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 September 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 November 13, 1998
Common Stock, $.01 par value 11,356,974 shares
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders
Equity - For the nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 320,530 $ 70,626
Accounts receivable - net 6,757,198 5,375,351
Prepaid expenses and other 161,551 186,082
--------- ---------
Total current assets 7,239,279 5,632,059
--------- ---------
Property, plant and equipment - net 6,360,042 5,518,772
--------- ---------
Other assets:
Advances to licensee 180,695 197,815
Goodwill - net 1,610,460 1,695,054
Due from officer 264,125 264,125
Deferred transaction and financing costs 1,119,102 232,810
--------- ---------
3,174,382 2,389,804
--------- ---------
Total assets $16,773,703 13,540,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under line of credit $ 1,857,169 $ 1,462,000
Accounts payable and accrued expenses 1,777,178 1,354,200
Current portion of capital lease obligations 1,655,507 1,647,148
Income taxes payable 16,986 16,044
-------- ---------
Total current liabilities 5,306,840 4,479,392
--------- ---------
Noncurrent liabilities:
Capital lease obligations 3,703,049 2,780,447
Reserve for restructuring costs 268,005 321,465
--------- ---------
Total noncurrent liabilities 3,971,054 3,101,912
--------- ---------
Minority interests 840,388 546,433
--------- ---------
Stockholders' equity:
Convertible preferred stock, $.10 par value;
1,000,000 shares authorized, 11,500 and
185,000 shares outstanding at September 30,
1998 and December 31, 1997, respectively
(each convertible into seven (7) shares of
common stock) 1,150 18,500
Common stock, $.01 par value;
50,000,000 shares authorized, 10,526,474 and
9,286,974 shares outstanding at September 30,
1998 and December 31, 1997, respectively 105,265 92,870
Additional paid-in capital 12,734,594 12,694,678
Accumulated deficit (6,185,588) (7,393,150)
----------- -----------
Total stockholders' equity 6,655,421 5,412,898
--------- ---------
Total liabilities and stockholders' equity $16,773,703 $13,540,635
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues: $3,257,547 $2,566,669 $9,760,201 $7,672,300
---------- ---------- ---------- ----------
Operating Expenses:
Salaries 930,326 689,718 2,620,030 2,045,402
Other operating expenses 675,883 754,634 2,155,216 2,351,991
Films and supplies 129,011 125,353 400,886 376,923
Equipment maintenance
and repairs 146,300 146,266 413,813 463,931
Consulting and marketing
fees 139,161 152,250 513,361 286,866
Professional fees 119,210 161,799 370,974 381,335
Depreciation and
amortization 412,654 397,173 1,262,899 1,085,798
Interest 167,328 162,200 554,777 387,277
Gain on sale of property,
plant and equipment - - (151,767) (105,000)
--------- --------- --------- ---------
2,719,873 2,589,393 8,140,189 7,274,523
--------- --------- --------- ---------
Income (loss) before non-cash compensation charge,
minority interests in joint
ventures and income taxes 537,674 (22,724) 1,620,012 397,777
Non-cash compensation
charge - (89,265) - (370,376)
Minority interests in
joint ventures (132,230) (167,339) (379,950) (331,140)
--------- --------- --------- ---------
Operating income (loss)
before income taxes 405,444 (279,328) 1,240,062 (303,739)
Income tax provision 13,014 8,665 32,500 32,596
------- ------- --------- ------
Net income (loss) $392,430 $(287,993) $1,207,562 $(336,335)
======== ========== ========== ==========
Net income (loss) per
common share-Basic $ .04 $ (.04) $ .12 $ (.06)
======== ========== ========== ==========
Weighted average common
shares outstanding-Basic 10,512,017 6,771,854 10,236,835 5,782,769
========== ========= ========== =========
Net income (loss) per
common share-Diluted $ .04 $ (.04) $ .11 $ (.06)
======== ========== ========== ==========
Weighted average common
shares outstanding-Diluted 10,950,834 6,771,854 11,248,767 5,782,769
========== ========= ========== =========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
Preferred Stock Common Stock
Shares Amount Shares Amount
<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 (173,500) (17,350) 1,214,500 12,145 5,205 -- --
Compensation in connection with stock
option grant 34,961 34,961
Record cashless exercise of stock option
grant 25,000 250 (250)
Net income for the nine months ended
September 30, 1998 1,207,562 1,207,562
----------- ---------- ------------ --------- ----------- ----------- ---------
BALANCE, SEPTEMBER 30, 1998 11,500 $1,150 10,526,474 $105,265 $12,734,594 $(6,185,588) $6,655,421
=========== ========== ============= =========== ============= ============= ================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,207,562 $(336,335)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 1,262,899 1,085,798
Gain on sale of property, plant and
equipment (151,767) (105,000)
Amortization of non-cash compensation - 370,376
Minority interests in joint ventures 379,950 331,140
Allowance for doubtful accounts 742,000 431,000
Changes in assets and liabilities:
Accounts receivable (2,187,328) (923,548)
Prepaid expenses and other 24,531 13,995
Advances to licensee 17,120 130,403
Due from officer - (76,315)
Accounts payable and accrued expenses 457,939 (74,404)
Income taxes payable 942 (1,510)
Other assets (886,217) (92,054)
-------- --------
Net cash provided by operating activities 867,631 753,546
------- -------
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 (32,339) (158,133)
-------- ---------
Net cash provided by investing act 622,661 466,867
------- -------
Cash flows from financing activities:
Borrowings under the revolving line of
credit 395,169 400,000
Proceeds from sale of property, plant
and equipment related to restructured
operations - 105,000
Distributions to limited partners of
joint ventures (85,995) (316,941)
Payments on capital lease obligations (1,496,102) (1,004,073)
Proceeds on subleases from restructured
operations 140,155 127,843
Payments against reserve for restructuring
costs (193,615) (336,383)
--------- ---------
Net cash used in financing activities (1,240,388) (1,024,554)
----------- -----------
Increase in cash and cash equivalents 249,904 195,859
Cash and cash equivalents at beginning
of period 70,626 173,879
-------- --------
Cash and cash equivalents at end
of period $320,530 $369,738
======== ========
</TABLE>
6
<PAGE>
<TABLE>
HEALTHCARE IMAGING SERVICES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Nine Months Ended
September 30,
1998 1997
(Unaudited)
<S> <C> <C>
Supplemental Cash Flow Information:
Interest paid during the period $557,796 $357,924
======== ========
Income taxes paid during the period $ 31,558 $ 34,107
======== ========
Supplemental Schedule of Non-cash Investing
and Financing Activities:
Capital leases principally for
property, plant and equipment $2,427,063 $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.
7
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 1998
Note 1. - Basis of Presentation
The accompanying unaudited consolidated condensed 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 September 30, 1998 and the related statements of
operations and cash flows for the periods ended September 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 nine months ended September 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 with 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 nine months ended September 30, 1998 and 1997, as applicable.
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 nine months ended September 30, 1998 and 1997, as applicable, 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:
8
<PAGE>
<TABLE>
<CAPTION>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended September 30,
1998 1997
-------------------------------------------- --------------------------------------------
Per- Per-
Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net Income (Loss) $ 392,430 10,512,017 $ 0.04 $ (287,993) 6,771,854 $ (0.04)
========== ==========
Effect of Dilutive
Securities
Stock Options - 358,317 - -
Convertible preferred stock - 80,500 - -
-------------- ----------------- -------------- -----------------
$ 392,430 10,950,834 $ 0.04 $ (287,993) 6,771,854 $ (0.04)
Diluted EPS
Net Income (Loss)
============== ================= =========== ============== ================= ===========
For the Nine Months Ended September 30,
1998 1997
-------------------------------------------- --------------------------------------------
Per- Per-
Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net Income (Loss) $1,207,562 10,236,835 $ 0.12 $ (336,335) 5,782,769 $ ( 0.06)
========== ==========
Effect of Dilutive
Securities
Stock Options - 646,188 - -
Convertible preferred stock - 365,744 - -
-------------- ----------------- -------------- -----------------
$1,207,562 11,248,767 $ 0.11 $ (336,335) 5,782,769 $ (0.06)
Diluted EPS
Net Income (Loss)
============== ================= =========== ============== ================= ===========
</TABLE>
Note 3. - Sale of Mobile MRI Unit
In November 1996, the Company formed with Practice Management
Corporation ("PMC") 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 owned by
PMC 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
9
<PAGE>
enabled the Company to substantially eliminate the overhead costs associated
with the operations of the Meadowlands MRI Facility, including the related debt
service.
Note 4. - Subsequent Event
On October 2, 1998 (effective October 1, 1998), HIS Imaging Co., a
wholly-owned subsidiary of the Company, acquired (the "Beran Acquisition") all
of the assets and business of, and assumed certain liabilities relating to (i.)
Echelon MRI, P.C., which operated a fixed-site MRI facility in Voorhees, New
Jersey, (ii.) Mainland Imaging Center, P.C., which operated a multi-modality
diagnostic imaging facility in Northfield, New Jersey and a radiology facility
in Ocean City, New Jersey, (iii.) Bloomfield Imaging Associates, P.A., which
operated a multi-modality diagnostic imaging facility in Bloomfield, New Jersey,
(iv.) North Jersey Imaging Management Associates, L.P., which managed the
Bloomfield, New Jersey facility and (v.) Irving N. Beran, M.D., P.A., which
operated a multi-modality diagnostic imaging facility in Voorhees and
Williamstown, New Jersey and a radiology facility in Atco and Williamstown, New
Jersey (collectively, the "Beran Entities"). The consideration given by the
Company in the Beran Acquisition was (i.) the assumption of certain obligations
and liabilities of the Beran Entities, (ii.) cash in the amount of $11.5 million
and (iii.) the issuance of 887.385 shares of Series D Cumulative Accelerating
Redeemable Preferred Stock of the Company (the "Series D Preferred Stock")
having an aggregate liquidation preference of $9,317,542.50 (i.e., $10,500 per
share liquidation preference), subject to post closing adjustments. The Company
also loaned the Beran Entities an aggregate of $2.5 million, which loan bears
interest at 8% per annum and matures upon the terms and conditions contained in
the related promissory notes. The Company used the proceeds of a $14.0 million
loan from DVI Financial Services, Inc. ("DFS") to pay the cash portion of the
purchase price and to fund the loan to the Beran Entities (the "DFS Loan"). The
terms of the DFS Loan provide for interest at twelve (12%) percent per annum
with no payment due in month one (1)(i.e., October 1998), interest only payments
of $140,000 in each of months two (2) through four (4)(i.e., November 1998,
December 1998 and January 1999), principal and interest payments of
approximately $308,000 in each of months five (5) and six (6) (i.e., February
1999 and March 1999), with a balloon payment of approximately $13.8 million due
in month seven (7) (i.e., April 1999). In addition, options to purchase 400,000
shares of common stock, par value $.01 per share ("Common Stock"), of the
Company at an exercise price of $1.03125 per share were issued to DFS for
providing the DFS Loan. The Beran Acquisition will be accounted for as a
purchase.
10
<PAGE>
The preferences and rights of the Series D Preferred Stock, and certain
covenants of the Company related to the issuance thereof, are set forth in the
Certificate of Designations, Preferences and Rights of the Series D Preferred
Stock filed by the Company with the Secretary of the State of Delaware on
October 2, 1998 (the "Certificate"). Among other things, dividends on the Series
D Preferred Stock will accrue commencing on the date of issuance (the "Issue
Date") at the rate of 8% of the liquidation preference and will increase by an
additional 2% upon each three month anniversary of the date of issuance;
provided, however, that in no event will the dividend rate be in excess of 15%
of the liquidation preference. All accrued and unpaid dividends will be payable
quarterly in cash commencing January 10, 1999. After March 1, 1999, (the
"Convertibility Date"), the holders of the Series D Preferred Stock will be
entitled to convert the Series D Preferred Stock into Common Stock equal to the
quotient of (x) the aggregate liquidation preference of the Series D Preferred
Stock being converted divided by (y) the Conversion Price (as hereinafter
defined); provided that unless the Company obtains stockholder approval of the
issuance of the Series D Preferred Stock, the holders of the Series D Preferred
Stock only will be able to convert into Common Stock representing in the
aggregate 19.9% of the outstanding Common Stock as of the Issue Date. The
"Conversion Price" shall be equal to the average of the market prices for the
Common Stock for the twenty (20) consecutive trading days immediately preceding
the Convertibility Date and shall be subject to adjustment in certain
circumstances. The holders of the Series D Preferred Stock will be entitled to
vote, on an as-converted basis, with the holders of the Common Stock as one
class on all matters submitted to a vote of the Company stockholders; provided
that unless the Company obtains stockholder approval of the issuance of the
Series D Preferred Stock, the holders of the Series D Preferred Stock will not
be able to exercise their aggregate voting rights in excess of 19.9% of the
outstanding Common Stock as of the Issue Date. The Company may redeem the Series
D Preferred Stock, in whole but not in part, at any time at its liquidation
preference plus all accrued and unpaid dividends to the date of redemption. The
Series D Preferred Stock may not be transferred until the Convertibility Date.
Note 5. - Deferred Transaction and Financing Costs
Deferred transaction and financing costs relate to expenses incurred in
connection with the Beran Acquisition and DFS Loan and in connection with the
Company's strategic expansion of its operations into physician practice
management.
11
<PAGE>
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.
Nine Months Ended September 30, 1998 vs. September 30, 1997
For the nine months ended September 30, 1998, revenues were $9,760,201
as compared to $7,672,300 for the nine months ended September 30, 1997, an
increase of approximately $2,088,000. This increase was primarily due to
increased revenues at the Company's multi-modality fixed-site facility in Ocean
Township, New Jersey (approximately $1,098,000), the acquisition of a fixed-site
MRI facility, with ultrasound, located in New York City, New York in November
1997 (approximately $678,000) (the "New York City MRI Facility") and increased
revenues at the Company's MRI facility in Wayne, New Jersey (approximately
$238,000) (the "Wayne MRI Facility"), all of which were partially offset by
decreased revenues at the Company's MRI facility located in Brooklyn, New York
(approximately $290,000) (the "Brooklyn MRI Facility").
For the nine months ended September 30, 1998, operating expenses were
$8,140,189 as compared to $7,644,899 for the nine months ended September 30,
1997, an increase of approximately $495,000. This increase was primarily due to
(i) expenses incurred in connection with the operation of the New York City MRI
Facility (approximately $542,000), (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
12
<PAGE>
the increased number of procedures being performed at certain of the Company's
facilities (approximately $426,000), and (iii) increased consulting and
marketing fees (approximately $208,000), all of which were partially offset by
certain non-cash compensation charges which were fully amortized during fiscal
1997 (approximately $370,000 was amortized during the nine months ended
September 30, 1997). The non-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 a former financial advisor pursuant to a consulting agreement
(the "Financial Advisor's Consulting Agreement"). See "Liquidity and Capital
Resources of the Company."
The operating results for the Company have been negatively impacted by
the Brooklyn MRI Facility and the Company's MRI joint ventures in Philadelphia,
Pennsylvania (the "Philadelphia MRI Facility") and at the Meadowlands Hospital
Medical Center in Secaucus, New Jersey (the "Meadowlands MRI Facility"). In
connection with the Company's review of the viability of the Brooklyn MRI
Facility, among other things, the Company has entered into a new lease
arrangement with respect to the lease of this facility. See "Liquidity and
Capital Resources of the Company." 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. However, notwithstanding the foregoing efforts, there
can be no assurance that the purchase of the interest in the Philadelphia MRI
Facility or other revenue enhancement efforts will be successfully concluded or
that the procedures generated at the Brooklyn MRI Facility will be sufficient to
better support the operations of the Brooklyn MRI 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. Although the
Company has entered into various letters of intent, the Company has not entered
into any definitive acquisition agreements or administrative service agreements
with respect to its physician
13
<PAGE>
practice management operations, although it expects to do so within
the next several months.
For the Three Months Ended September 30, 1998 v. September 30, 1997
For the three months ended September 30, 1998, revenues were $3,257,547
as compared to $2,566,669 for the three months ended September 30, 1997, an
increase of approximately $691,000. This increase was primarily due to increased
revenues at the Company's multi-modality fixed-site facility in Ocean Township,
New Jersey (approximately $280,000), the acquisition of the New York City MRI
Facility in November 1997 (approximately $248,000) and increased revenues at the
Wayne MRI Facility (approximately $150,000).
For the three months ended September 30, 1998, operating expenses were
$2,719,873 as compared to $2,678,658 for the three months ended September 30,
1997, an increase of approximately $41,000. This increase was primarily due to
(i) expenses incurred in connection with the operation of the New York City MRI
Facility (approximately $182,000) and (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
$192,000) all of which were partially offset by (x) decreased rent expense
(approximately $67,000) mainly attributed to the new lease arrangement for the
Brooklyn MRI Facility and (y) certain non-cash compensation charges which were
fully amortized during fiscal 1997 (approximately $89,000 was amortized during
the three months ended September 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, Philadelphia and Meadowlands MRI
Facilities. In connection with the Company's review of the viability of the
Brooklyn MRI Facility, among other things, the Company has entered into a new
lease arrangement with respect to the lease of this facility. See "Liquidity and
Capital Resources of the Company." 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. However, notwithstanding the foregoing efforts, there
can be no assurance that the purchase of the interest in the Philadelphia MRI
Facility or other revenue enhancement efforts will be successfully concluded or
that the Brooklyn MRI Facility's new lease terms and the procedures generated at
such facility will be sufficient to better support the operations of the
Brooklyn MRI Facility. In May
14
<PAGE>
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.
Liquidity and Capital Resources of the Company
As of September 30, 1998, the Company had a cash balance of $320,530,
current assets of $7,239,279, and working capital of $1,932,439. Cash flows
provided by operating activities for the nine months ended September 30, 1998
were $867,631, which consisted primarily of net income of $1,207,562,
depreciation and amortization of $1,262,899, an increase in the allowance for
doubtful accounts receivable of $742,000 and minority interests in joint
ventures of $379,950. Other significant components of cash flows used in
operating activities include an increase in accounts receivable of $2,187,328
due to an increase in the number of procedures being performed at the Company's
facilities and an increase in other assets of $886,217 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 $457,939.
Cash flows provided by investing activities for the nine months ended
September 30, 1998 were $622,661 primarily due to proceeds from the sale of the
mobile MRI unit in May 1998 which had been utilized at the Meadowlands MRI
Facility.
Cash flows used in financing activities for the nine months ended
September 30, 1998 were $1,240,388, which consisted primarily of payments on
capital lease obligations of $1,496,102, payments against reserves for
restructuring costs of $193,615, and distributions to limited partners of joint
ventures of $85,995, partially offset by borrowings of $395,169 under the
revolving line of credit and proceeds of $140,155 from (i) the collection of
certain accounts receivable assigned to the Company to satisfy indebtedness
relating to previously restructured mobile MRI operations and (ii) lease
payments 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. In order
to become profitable, this joint venture must attain a certain volume of
business and it is uncertain whether
15
<PAGE>
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 generally 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 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.
Other Matters
On October 2, 1998 (effective October 1, 1998), HIS Imaging Co., a
wholly-owned subsidiary of the Company, acquired (the "Beran Acquisition") all
of the assets and business of, and assumed certain liabilities relating to (i.)
Echelon MRI, P.C., which operated a fixed-site MRI facility in Voorhees, New
Jersey, (ii.) Mainland Imaging Center, P.C., which operated a multi-modality
diagnostic imaging facility in Northfield, New Jersey and a radiology facility
in Ocean City, New Jersey, (iii.) Bloomfield Imaging Associates, P.A., which
operated a multi-modality diagnostic imaging facility in Bloomfield, New Jersey,
(iv.) North Jersey Imaging Management Associates, L.P., which managed the
Bloomfield, New Jersey facility and (v.) Irving N. Beran, M.D., P.A., which
operated a multi-modality diagnostic imaging facility in Voorhees and
Williamstown, New Jersey and a radiology facility in Atco and Williamstown, New
Jersey (collectively, the "Beran Entities"). The consideration given by the
Company in the Beran Acquisition was (i.) the assumption of certain obligations
and liabilities of the Beran Entities, (ii.) cash in the amount of $11.5 million
and (iii.) the issuance of 887.385 shares of Series D Cumulative Accelerating
Redeemable Preferred Stock of the Company (the "Series D Preferred Stock")
having an aggregate liquidation
16
<PAGE>
preference of $9,317,542.50 (i.e., $10,500 per share liquidation preference),
subject to post closing adjustments. Dividends on the Series D Preferred Stock
will accrue commencing on the date of issuance at the rate of 8% of the
liquidation preference and will increase by an additional 2% upon each three
month anniversary of the date of issuance; provided, however, that in no event
will the dividend rate be in excess of 15% of the liquidation preference. All
accrued and unpaid dividends will be payable quarterly in cash commencing
January 10, 1999. The Company also loaned the Beran Entities an aggregate of
$2.5 million, which loan bears interest at 8% per annum and matures upon the
terms and conditions contained in the related promissory notes. The Company used
the proceeds of a $14.0 million loan from DVI Financial Services, Inc. ("DFS")
to pay the cash portion of the purchase price and to fund the loan to the Beran
Entities (the "DFS Loan"). The terms of the DFS Loan provide for interest at
twelve (12%) percent per annum with no payment due in month one (1)(i.e.,
October 1998), interest only payments of $140,000 in each of months two (2)
through four (4)(i.e., November 1998, December 1998 and January 1999), principal
and interest payments of approximately $308,000 in each of months five (5) and
six (6) (i.e., February 1999 and March 1999), with a balloon payment of
approximately $13.8 million due in month seven (7) (i.e., April 1999).
In October 1998, the Company entered into a five (5) year Financial and
Consulting Services Agreement with DFS (the "DFS Consulting Agreement").
Pursuant to the DFS Consulting Agreement, DFS agreed to provide assistance to
the Company in financing and structuring acquisitions. Pursuant to the DFS
Consulting Agreement, DFS has been granted options (the "DFS Options") to
purchase an aggregate of 500,000 shares of common stock, par value $.01 per
share, of the Company ("Common Stock") at exercise prices ranging from $0.90625
to $1.46875 per share, subject to the various terms and conditions outlined in
the applicable option agreements. Options to purchase 400,000 shares of Common
Stock were issued to DFS in connection with the provision of the DFS Loan. In
connection with the issuance of the DFS Options, the Company will record an
aggregate non-cash compensation charge of $367,308, $320,011 of which will be
amortized over the repayment terms of the DFS Loan.
As of January 30, 1996, the Company entered into the Financial
Advisor's Consulting Agreement the term of which was extended, from time to
time, through January 1999. In consideration for the rendition of certain
financial advisory services, during fiscal 1996, Biltmore Securities, Inc. was
issued options to purchase 750,000 shares of Common Stock at a cash exercise
price of $0.75 per share and, during fiscal 1998, upon consummation of the Beran
Acquisition, certain transferees of Biltmore were issued 750,000 shares
of Common Stock.
Prior to September 1998, the Company leased the Brooklyn MRI Facility
from DMR Associates, L.P. ("DMR"). The Company leases the MRI equipment at such
facility from DFS. DMR is owned by MR Associates, as the general partner, and
DFS, as a limited partner. MR Associates is in turn owned by the CEO and Joseph
J. Raymond, another director of the Company. The Company's lease payments to
17
<PAGE>
DMR were structured to fully satisfy DMR's costs and expenses related to the
facility, including mortgage payments, taxes and other related costs. In
December 1996, the Company agreed to guarantee an approximately $250,000 loan
(the "DFS Loan") from DFS to DMR in connection with DMR's refinancing of an
equipment lease related to this Brooklyn facility. This loan bore interest at
twelve percent (12%) per annum and was repayable over thirty-four (34) months
commencing February 15, 1997. The outstanding balance of this loan was
approximately $178,000 at December 31, 1997. In September 1998, DMR sold its
interest in this facility to an affiliate of DFS which, in turn, has entered
into a lease arrangement (the "New Lease Arrangement") with the Company in
respect of this facility and repaid the DFS Loan. As a result, the Company
anticipates realizing cash and corresponding rent expense savings of
approximately $163,000 on an annualized basis under the New Lease Arrangement.
In consideration for Mr. Raymond's agreement to such sale, the Company
granted Mr. Raymond (subject to stockholder ratification and approval)an option
to purchase 150,000 shares of Common Stock (at an exercise price per share equal
to the closing sales price of the Common Stock on The Nasdaq National Market on
the date stockholder ratification and approval of such stock option grant is
obtained), which option will become 100% exercisable upon such stockholder
ratification and approval for a ten (10) year period. In addition, the Company
has agreed that, to the extent the Company exercises its purchase option under
the New Lease Arrangement and sells such facility to an unrelated third party
(other than in connection with a merger, consolidation, sale of substantially
all of the assets of the Company or similar transaction), Mr. Raymond will be
entitled to receive an amount equal to 60% of any "profits" realized by the
Company upon such sale (i.e., the net proceeds received by the Company upon such
sale less the Company's depreciated basis in the property). In connection with
such stock option grant, the Company will record a non-cash compensation charge,
the amount of such charge and recognition therefore will be determined on the
date stockholder ratification and approval is obtained.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with DVI Business Credit Corporation ("DVIBC"), an affiliate
of DFS, to provide a revolving line of credit to the Company. The maximum amount
available under such credit facility was $2.0 million, which amount increased to
$3.0 million in October 1998 in connection with the Beran Acquisition, with
advances limited to seventy-five percent (75%) of eligible accounts receivable,
as determined by the 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
18
<PAGE>
the execution of the aforementioned loan and security agreement, which date was
extended to May 1999. 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 complementary to the Company. At September 30, 1998, the
Company had $1,857,169 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 Jersey Integrated
HealthPractice, Inc. ("JIHP"), the management services organization which
manages Pavonia Medical Associates, P.A. ("Pavonia") (the "JIHP Letters of
Intent"), the Company agreed to guarantee a loan of $1.0 million from 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. In addition,
pursuant to the DFS Consulting Agreement described above, the Company granted
10,000 of the previously described DFS Options as compensation for the funding
provided to JIHP. 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. This could result in a system failure or miscalculation
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. Like most companies today, the Company uses computer
technology in conducting its operations. In connection with the Company's
expanded strategic focus into the area of establishing physician practice
management operations, the Company has identified a new state of the art
information system that is represented to be Year 2000 compliant to be utilized
by the entire Company in a wide area network setting. With this in mind, the
Company anticipates achieving internal Year 2000 compliance through the
integration of new information systems. However, there can be no assurance that
the Company will purchase this new information system at all, or if and when it
does, be able to integrate the system in time to prevent any Year 2000 issues.
19
<PAGE>
Except as set forth above, 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. The
Company has not evaluated the status of other third parties' compliance with
Year 2000 issues nor developed alternatives and contingency plans. 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
Not Applicable.
20
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 5 have been omitted because the related information is
either inapplicable or has been previously reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on September 18, 1998
relating to the issuance of its Press Release on September 17,
1998 announcing the signing of definitive agreements to
acquire the five (5) New Jersey - based diagnostic imaging
facilities operated by the Beran Entities.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHCARE IMAGING SERVICES, INC.
(Registrant)
/s/ ELLIOTT H. VERNON
---------------------
DATE: November 13, 1998 Elliott H. Vernon,
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: November 13, 1998 /s/ SCOTT P. MCGRORY
--------------------
Scott P. McGrory,
Vice President - Controller
(Principal Financial and
Accounting Officer)
22
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1998
INDEX TO EXHIBITS
EXHIBIT PAGE
27 Financial Data Schedule
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $320,530
<SECURITIES> 0
<RECEIVABLES> 6,757,198
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,239,279
<PP&E> 12,515,523
<DEPRECIATION> 6,155,481
<TOTAL-ASSETS> 16,773,703
<CURRENT-LIABILITIES> 5,306,840
<BONDS> 0
0
1,150
<COMMON> 105,265
<OTHER-SE> 6,549,006
<TOTAL-LIABILITY-AND-EQUITY> 16,773,703
<SALES> 0
<TOTAL-REVENUES> 9,760,201
<CGS> 0
<TOTAL-COSTS> 8,140,189
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,240,062
<INCOME-TAX> 32,500
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,207,562
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
