised of radiologists who in
turn provide such services to individual physicians, physicians' groups
and other health care providers which consist of managed care
organizations, labor unions and self-funded corporations. The Company
currently earns substantially all of its MRI revenues through its
arrangements with its Medical Lessees. Although the Company's right to
payment for services rendered to Medical Lessees is not dependent upon
payments received by the Medical Lessees, as part of its arrangements
with certain Medical Lessees, the Company does not seek payment from
the Medical Lessee until the Medical Lessee has been paid for the MRI
services it has provided. Therefore, the Company bears the risk of
delayed payment since principally all amounts due to the Medical
Lessees are subject to third-party reimbursement from health insurance
companies, which historically have proven to be credit worthy. Upon the
expiration or other termination of the arrangements with such Medical
Lessees, the Company is contractually entitled to seek payment from
such Medical Lessees for all services provided, including those with
respect to which the Medical Lessees have not been paid. However, the
Company generally does not seek to recover unpaid claims.
F-8
<PAGE>
The Company's accounts receivable (principally due from Medical
Lessees) represent the Company's proportionate share of Medical
Lessees' procedure fees and administrative fees. Such accounts
receivable are shown net of allowance for doubtful accounts which
consists of the Company's estimate of amounts that will not be
collected from Medical Lessees and wholesale accounts due to
non-payment by patients and other third party payors.
LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." The Company adopted this standard
in 1996 without any significant impact on the Company's financial
position or results of operations.
STOCK OPTIONS AND WARRANTS - In October 1995, the FASB issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Pursuant to this statement, companies are encouraged,
but are not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to
continue to account for such transactions under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," but
are required to disclose in a note to the annual audited financial
statements pro forma net income (loss) and pro forma earnings (losses)
per share as if the company had applied the newer method of accounting.
The Company has elected to continue to follow the provisions of APB
Opinion No. 25 and related interpretations in accounting for employee
stock options.
2. RESTRUCTURED OPERATIONS
On August 31, 1995, the Company consummated the sale of its lithotripsy
unit and ancillary equipment to an unaffiliated third party. The sale
resulted in the discontinuance of the Company's lithotripsy operations.
The Company pursued the sale due to losses sustained in connection with
the lithotripsy operations since the inception of lithotripsy services
in May 1992 and the expectation of continuing losses. For the year
ended December 31, 1995, the lithotripsy operations incurred a loss of
$369,915 (which includes a loss on the sale of the lithotripsy unit and
ancillary equipment in the amount of $191,181). The sale enabled the
Company to substantially eliminate the overhead costs associated with
the lithotripsy operations, including the related debt service. The
remaining debt service obligation at the date of sale, which was
satisfied with the proceeds from the sale, was approximately $475,000.
The Company entered into an arrangement, effective September 1, 1994,
pursuant to which it operated 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, and a current
consultant to, the Company and the brother of the Company's Chairman of
the Board, President and Chief Executive Officer (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 Company decided to enter into this restructuring
arrangement due to the competitive pressures associated with the mobile
MRI business and in order to focus its energy and management expertise
on fixed-site imaging sites as well as further diversification in the
health care industry. As a result of the restructuring of its mobile
MRI operations, the Company recorded a restructuring charge in fiscal
1994 in the amount of $2,375,000.
In December 1995, due to the sublessee's failure to remain current with
its 1995 monthly payment obligations, the Company repossessed and sold
one of its mobile MRI units for $625,000. In February 1996, the Company
terminated its master agreement with the sublessee and repossessed the
remaining three mobile MRI units from the sublessee as a result of the
failure of the sublessee and certain of its customers to satisfy their
obligations to the Company. In an attempt to satisfy the past due
amounts, the sublessee and its customers provided the Company with cash
and additional patient receivable claims to partially offset the amounts
owed to the Company. The additional patient receivable claims were to
supplement the amounts previously submitted to the Company to satisfy
prior past due indebtedness . The Company soon after returned the three
mobile MRI units to the sublessee.
F-9
<PAGE>
Effective July 27, 1996, the Company again repossessed the three mobile
MRI units due to the sublessee's continuing failure to meet its
obligations to the Company.
In August 1996, the Company entered into a lease purchase agreement
with respect to the sale of one of the Company's mobile MRI units. The
lease purchase agreement provided for a $20,000 down payment upon
execution of the agreement, 11 monthly installments of $5,000 each
which commenced October 1, 1996 and a final payment of $35,000 due in
September 1997.
In November 1996, the Company formed a limited liability company which
it intends to operate as a joint venture with Practice Management
Corporation to provide on-site MRI services to Meadowlands Hospital
Medical Center. The Company will own sixty percent (60%) of this joint
venture. It is anticipated that the site will commence operations on or
about April 1, 1997 and will initially provide MRI services utilizing
one of the Company's mobile MRI units. The Company estimates that
initial costs to be incurred in establishing the facility will range
between $150,000 and $225,000. The Company anticipates that these
amounts will be in the form of working capital loans by the Company to
the joint venture. The Company believes that the start-up phase will
last six to nine months, although there can be no assurances that it
will not be a longer period.
Effective July 22, 1994, the Company's Maiden Choice MRI facility
located in Catonsville, Maryland ceased operations. This facility was
closed due to losses sustained during fiscal 1993 and the six months
ended June 30, 1994 in the amount of $242,579 and $132,381,
respectively, and due to the expectation of continuing losses. This
facility was operated by Maiden Choice Imaging Associates, L.P., a
joint venture in which the Company owns sixty percent (60%) and the
limited partners own the remaining forty percent (40%). The Company
entered into a sublease arrangement with a radiology group, of which
one of the members was among the limited partners in this joint
venture, to sublease the medical equipment and facility from the
Company. This sublease arrangement commenced April 1, 1995 and provides
for sixty (60) monthly payments of $10,000 commencing June 15, 1995. In
addition, the sublessee is responsible for paying the rent for the
office space and for all future operating costs incurred. The Company,
as a result of the closing of the Maiden Choice facility, recorded a
restructuring charge in fiscal 1994 in the amount of $1,413,000 which
is comprised of a loss representing the estimated difference between
the gross sublease receipts and the aggregate capital lease obligations
for the medical equipment of $1,036,000, write-off on abandonment of
leasehold improvements of $247,000 and an accrual for other costs of
$130,000. This restructuring enabled the Company to eliminate all
operating costs associated with the operation of the Maiden Choice MRI
facility, except for debt service, and provides for the receipt of
lease payments under the sublease arrangement thereby resulting in
significant cash savings.
The aggregate restructuring charges during the year ended December 31,
1994 for both the restructuring of the mobile MRI operations and the
closing of the Maiden Choice MRI facility were $3,788,000.
At December 31, 1996, the Company reevaluated its future obligations
under the capital leases for its MRI units and other obligations
relating to its restructured operations and concluded that the
remaining reserve at December 31, 1996 is adequate.
Effective July 1, 1994, the Company consummated the restructuring of
Edgewater Imaging Associates, L.P. ("EIA"). This restructuring was
necessary in order to meet stricter interpretations of laws in New
Jersey and to comply with the Federal Medicare and Medicaid "Stark
Law." The restructuring resulted in the acquisition by HealthCare
Imaging Services of Edgewater, Inc., a wholly-owned subsidiary of the
Company ("HISE"), of the operating business of EIA (in which HISE
previously owned a sixty percent (60%) interest) in exchange for the
issuance of 382,104 shares of the common stock (the "Common Stock") of
the Company (having a market value of approximately $811,971 on the
effective date of the restructuring, based on the per share closing
price of the Common Stock of $2.125 as of June 30, 1994) to the EIA
limited partners for the remaining forty percent (40%) interest. At
June 30, 1994, the net book value of the forty percent (40%) of EIA
owned by the EIA limited partners was $753,170. In connection with this
transaction, the Company recorded goodwill of $185,075. The
restructured limited partnership, EIA, continues to own the capital
lease for the medical equipment and operating lease for the facility's
office space which are being
F-10
<PAGE>
subleased to HISE. The EIA limited partners continue to own a forty
percent (40%) interest in the restructured EIA and HISE continues to
own a sixty percent (60%) interest in the restructured EIA.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, DECEMBER 31,
1996 1995
Medical equipment under capital leases $ 7,088,383 $ 7,793,361
Medical equipment 536,608 555,140
Office equipment under capital leases 48,789 48,789
Office equipment 113,182 122,002
Furniture and fixtures under capital leases 88,959 88,959
Furniture and fixtures 404,232 391,270
Computer equipment 344,492 288,956
Leasehold improvements 1,128,186 1,090,296
Leasehold improvements under capital leases 971,379 971,379
------------ ------------
10,724,210 11,350,152
Less accumulated depreciation and amortization 6,376,465 6,077,937
------------ ------------
$ 4,347,745 $ 5,272,215
============ ============
</TABLE>
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under noncancellable operating leases,
the present value of future minimum capital lease payments and
long-term debt payments as of December 31, 1996 (excluding amounts
relating to the restructured operations) are:
<TABLE>
<CAPTION>
YEAR ENDING LONG-TERM DEBT
DECEMBER 31, AND CAPITAL LEASE
OBLIGATIONS OPERATING LEASES
<S> <C> <C>
1997 $1,460,623 $ 784,671
1998 1,452,453 557,317
1999 943,974 434,324
2000 12,892 231,855
2001 - 13,500
Thereafter - -
---------- ------------
Total minimum lease/debt payments 3,869,942 $2,021,667
============
Less amounts representing interest and maintenance 625,756
----------
Present value of minimum capital lease payments 3,244,186
Less current portion of obligations 1,102,559
----------
$2,141,627
==========
</TABLE>
The carrying value of the medical equipment, office equipment,
furniture and fixtures and leasehold improvements under capital lease
obligations was $2,747,042, $13,753, $29,806 and $412,836,
respectively, at December 31, 1996 and $3,356,310, $23,511, $42,514 and
$542,541, respectively, at December 31, 1995. These amounts exclude
property, plant and equipment relating to the restructured operations
(Note 2).
F-11
<PAGE>
Rent expense was $711,188, $618,244 and $734,867 for 1996, 1995 and
1994, respectively.
Future minimum lease payments under capital leases and sublease income
relating to restructured operations are as follows at December 31,
1996. These amounts are included in the reserve for restructuring
costs.
YEAR ENDING CAPITAL LEASE SUBLESSEE
DECEMBER 31, OBLIGATIONS INCOME
1997 $ 604,850 $ (508,392)
1998 604,177 (120,000)
1999 410,521 (120,000)
2000 85,353 (30,000)
Thereafter - -
---------- ----------
$1,704,901 $(778,392)
========== ==========
The capital lease obligations for the restructured operations include
interest.
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
STATE AND
FEDERAL LOCAL TOTAL
<S> <C> <C> <C>
December 31, 1996:
Current $ - $ 49,348 $ 49,348
Deferred - - -
-------------- ------------ -------------
$ - $ 49,348 $ 49,348
============== ============ ============
December 31, 1995:
Current $ 13,099 $ 98,828 $ 111,927
Deferred (21,854) (232,340) (254,194)
--------------- ------------ ------------
$ (8,755) $ (133,512) $ (142,267)
=============== ============ ============
December 31, 1994:
Current $(108,088) $ 129,680 $ 21,592
Deferred (189,912) 13,320 (176,592)
----------- ------------ ----------
$(298,000) $ 143,000 $ (155,000)
========== =========== ===========
</TABLE>
In July 1995, the Company merged certain wholly-owned subsidiaries into
the Company in order to be able to offset operating profits and losses
in the same jurisdiction, thereby reducing state income taxes.
The difference between the actual income tax benefit and the tax
benefit computed by applying the statutory Federal income tax rate to
the loss before taxes is attributable to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
------ ------ -----
Dollars Percentage Dollars Percentage Dollars Percentage
<S> <C> <C> <C> <C> <C> <C>
Statutory Federal income tax rate $(276,232) (34.0) $ (88,637) (34.0) $(2,110,928) (34.0)
State income taxes - net of Federal benefit 32,570 4.0 (88,119) (33.8) 94,380 1.5
Other - net (146,173) (18.0) (25,155) (9.7) 19,228 .3
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Valuation allowance 439,183 54.1 59,644 22.9 1,842,320 29.7
------------ ------ ----------- ------ ----------- ------
Actual income tax (benefit) $ 49,348 6.1 $ (142,267) (54.6) $ (155,000) (2.5)
============ ====== =========== ====== =========== =======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
tax effects of significant items comprising the Company's net deferred
tax position as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Difference between financial reporting and tax basis of property, plant
and equipment $ 272,175 $ 411,464
-------------- ------------
Deferred tax assets:
Federal and State tax NOL carryforwards 2,063,327 2,058,661
Non cash compensation 592,644 -
Provision for bad debts 193,172 443,620
Restructuring charges 80,361 126,265
Other 40,974 42,038
-------------- ------------
2,970,478 2,670,584
Valuation allowances (2,698,303) (2,259,120)
-------------- ------------
Total deferred tax assets - net 272,175 411,464
-------------- ------------
Net deferred tax asset $ - $ -
============== =============
</TABLE>
At December 31, 1996 and 1995, in view of prior operating losses and
the uncertainties regarding future operations, the Company has provided
valuation allowances of $2,301,402 and $1,901,964, respectively,
against Federal deferred tax assets and $396,901 and $357,156,
respectively, against state deferred tax assets.
The Company has net operating loss ("NOLs") carryforwards of
approximately $5.2 million for Federal income tax purposes which expire
December 31, 2006 through December 31, 2011.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
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 (the "Placement Agent") as its
fee. Each share of Series C Preferred Stock is convertible into seven
(7) shares of Common Stock. At its Annual Meeting of Stockholders held
on May 2, 1996 (the "Meeting"), the Company obtained stockholder
approval for, among other things, the issuance of the Series C
Preferred Stock and an increase in its authorized Common Stock from 9
million to 50 million shares. 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.
F-13
<PAGE>
STOCK OPTIONS
The Company adopted a 1991 Stock Option Plan (the "1991 Plan" or
"Employees Plan") which provides for the issuance of options covering
up to 700,000 shares of Common Stock. Options may be granted under the
1991 Plan to key employees (including officers who may also be
directors) of the Company and its subsidiaries, if any, as selected by
a committee appointed by the Board of Directors to administer the Plan
(the "Stock Option Committee"). Options granted to employees under the
1991 Plan may be either incentive stock options or nonqualified stock
options. The purchase price of the Common Stock made subject to an
option may not be less than the fair market value of the Common Stock
on the date of grant in the case of incentive stock options or 85% of
such value in the case of nonqualified stock options. The terms of each
option and the increments in which it is exercisable are determined by
the Stock Option Committee, but the term of a nonqualified stock option
generally may not exceed ten years from the date of grant and the term
of an incentive stock option may in no event be more than ten years
from the date of grant (and shall otherwise be consistent with the
Internal Revenue Code of 1986). No option may be granted under the 1991
Plan after November 2001. The options may be transferable under certain
circumstances.
On February 13, 1996, the Board of Directors approved, subject to
stockholder approval (which was obtained at the Meeting), an amendment
to the 1991 Plan increasing the number of shares of Common Stock that
may be subject to options awarded to any participant pursuant to the
1991 Plan from an aggregate of 200,000 for the term of such plan to
250,000 shares in any given calendar year.
Prior to 1996, the Company also had a 1991 Directors Stock Option Plan
for Non-employee Directors providing for the issuance of options
covering up to 60,000 shares of Common Stock to non-employee directors.
This plan was replaced by the 1996 Stock Option Plan for Non-Employee
Directors.
On February 13, 1996, subject to stockholder approval (which was
obtained at the Meeting), the Board of Directors adopted the HealthCare
Imaging Services, Inc. 1996 Stock Option Plan for Non-Employee
Directors (the "1996 Directors' Plan") providing for the issuance of
options covering up to 250,000 shares of Common Stock to non-employee
directors. Under such plan, non-qualified stock options exercisable to
purchase an aggregate of 25,000 shares of Common Stock were granted to
each of the three existing non-employee directors of the Company on
February 13, 1996 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 at an exercise price of $2.09375 were
granted to each of the three newly elected non-employee directors of
the Company at the Meeting. 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 option under the 1996
Directors' Plan may be granted after May 1, 2006. Stock options are
non-transferable during the life of the option holder.
As consideration for the execution of a 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 (the "Placement Agent Shares") upon consummation by the Company
by January 30, 1997, which date was extended to January 30, 1998, of an
acquisition of, or other business combination with, a company (or
companies) with assets of at least $2.5 million (the "Acquisition"). In
connection with the issuance of the Placement Agent Options, the
Company recorded a non-cash compensation charge of $685,800 which is
being amortized over the term of the consulting agreement. In January
1997, the January 30, 1997 expiration date of the consulting agreement
was extended to January 30, 1998.
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 recorded a non-cash compensation charge of $91,441 in the
quarter ended March 31, 1996.
F-14
<PAGE>
As of February 1, 1996, the Company amended its employment agreement
with 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
was 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 were
terminated, and the Company granted to the CEO stock options (subject
to stockholder ratification and approval which was obtained at the
Meeting) 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"). In connection with the issuance of the
CEO New Options, the Company recorded a non-cash compensation charge of
$562,506 which is being amortized over the twenty-one months ending
October 31, 1997. Furthermore, the CEO received a restricted stock
grant (subject to stockholder ratification and approval which was
obtained at the Meeting) of 250,000 shares of Common Stock (the "CEO
Restricted Stock Grant"). The restrictions related to the CEO
Restricted Stock Grant will lapse upon consummation by the Company of
an Acquisition. As in the case of the Placement Agent Shares, the
Company extended the required consummation date of the Acquisition to
January 30, 1998 subject to stockholder ratification and approval of
this extension which it intends to solicit at the 1997 Annual Meeting
of Stockholders. In connection with the issuance of the CEO Restricted
Stock Grant, the Company recorded a non-cash compensation charge of
$468,744 which is being amortized over the twelve-month contingency
period ended January 30, 1997, which date was extended (subject to
stockholder ratification and approval) until January 30, 1998. To the
extent the Company does not consummate an Acquisition meeting the
specified standards by January 30, 1998 (assuming stockholder
ratification and approval of the extension), the CEO Restricted Stock
Grant will be forfeited and the previously recorded non-cash
compensation charge will be reversed accordingly. In January 1997, the
term of the employment agreement was further extended to October 22,
1998 on the same terms and conditions.
As consideration for the execution of a one-year consulting agreement,
as of October 15, 1996, the Company granted to a consultant stock
options (the "Consultant Options") exercisable to purchase an aggregate
of 50,000 shares of Common Stock over a five-year period at a cash
exercise price of $1.0625 per share. The Consultant Options vest
quarterly in equal installments over the one-year consulting agreement
term. In connection with the issuance of the Consultant Options, the
Company recorded a non-cash compensation charge of $35,628 which is
being amortized over the term of the consulting agreement.
F-15
<PAGE>
The following is a summary of the number of options outstanding under
each of the plans, as described above:
<TABLE>
<CAPTION>
EMPLOYEES' DIRECTORS' OTHER
PLAN PLANS OPTIONS
<S> <C> <C> <C>
Balance at January 1, 1995 479,650 24,000 -
Options forfeited at an exercise price of $5.00 per share (21,200) - -
Options forfeited at an exercise price of $2.50 per share (16,250) - -
Options forfeited at an exercise price of $1.50 per share (22,800) - -
------------- -------------- -------------
Balance at December 31, 1995 419,400 24,000 -
Options granted at an exercise price of $.75 per share - - 1,350,000
Options granted at an exercise price of $1.69 per share - 75,000 -
Options granted at an exercise price of $2.09 per share - 75,000 -
Options granted at an exercise price of $1.06 per share - - 50,000
Options forfeited at an exercise price of $5.00 per share (175,400) (24,000) -
Options forfeited at an exercise price of $2.50 per share (38,000) - -
Options forfeited at an exercise price of $1.50 per share (150,400) - -
------------- -------------- ------------
Balance at December 31, 1996 55,600 150,000 1,400,000
============= ============== ============
Options exercisable at December 31, 1996
(exercisable at prices ranging from $.75 to $5.00 per share) 54,600 60,000 1,350,000
============= ============== ============
</TABLE>
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its employee stock options.
Accordingly, no compensation cost has been recognized for the
foregoing options. The excess, if any, of the fair market value of
shares on the measurement date over the exercise price is charged to
operations each year as the options become exercisable. Had
compensation cost for these options been determined using the
Black-Scholes option-pricing model described in FASB Statement No.
123, the Company would have recorded aggregate compensation expense
of approximately $947,092 which would be expensed over the options'
vesting period. The assumptions used in the option-pricing model
include a risk-free interest rate of 6%, expected life of 3 years and
expected volatility of 106%. The pro forma impact of following the
provisions of FASB Statement No. 123 on the Company's operations and
loss per share would be as follows:
December 31, 1996
Net loss - as reported $ (861,796)
============
- pro forma $(1,059,686)
============
Net loss per common share - as reported $ (.18)
============
- pro forma $ (.22)
============
Net loss per common share has been calculated using the weighted
average shares outstanding for the period.
WARRANTS
On the date of the consummation of Company's initial public offering,
1,682,000 Common Stock Purchase Warrants ("Initial Warrants") were
issued.
F-16
<PAGE>
On December 20, 1993, the Company commenced an offering, which
expired on November 14, 1994, pursuant to which the Initial Warrants
became exercisable to purchase one share of Common Stock for $2.50
per share and receive one Class B Warrant. Each Class B Warrant
entitled each Class B Warrantholder to purchase one share of Common
Stock for $2.00 per share for a period of one year and thereafter,
until its expiration, for $7.00 per share. Both the Initial Warrants
and Class B Warrants expired on November 12, 1996. From December 21,
1996 until January 29, 1996, the Company reduced the exercise price
for each Class B Warrant from $7.00 to $4.00 per share of Common
Stock issuable thereunder. 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 of Common Stock issuable thereunder. 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 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 resulted from the anti-dilution provisions of the Initial
Warrants and Class B Warrants. All of the Initial Warrants and Class
B Warrants expired pursuant to their terms on November 12, 1996.
Through November 12, 1996, 316,670 Initial Warrants had been
exercised at the exercise price of $4.00 per share; 255,200 Initial
Warrants (including 140,000 Initial Warrants issued upon exercise of
certain options granted to the underwriter of the Company's initial
public offering) had been exercised at the exercise price of $2.50
per share and no Initial Warrants had been exercised at the exercise
price of $7.00 per share. An aggregate of 255,200 Class B Warrants
were issued upon the exercise of the Initial Warrants and certain
warrants granted to the underwriter of the Company's initial public
offering when the exercise price was $2.50 per share. No Class B
Warrants were ever exercised.
The following is a summary of the number of warrants outstanding:
<TABLE>
<CAPTION>
INITIAL CLASS B
WARRANTS WARRANTS
--------- --------
<S> <C> <C>
Balance at January 1, 1994 1,365,330 -
Warrants Issued During 1994 140,000 255,200
Warrants Exercised During 1994 (255,200) -
------------- -------------
Balance at December 31, 1994 1,250,130 255,200
Warrants Issued During 1995 - -
Warrants Exercised During 1995 - -
------------- -------------
Balance at December 31, 1995 1,250,130 255,200
Warrants Issued During 1996 - -
Warrants Exercised During 1996 - -
Warrants Expired During 1996 (1,250,130) (255,200)
------------- -------------
- -
============= =============
Balance at December 31, 1996
</TABLE>
F-17
<PAGE>
As of December 31, 1996, the Company has reserved Common Stock for
issuance upon conversion of the Series C Preferred Stock and exercise
of stock options as follows:
<TABLE>
<CAPTION
<S> <C>
Series C Preferred Stock 4,620,000
Employees' Stock Options 700,000
Directors' Stock Options 250,000
Other Stock Options 1,400,000
-------------
6,970,000
=============
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company implemented a 401(k) defined contribution profit
sharing plan, effective January 1, 1994, covering substantially all
employees. Matching contributions by the Company are made at the
discretion of the Plan Administrator. During the years ended
December 31, 1996, 1995 and 1994, no matching contributions were
made by the Company.
8. RELATED PARTY TRANSACTIONS
CAPITAL LEASES - The Company leases various pieces of medical
equipment from DVI, Inc. ("DVI"), at interest rates ranging from
10.9 percent to 15.3 percent due through October 1999. The Company
owed DVI $4,658,162 (of which $1,468,947 is included in the
restructuring reserve) at December 31, 1996 and $6,285,275 (of
which $2,382,182 is included in the restructuring reserve) at
December 31, 1995. Historically, the Company has been able to
obtain financing for its medical equipment through DVI Financial
Services, Inc., a wholly-owned subsidiary of DVI ("DFS"). Prior to
April 1996, DFS was a principal stockholder of the Company. In
December 1995, DFS' two representatives on the Company's Board of
Directors resigned and in April 1996 DFS sold its 800,000 shares of
the Common Stock (representing approximately 17% of the then
outstanding Common Stock).
DUE FROM OFFICER - At December 31, 1996, the CEO owed the Company
$176,049 in connection with certain non-interest bearing advances.
These advances were scheduled to be repaid by December 31, 1994 but
have not been repaid to date.
SUBLEASE ARRANGEMENT FOR MOBILE MRI EQUIPMENT - Effective September
1, 1994, the Company entered into an arrangement pursuant to which
it operated 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, and a
current consultant to, the Company and the brother of the CEO. This
sublease arrangement was terminated in July 1996. (Note 2).
MANAGEMENT CONSULTANT - Effective January 1, 1997, the Company
entered into an agreement on a month-to-month basis with Mark R.
Vernon whereby Mr. Vernon provides certain consulting services to
the Company relating to the Company's development of additional
diagnostic imaging sites. The agreement provides for a fixed
monthly fee of $5,000, plus reimbursement of reasonable
out-of-pocket expenses.
BROOKLYN, NEW YORK MRI FACILITY - The Company leases its Brooklyn,
New York MRI facility from DMR Associates, L.P., a limited
partnership ("DMR"). DMR is owned by MR General Associates, L.P.,
as the general partner ("MR Associates"), and DFS, as a limited
partner. MR Associates is in turn owned by the CEO and another
director of the Company. In December 1996, the Company guaranteed
an approximately $250,000 loan from DFS to DMR.
F-18
<PAGE>
9. RELATIONSHIP WITH CERTAIN MEDICAL LESSEES
For the year ended December 31, 1996, the Company had five Medical
Lessees (Monmouth Diagnostic Imaging, P.A.; Wayne MRI, P.A.;
Edgewater Diagnostic Imaging, P.A.; Kings Medical Diagnostic
Imaging, P.C.; and Rittenhouse Square Imaging, L.P.) who accounted
for approximately 30%, 21%, 19%, 18% and 12% of total revenues,
respectively. For the year ended December 31, 1995, the Company had
five Medical Lessees (Monmouth Diagnostic Imaging, P.A.; Edgewater
Diagnostic Imaging, P.A.; Wayne MRI, P.A.; Kings Medical Diagnostic
Imaging, P.C. and Rittenhouse Square Imaging, L.P.) who accounted
for approximately 29%, 21%, 20%, 13% and 12% of total revenues,
respectively. For the year ended December 31, 1994, the Company had
four Medical Lessees (Monmouth Diagnostic Imaging, P.A.; Edgewater
Diagnostic Imaging, P.A.; Kings Medical Diagnostic Imaging, P.C.
and Wayne MRI, P.A.) who accounted for approximately 18%, 17%, 16%
and 15% of total revenues, respectively. To the extent the Company
were to lose any of its existing Medical Lessees, the impact on
revenues and net income would not be materially affected because
the Company believes it will be readily able to replace such
Medical Lessees.
10. COMMITMENTS AND CONTINGENCIES
The Company entered into Excess Capacity License Agreements with
one unrelated party and Mark R. Vernon ("Licensees") whereby it
licenses its office space, equipment and employees at its Brooklyn,
New York MRI facility during times such space, equipment and
employees are not being utilized by the Company. The Licensees in
turn license such "excess" space, equipment and employees to
physicians and medical practices ("sublicensees") for the provision
of MRI scans. The Company receives a fee for every MRI scan
performed by the Licensees and/or sublicensees at the facility and
also furnishes related billing and collection services for an
additional fee. Furthermore, the Company provides a short term line
of credit to the Licensees under the Excess Capacity License
Agreements for certain working capital purposes based upon a
percentage of the fees payable to the Licensees and/or the
sublicensees which is secured by the Licensees' and sublicensees'
related patient accounts receivable. Advances under the line of
credit amounted to $351,401 at December 31, 1996 which are solely
attributed to the unrelated licensee.
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. The New Jersey sales tax examination was
concluded on May 31, 1996 with the Company's payment of $214,280 to
the NJDT under a conditional agreement with the NJDT. Such
agreement acknowledged that the State of New Jersey has not yet
reached an agreement with the State of New York to assure that New
York will give full credit (under the interstate agreement between
New Jersey and New York) for sales tax paid by the Company to the
State of New Jersey. The NJDT has agreed that it will continue to
deal directly with New York to assure that the Company receives
full credit under the interstate taxation agreement.
In February 1996, the Company was notified by the New York State
Department of Taxation and Finance ("NYDT") regarding the
commencement of a sales and use tax examination and has received a
preliminary assessment for taxes and interest due of $170,261. The
Company is currently awaiting acknowledgment that certain NYDT
sales taxes were previously overpaid and that the Company is
entitled to recoupment thereof. To the extent the NYDT accepts the
Company's position relating to the recoupment of overpaid taxes,
the sales tax deficiency may be substantially reduced. Management
believes that the ultimate resolution of these matters, beyond the
amounts already reserved therefor, will not have a material impact
on the Company's financial condition or results of operations.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with DVI Business Credit, an affiliate of DVI
and DFS ("DVIBC"), to provide a revolving line of credit to the
Company. The maximum amount available under such credit facility is
$2.0 million, with advances limited to seventy-five percent (75%)
of eligible accounts receivable, as determined by DVIBC. Borrowings
under the line of credit bear interest at the rate of three percent
(3%) over the prime lending rate and are repayable within two years
from the execution of the aforementioned loan and security
agreement. The Company's obligations under the credit
F-19
<PAGE>
facility are collateralized through a grant to DVIBC of a first
security interest in all eligible accounts receivable, other than
those of DFS. The agreement contains customary affirmative and
negative covenants including covenants requiring the Company to
maintain certain financial ratios and minimum levels of working
capital. Borrowings under this credit facility will be used to fund
working capital needs as well as acquiring businesses which are
complementary to the Company. In addition, the line of credit does
not constrict the Company's borrowing ability as it relates to the
acquisition of new equipment from DFS. To date, the Company has not
made any borrowings under this credit facility.
11. SELECTED QUARTERLY DATA (UNAUDITED)
The following table sets forth selected quarterly financial
information for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION
NET EARNINGS (LOSS)
QUARTER ENDED NET REVENUES AMOUNT PER SHARE
------------- ------------ ------ ---------
<S> <C> <C> <C>
3-31-96 $2,354,892 $(266,324) $(.06)
6-30-96 2,283,056 (372,260) (.08)
9-30-96 2,425,043 (271,155) (.06)
12-31-96 2,724,600 47,943 .02
----------- ---------- ------
YEAR $9,787,591 $(861,796) $(.18)
========== ========== ======
3-31-95 $2,362,831 $(139,927) $(.03)
6-30-95 2,511,183 26,496 .01
9-30-95 2,330,279 (189,353) (.04)
12-31-95 2,044,991 184,354 .03
--------- ---------- ------
YEAR $9,249,284 $(118,430) $(.03)
========== ========== ======
</TABLE>
F-20
<PAGE>
SCHEDULE II
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1996 Expenses Deductions 1996 (E)
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable - Mobile MRI Operations $1,082,000 $ - $ 610,850(D) $ 471,150
========== =========== ========== =========
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1995 Expenses Deductions 1995 (E)
----------- ----------- ------------ -----------
Allowance for doubtful accounts
receivable - Mobile MRI Operations $1,082,000 $ - $ - $1,082,000
========== ============= ============ ==========
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1994 Expenses Deductions 1994
----------- ----------- ------------ -----------
Allowance for doubtful accounts
receivable - Mobile MRI Operations (A) $ 300,000 $ 825,000(B) $ 43,000(C) $1,082,000
=========== =========== ============ ==========
</TABLE>
Notes:
(A) The Company entered into an arrangement, effective August 31, 1994,
pursuant to which it operated solely as a sublessor of its mobile
MRI equipment rather than as an operator of such equipment (See
Note 2).
(B) Represents an additional allowance for doubtful accounts receivable
due from the Company's mobile MRI customers prior to the
commencement of the sublease arrangements (See Note 2).
(C) Represents the write-offs of accounts receivable considered
uncollectible.
(D) Represents recoveries and write-offs of accounts receivable of
$392,286 and $218,564, respectively.
(E) The above noted amounts are included in the allowance for doubtful
accounts receivable as disclosed on the
consolidated balance sheets. Such allowance for doubtful accounts
receivable disclosed on the consolidated balance sheets also
represents the Medical Lessee's allowance of approximately
$3,847,347 and $3,219,039 in 1996 and 1995, respectively.
F-21
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-42091, No. 33- 72876 and No. 33-86214 on Form S-3 and Registration
Statements No. 33-86872 and No. 333-8699 on Form S-8 of Healthcare Imaging
Services, Inc. (the "Company") of our report dated March 14, 1997, appearing
in this Annual Report on Form 10-K of the Company for the year ended December
31, 1996.
/s/Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> $173,879
<SECURITIES> 625,000
<RECEIVABLES> 4,328,553
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,287,453
<PP&E> 10,724,210
<DEPRECIATION> 6,376,465
<TOTAL-ASSETS> 10,566,732
<CURRENT-LIABILITIES> 2,344,140
<BONDS> 0
0
66,000
<COMMON> 49,620
<OTHER-SE> 4,889,187
<TOTAL-LIABILITY-AND-EQUITY> 10,566,732
<SALES> 0
<TOTAL-REVENUES> 9,787,591
<CGS> 0
<TOTAL-COSTS> 10,183,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (812,448)
<INCOME-TAX> 49,348
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (861,796)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> 0
</TABLE>
