<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-19636
HEALTHCARE IMAGING SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3119929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Schulz Drive, Red Bank, New Jersey 07701
(Address of principal executive offices) (Zip Code)
(732) 224-9292
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 12, 1998
Common Stock, $.01 par value 10,526,474 shares
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders'
Equity - For the six months ended June 30, 1998 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
2
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
Assets 1998 1997
- ------ ------ -----
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 113,326 $ 70,626
Accounts receivable - net 6,283,207 5,375,351
Prepaid expenses and other 180,807 186,082
-------------- --------------
Total current assets 6,577,340 5,632,059
------------- -------------
Property, Plant and Equipment - Net 5,181,600 5,518,772
------------- -------------
Other Assets:
Advances to licensee 126,225 197,815
Goodwill - net 1,634,790 1,695,054
Due from officer 264,125 264,125
Other assets 733,265 232,810
-------------- --------------
Total other assets 2,758,405 2,389,804
------------- -------------
Total Assets $14,517,345 $13,540,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Borrowings under revolving line of credit $ 1,645,269 $ 1,462,000
Accounts payable and accrued expenses 1,473,193 1,354,200
Current portion of capital lease obligations 1,538,903 1,647,148
Income taxes payable 9,094 16,044
----------------- ----------------
Total current liabilities 4,666,459 4,479,392
-------------- --------------
Noncurrent Liabilities:
Capital lease obligations 2,652,259 2,780,447
Reserve for restructuring costs 262,439 321,465
--------------- ---------------
Total noncurrent liabilities 2,914,698 3,101,912
-------------- --------------
Minority Interests 708,158 546,433
--------------- ---------------
Stockholders' Equity:
Convertible preferred stock, $.10 par value: 1,000,000 shares authorized 21,500
outstanding at June 30, 1998 and 185,000 outstanding at December 31, 1997,(each
convertible into seven (7) shares of common stock) 2,150 18,500
Common stock, $.01 par value: 50,000,000 shares authorized, 10,456,474
outstanding at June 30, 1998 and 9,286,974 outstanding at December 31, 1997 104,565 92,870
Additional paid-in capital 12,699,333 12,694,678
Accumulated deficit (6,578,018) (7,393,150)
--------------- ---------------
Total stockholders' equity 6,228,030 5,412,898
-------------- -------------
Total Liabilities and Stockholders' Equity $ 14,517,345 $13,540,635
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
----------- ------------
<S> <C> <C> <C> <C>
Revenues $3,304,013 $2,425,181 $6,502,654 $5,105,631
OPERATING EXPENSES:
Salaries 918,318 652,981 1,689,704 1,355,684
Other operating expenses 735,452 784,214 1,479,333 1,597,357
Films and supplies 144,182 109,252 271,875 251,570
Equipment maintenance and repairs 129,131 144,170 267,513 317,665
Consulting and marketing fees 123,751 85,416 374,200 134,616
Professional fees 156,340 156,935 251,764 219,536
Depreciation and amortization 425,374 363,772 850,245 688,625
Interest 192,850 117,938 387,449 225,077
Gain on sale of property, plant and equipment (151,767) (105,000) (151,767) (105,000)
----------- ----------- ------------ ------------
2,673,631 2,309,678 5,420,316 4,685,130
----------- ----------- ------------ ------------
Income before non-cash compensation charge, minority
interests in joint ventures and income taxes 630,382 115,503 1,082,338 420,501
Non-cash compensation charge -- (89,265) -- (281,111)
Minority interests in joint ventures (111,590) (66,642) (247,720) (163,801)
----------- ----------- ------------ ------------
Operating income (loss) before income taxes 518,792 (40,404) 834,618 (24,411)
Income tax provision 9,500 10,750 19,486 23,931
----------- ----------- ------------ ------------
Net income (loss) $ 509,292 $ (51,154) $ 815,132 $ (48,342)
=========== =========== ============ ============
Net income (loss) per common share - Basic $ .05 $ (.01) $ .08 $ (.01)
=========== =========== ============ ============
Weighted average common shares outstanding - Basic 10,428,012 5,594,589 10,096,963 5,280,029
=========== =========== ============ ============
Net income (loss) per common share- Diluted $ .04 $ (.01) $ .07 $ (.01)
=========== =========== ============ ============
Weighted average common shares outstanding - Diluted 11,318,017 5,594,589 11,366,540 5,280,029
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- -------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 185,000 $18,500 9,286,974 $92,870 $12,694,678 $(7,393,150) $5,412,898
Conversion of Series C Convertible
Preferred Stock (163,500) (16,350) 1,144,500 11,445 4,905 -- --
Record cashless exercise of stock
option grant 25,000 250 (250)
Net income for six months ended June
30, 1998 815,132 815,132
----------- ---------- ------------- ----------- ------------- ------------- -------------
BALANCE, JUNE 30, 1998 21,500 $2,150 10,456,474 $104,565 $12,699,333 $(6,578,018) $6,228,030
=========== ========== ============= =========== ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
(UNAUDITED)
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 815,132 $ (48,342)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 850,245 688,625
Gain on sale of property, plant and equipment (151,767) (105,000)
Amortization of non-cash compensation -- 281,111
Minority interests in joint ventures 247,720 163,801
Allowance for doubtful accounts 448,519 278,000
Changes in Assets and Liabilities:
Accounts receivable (1,419,856) (604,145)
Prepaid expenses and other 5,275 (34,086)
Advances to licensee 71,590 84,271
Accounts payable and accrued expenses 118,993 (190,560)
Income taxes payable (6,950) (1,999)
Other assets (496,505) (130,798)
------------ ------------
Net cash provided by operating activities 482,396 380,878
------------ ------------
Cash Flows from Investing Activities:
Proceeds from sale of marketable securities -- 625,000
Proceeds from sale of property, plant and equipment 655,000 --
Purchases of property, plant and equipment (4,785) (129,230)
------------ ------------
Net cash provided by investing activities 650,215 495,770
------------ ------------
Cash Flows from Financing Activities:
Borrowings under the revolving line of credit 183,269 300,000
Proceeds from sale of property, plant and equipment related to
restructured operations -- 105,000
Distributions to limited partners of joint ventures (85,995) (208,188)
Payments on capital lease obligations (1,128,159) (616,297)
Proceeds received on sublease for restructured operations 76,500 97,843
Payments against reserve for restructuring costs (135,526) (279,870)
------------ ------------
Net cash used in financing activities (1,089,911) (601,512)
------------ ------------
Increase in cash and cash equivalents 42,700 275,136
Cash and cash equivalents at beginning of period 70,626 173,879
------------ ------------
Cash and cash equivalents at end of period $ 113,326 $ 449,015
============ ============
Supplemental Cash Flow Information:
Interest paid during the period $ 386,856 $ 218,121
============ ============
Income taxes paid during the period $ 26,436 $ 25,931
============ ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Capital leases principally for medical equipment $ 891,726 $ 1,135,084
============ ============
Reinstatement of mobile MRI unit related to previously
recorded restructured operations $ 421,973
============
Reinstatement of capital lease obligation related to previously
recorded restructured operations $ 574,575
============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in annual
consolidated financial statements have been omitted from the
accompanying interim consolidated financial statements. In the opinion
of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the
Company's financial position as of June 30, 1998 and the related
statements of operations and cash flows for the periods ended June 30,
1998 and 1997. There is no substantial income tax provision for the
periods presented due to significant historical net operating loss
carryforwards.
The results of operations for the six months ended June 30, 1998
are not necessarily indicative of the results of operations expected for
the year ending December 31, 1998 or any other period. The consolidated
financial statements included herein should be read in conjunction with
the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997 which is on file at the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic earnings (loss) per common share are computed by dividing
net income (loss) by the number of weighted average common shares
outstanding for the three and six months ended June 30, 1998 and 1997.
Diluted earnings (loss) per common share are computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the three and six months ended June 30, 1998 and 1997
plus the incremental shares that would have been outstanding upon the
assumed exercise of dilutive stock option awards and conversion of the
preferred shares.
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings (loss) per share
computations:
7
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<TABLE>
<CAPTION>
For the Three Months Ended June 30,
1998 1997
-------------------------------------------- --------------------------------------------
Per- Per-
Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income (Loss) $ 509,292 10,428,012 $ 0.05 $ (51,154) 5,594,589 $ (0.01)
========== ==========
EFFECTIVE OF DILUTIVE
SECURITIES
Stock Options - 711,043 - -
Convertible preferred stock - 178,962 - -
-------------- ----------------- -------------- -----------------
DILUTED EPS
Net Income (Loss) $ 509,292 11,318,017 $ 0.04 $ (51,154) 5,594,589 $ (0.01)
============== ================= =========== ============== ================= ===========
<CAPTION>
For the Six Months Ended June 30,
1998 1997
-------------------------------------------- -------------------------------------------
Per- Per-
Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income (Loss) $ 815,132 10,096,963 $ 0.08 $ (48,342) 5,280,029 $ ( 0.01)
========== ==========
EFFECTIVE OF DILUTIVE
SECURITIES
Stock Options - 766,196 - -
Convertible preferred stock - 503,381 - -
-------------- -------------- -------------- -----------------
DILUTED EPS
Net Income (Loss) $ 815,132 11,366,540 $ 0.07 $ (48,342) 5,280,029 $ (0.01)
============== ============== =========== ============== ================= ===========
</TABLE>
NOTE 3. SALE OF MOBILE MRI UNIT
In November 1996, the Company formed with Practice Management
Corporation a limited liability company, of which the Company owned
sixty (60%) percent, to provide on-site MRI services to Meadowlands
Hospital Medical Center (the "Meadowlands MRI Facility") located in
Secaucus, New Jersey. The site commenced operations on May 8, 1997
utilizing one of the Company's mobile MRI units. Based upon losses
sustained at such site and the expectations of continuing losses, the
Company decided to sell the mobile MRI unit and to cease its MRI
services at the Meadowlands MRI Facility. In order to facilitate the
wind-down of operations, in March 1998, an agreement was reached whereby
the Company acquired (for nominal consideration) the joint venture
interest not owned by it effective as of December 31, 1997.
In May 1998, the Company sold its remaining mobile MRI unit
(previously utilized at the Meadowlands MRI Facility) to an unaffiliated
third party. As a result of the sale of the mobile MRI unit, the Company
recorded a one-time gain of $151,767, which was recorded in the second
quarter of fiscal 1998. The sale enabled the Company to substantially
eliminate
8
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the overhead costs associated with the operations of the Meadowlands MRI
Facility, including the related debt service.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
including, without limitation, statements regarding the expansion of the
Company's strategic focus, and sufficiency of the Company's liquidity and
sources of capital. Any statements contained herein which are not historical
facts or which contain the words "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may" or "should," and similar expressions,
shall be deemed to be forward- looking statements. These forward-looking
statements reflect the current view of the Company with respect to future events
and are subject to certain risks, uncertainties, assumptions and other factors
which could cause actual results to differ materially, including, but not
limited to, the ability to establish physician practice management operations,
availability of financing, reimbursement of healthcare costs, delayed payment
and risk of non-payment and reliance on key personnel. Additional information
regarding factors that could potentially affect the Company or its financial
results are included in the Company's other filings with the Securities and
Exchange Commission.
For the Six Months Ended June 30, 1998 vs. June 30, 1997
For the six months ended June 30, 1998, revenues were $6,502,654
as compared to $5,105,631 for the six months ended June 30, 1997, an increase of
approximately $1,397,000. This increase was primarily due to increased revenues
at the Company's multi-modality fixed- site facility in Ocean Township, New
Jersey (approximately $819,000), as well as the commencement of fixed-site MRI
services in May 1997 at the Meadowlands Hospital Medical Center located in
Secaucus, New Jersey (approximately $246,000) (the "Meadowlands MRI Facility")
and the acquisition of a fixed-site MRI facility, with ultrasound, located in
New York City, New York in November 1997 (approximately $430,000) (the "New York
City MRI Facility"), all of which were partially offset by decreased revenues at
the Company's MRI facility located in Brooklyn, New York (approximately
$291,000) (the "Brooklyn MRI Facility").
For the six months ended June 30, 1998, operating expenses were
$5,420,316 as compared to $4,966,241 for the six months ended June 30, 1997, an
increase of approximately $454,000. This increase was primarily due to (i)
expenses incurred in connection with the operation of the New York City MRI
Facility (approximately $360,000), (ii) increased salary expense due to staffing
requirements relating to the Company's expanded strategic focus into the area of
physician practice management, as well as to the increased number of procedures
being performed at certain of the Company's facilities (approximately $234,000),
and (iii) increased consulting and marketing fees (approximately $228,000), all
of which were partially offset by certain non-cash compensation charges which
were fully amortized during fiscal 1997 (approximately $281,000 was amortized
during the six months ended June 30, 1997). The non-
9
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cash compensation charges resulted primarily from the grant of (x) stock options
and a restricted stock award to the Company's Chairman of the Board, President
and Chief Executive Officer (the "CEO") and (y) stock options to Biltmore
Securities, Inc. ("Biltmore") pursuant to a consulting agreement. See "Liquidity
and Capital Resources of the Company."
The operating results for the Company have been negatively
impacted by the Brooklyn and Meadowlands MRI Facilities and the Company's MRI
joint venture in Philadelphia, Pennsylvania (the "Philadelphia MRI Facility").
The Company's expanded advertising and marketing efforts on behalf of the
Philadelphia MRI Facility over the last eighteen (18) months have significantly
reduced losses. In addition, the Company is negotiating the purchase of the
interest in the Philadelphia MRI Facility not currently owned by it (i.e., the
limited partners' interests) and it expects to consummate such purchase by the
end of fiscal 1998. In connection with the Company's review of the viability of
the Brooklyn MRI Facility, the Company is renegotiating the terms of its lease
of this facility. In addition, the Company entered into an Excess Capacity
Agreement effective June 1998 in respect of the Brooklyn MRI Facility, whereby
the Company provides the use of the Brooklyn MRI facility and all ancillary
services during "off-hours" to an unaffiliated licensee. However,
notwithstanding the foregoing efforts, there can be no assurance that the
renegotiation of the lease of the Brooklyn MRI Facility will be successfully
concluded or that the procedures generated from the Excess Capacity Agreement
will be sufficient to better support the operations of this facility. In May
1998, based upon losses already sustained and the expectation of continuing
losses, the Company decided to close the Meadowlands MRI Facility and sell the
mobile MRI unit it was using at such facility. The sale enabled the Company to
substantially eliminate the overhead costs associated with the operations of the
Meadowlands MRI Facility, including the related debt service.
In furtherance of the Company's previously announced expanded
strategic focus into the area of establishing physician practice management
operations in New Jersey, New York and Philadelphia, Pennsylvania, the Company
is actively negotiating affiliations with several primary care and
multi-specialty physician practices, as well as the faculty practices of certain
hospitals. The Company has not entered into any definitive acquisition
agreements or administrative service agreements with respect to its physician
practice management operations, although it expects to do so within the next
several months.
For the Three Months Ended June 30, 1998 v. June 30, 1997
For the three months ended June 30, 1998, revenues were
$3,304,013 as compared to $2,425,181 for the three months ended June 30, 1997,
an increase of approximately $879,000. This increase was primarily due to
increased revenues at the Company's multi-modality fixed- site facility in Ocean
Township, New Jersey (approximately $498,000), as well as from the acquisition
of the New York City MRI Facility in November 1997 (approximately $225,000), all
of which were partially offset by decreased revenues at the Brooklyn MRI
Facility (approximately $111,000).
10
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For the three months ended June 30, 1998, operating expenses were
$2,673,631 as compared to $2,398,943 for the three months ended June 30, 1997,
an increase of approximately $275,000. This increase was primarily due to (i)
expenses incurred in connection with the operation of the New York City MRI
Facility (approximately $187,000), (ii) increased salary expense due to staffing
requirements relating to the Company's expanded strategic focus into the area of
physician practice management, as well as to the increased number of procedures
being performed at certain of the Company's facilities (approximately $209,000),
and (iii) increased consulting and marketing fees (approximately $32,000), all
of which were partially offset by certain non-cash compensation charges which
were fully amortized during fiscal 1997 (approximately $89,000 was amortized
during the three months ended June 30, 1997). The non-cash compensation charges
resulted primarily from the grant of stock options and a restricted stock award
to the CEO. See "Liquidity and Capital Resources of the Company."
As discussed above, the operating results for the Company have
been negatively impacted by the Brooklyn, Meadowlands and Philadelphia MRI
Facilities. The Company's expanded advertising and marketing efforts on behalf
of the Philadelphia MRI Facility over the last eighteen (18) months have
significantly reduced losses. In addition, the Company is negotiating the
purchase of the interest in the Philadelphia MRI Facility not currently owned by
it (i.e., the limited partners' interests) and it expects to consummate such
purchase by the end of fiscal 1998. In connection with the Company's review of
the viability of the Brooklyn MRI Facility, the Company is renegotiating the
terms of its lease of this facility. In addition, the Company entered into an
Excess Capacity Agreement effective June 1998 in respect of the Brooklyn MRI
Facility, whereby the Company provides the use of the Brooklyn MRI facility and
all ancillary services during "off-hours" to an unaffiliated licensee. However,
notwithstanding the foregoing efforts, there can be no assurance that the
renegotiation of the lease of the Brooklyn MRI Facility will be successfully
concluded or that the procedures generated from the Excess Capacity Agreement
will be sufficient to better support the operations of this facility. In May
1998, based upon losses already sustained and the expectation of continuing
losses, the Company decided to close the Meadowlands MRI Facility and sell the
mobile MRI unit it was using at such facility. The sale enabled the Company to
substantially eliminate the overhead costs associated with the operations of the
Meadowlands MRI Facility, including the related debt service.
In furtherance of the Company's previously announced expanded
strategic focus into the area of establishing physician practice management
operations in New Jersey, New York and Philadelphia, Pennsylvania, the Company
is actively negotiating affiliations with several primary care and
multi-specialty physician practices, as well as the faculty practices of certain
hospitals. The Company has not entered into any definitive acquisition
agreements or administrative service agreements with respect to its physician
practice management operations, although it expects to do so within the next
several months.
11
<PAGE>
Liquidity and Capital Resources of the Company
As of June 30, 1998, the Company had a cash balance of $113,326,
current assets of $6,577,340, and working capital of $1,910,881. Cash flows
provided by operating activities for the six months ended June 30, 1998 were
$482,396, which consisted primarily of net income of $815,132, depreciation and
amortization of $850,245, an increase in the allowance for doubtful accounts
receivable of $448,519 and minority interests in joint ventures of $247,720.
Other significant components of cash flows used in operating activities include
an increase in accounts receivable of $1,419,856 due to an increase in the
number of procedures being performed at the Company's facilities and an increase
in other assets of $496,505 due to costs incurred in connection with the
Company's expanded strategic focus into the area of physician practice
management, both of which were partially offset by an increase in accounts
payable and accrued expenses of $118,993.
Cash flows provided by investing activities for the six months
ended June 30, 1998 were $650,215 primarily due to proceeds from the sale of the
mobile MRI unit which had been utilized at the Meadowlands MRI Facility.
Cash flows used in financing activities for the six months ended
June 30, 1998 were $1,089,911, which consisted primarily of payments on capital
lease obligations of $1,128,159, payments against reserves for restructuring
costs of $135,526, and distributions to limited partners of joint ventures of
$85,995, partially offset by borrowings of $183,269 under the revolving line of
credit and proceeds of $76,500 from (i) the collection of assigned accounts
receivable to satisfy indebtedness relating to previously restructured mobile
MRI operations and (ii) receipts relating to the Company's sublease of its MRI
equipment and facility located in Catonsville, Maryland.
The Philadelphia MRI Facility, which has been operating since
November 1992, continues to operate at a loss resulting in negative cash flows.
The Company's expanded advertising and marketing efforts on behalf of the
Philadelphia MRI Facility over the last eighteen (18) months have significantly
reduced losses. 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 is negotiating the purchase of the present limited
partners' interests in such joint venture which it expects to consummate by the
end of fiscal 1998. However, there can be no assurance that these negotiations
will be successfully concluded.
The nature of the Company's operations require significant
capital expenditures which have been financed through the issuance of debt and
capital leases and proceeds received from the sale of equity securities,
including the Company's initial public offering of common stock and redeemable
warrants in November 1991, the subsequent exercise of such redeemable warrants
and the sale of Series C Convertible Preferred Stock in February 1996. Continued
expansion of the Company's business, including the establishment of physician
practice management operations, will require substantial cash resources and will
have an impact on the Company's liquidity. The Company believes it will continue
to be able to obtain the financing
12
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necessary for its operations as well as any expansion of its diagnostic imaging
operations or for the development of its physician practice management
operations.
As of January 30, 1996, the Company entered into a one-year
consulting agreement with Biltmore. Pursuant to the consulting agreement,
Biltmore agreed to act as a consultant to the Company in connection with, among
other things, corporate finance and evaluations of possible business partners
and to assist in the structuring, negotiating and financing of strategic
alliances. The consulting agreement provided for the issuance to Biltmore, upon
the execution thereof, of options (the "Biltmore Options") exercisable to
purchase 750,000 shares of the Company's common stock, par value $0.01 per share
(the "Common Stock") at a cash exercise price of $0.75 per share and for the
additional issuance to Biltmore of 750,000 shares (the "Biltmore Fee Shares") of
Common Stock upon consummation by the Company by January 30, 1997, which date
was extended to January 30, 1999, of an acquisition of a company (or companies)
with assets of at least $2,500,000 during the term of the consulting agreement
(the "Acquisition"). In connection with the issuance of the Biltmore Options,
the Company recorded a non-cash compensation charge of $685,800 which was
amortized over the one-year term of the consulting agreement.
In February 1998, the Company entered into an agreement (the
"Biltmore Agreement") with those parties who have been assigned the Biltmore
Options and the rights to the Biltmore Fee Shares pursuant to which the Company,
upon the terms and subject to the conditions set forth in the Biltmore
Agreement, has agreed to pay an aggregate of $3.5 million for the Biltmore
Options and the rights to the Biltmore Fee Shares. The Biltmore Agreement
provides that the closing date of this purchase shall be determined by the
Company, however, in no event will the closing occur later than the ninetieth
(90th) day following the earlier to occur of (i) the consummation of the
acquisition by the Company of Jersey Integrated HealthPractice, Inc. ("JIHP"),
the management services organization which manages Pavonia Medical Associates,
P.A. ("Pavonia") and (ii) the Company raising aggregate gross proceeds of $60.0
million from one or more debt and/or equity financings. In the event that
neither of the above-referenced conditions is met by September 30, 1998, the
Biltmore Agreement will terminate and be of no further force or effect.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with a lender 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 the lender. 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 facility
are collateralized through a grant of a first security interest in all eligible
accounts receivable. 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
13
<PAGE>
complementary to the Company. At June 30, 1998, the Company had $1,645,269
outstanding under this credit facility.
In December 1997, in conjunction with the Company's execution of
letters of intent in respect of its acquisition of JIHP (the "JIHP Letters of
Intent"), the Company agreed to guarantee a loan of $1.0 million from DVI
Financial Services, Inc. ("DFS") to JIHP. This loan bears interest at 12% per
annum and is payable in forty-eight (48) monthly installments of $26,330 which
commenced February 1998. Pavonia and each physician stockholder of Pavonia have
agreed that to the extent that the Company is or becomes liable in respect of
any indebtedness or other liability or obligation of either Pavonia or JIHP, and
the acquisition by the Company of JIHP is not consummated as contemplated by the
JIHP Letters of Intent, then Pavonia and each physician stockholder of Pavonia
agrees to indemnify and hold the Company harmless from and against any such
liabilities.
The "Year 2000 issue" is a result of computer programs written
using two digits instead of four digits to refer to a particular year.
Therefore, these computer programs may recognize a date using "00" as the year
1900 rather than the year 2000. Like most companies today, the Company uses
computer technology in conducting its operations. The Company has not yet
addressed the Year 2000 issue nor made any assessments as to what effect, if
any, the Year 2000 issue will have on the Company as a result of its information
systems or those of its lessees, licenses, third-party payors or other related
third parties or as to what costs, if any, the Company will incur to attain Year
2000 compliance. Accordingly, no assurances can be given that the effect of the
Year 2000 issue will not have a material adverse effect on the Company's
operations and financial conditions.
The Company believes that cash to be provided by the Company's
operating activities together with borrowings available from the Company's
revolving line of credit will enable the Company to meet its anticipated cash
requirements for its present operations for the next twelve months. Continued
expansion of the Company's business, including the establishment of physician
practice management operations, will require additional sources of financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
14
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 5 have been omitted because the related information is
inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.55 - Amendment to Stock Purchase Agreement, dated
as of May 1998, by and among HealthCare Imaging Services,
Inc., the Stephanie Loewenstern Irrevocable Trust, the Brett
Loewenstern Irrevocable Trust, the Victoria Loewenstern
Irrevocable Trust, the Richard B. Bronson Revocable Trust and
the Reiter Family Partnership.
Exhibit 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHCARE IMAGING SERVICES, INC.
(Registrant)
Date: August 12, 1998 /s/ Elliott H. Vernon
---------------------
Elliott H. Vernon
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
Date: August 12, 1998 /s/ Scott P. McGrory
--------------------
Scott P. McGrory
Vice President - Controller
(Principal Financial and
Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page Number
- -------------- ----------- -----------
Exhibit 10.55 Amendment to Stock Purchase Agreement, dated
as of May 1998, by and among HealthCare
Imaging Services, Inc., the Stephanie Loewenstern
Irrevocable Trust, the Brett Loewenstern
Irrevocable Trust, the Victoria Loewenstern
Irrevocable Trust, the Richard B. Bronson
Revocable Trust and the Reiter Family Partnership.
Exhibit 27 Financial Data Schedule
17
<PAGE>
AMENDMENT TO
STOCK PURCHASE AGREEMENT
This AMENDMENT TO STOCK PURCHASE AGREEMENT ("Agreement") is made and
entered into as of May __, 1998 by and among Healthcare Imaging Services, Inc.,
a Delaware corporation (the "Company"), the Stephanie Loewenstern Irrevocable
Trust, the Brett Loewenstern Irrevocable Trust, the Victoria Loewenstern
Irrevocable Trust, the Richard B. Bronson Revocable Trust, and the Reiter
Family Partnership (each of the aforementioned entities are referred to herein
collectively as the "Sellers").
W I T N E S S E T H :
WHEREAS, HIS and the Sellers are parties to a Stock Purchase
Agreement, dated as of February 24, 1998 (the "Stock Purchase Agreement", all
capitalized terms used herein but not otherwise defined herein shall have the
respective meanings ascribed thereto in the Stock Purchase Agreement); and
WHEREAS, HIS and the Sellers desire to amend and restate Section 3 of
the Stock Purchase Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Section 3 of the Stock Purchase Agreement is hereby amended and
restated in its entirety to read as follows:
"Closing Date- The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place contemporaneously with the
consummation of all the transactions necessary to acquire 100% of the capital
stock, by merger or otherwise, of Jersey Integrated HealthPractice, Inc., as
contemplated by (i) the letter of intent by and between the Company and Pavonia
Medical Associates, P.A., dated January 28, 1998 and (ii) the letter of intent
by and between the Company and Liberty Health Care Systems, Inc., dated January
28, 1998, and at a location to be selected by the Company. In the event that
the Closing has not occurred by September 30, 1998, then this Agreement shall
terminate and be of no further force or effect."
2. Except as set forth herein, the Stock Purchase Agreement shall
remain in full force and effect.
3. This Agreement shall bind and inure to the benefit of the parties
hereto, and their respective successors and assigns.
4. The validity, interpretation, construction, performance and
enforcement of this Agreement shall be governed by the internal laws of the
State of New Jersey, without regard to its conflicts of law rules.
5. This Agreement may be executed in one or more counterparts, which
together shall constitute one agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
HEALTHCARE IMAGING SERVICES, INC.
By: /s/ Elliott H. Vernon
----------------------------------------------------
Elliott H. Vernon
Chairman, President and Chief Executive Officer
RICHARD B. BRONSON REVOCABLE TRUST
By: /s/ Richard B. Bronson
----------------------------------------------------
Name:
Title:
STEPHANIE LOEWENSTERN IRREVOCABLE TRUST
By: /s/ Elliot Loewenstern
----------------------------------------------------
Name:
Title:
BRETT LOEWENSTERN IRREVOCABLE TRUST
By: /s/ Elliot Loewenstern
----------------------------------------------------
Name:
Title:
VICTORIA LOEWENSTERN IRREVOCABLE TRUST
By: /s/ Elliot Loewenstern
----------------------------------------------------
Name:
Title:
REITER FAMILY PARTNERSHIP
By: /s/ Elliot Loewenstern
----------------------------------------------------
Name:
Title:
2
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