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 March 31, 1999
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 May 17, 1999
Common Stock, $.01 par value 11,356,974 shares
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
- ------- ---------------------- ----
Item 1. Financial Statements:
Consolidated Balance Sheet -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders
Equity - For the three months ended March 31, 1999 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 15
Market Risk
PART II. OTHER INFORMATION
- -------- -----------------
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
- ----------
2
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
- ------ ------ -----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,391,047 $1,506,123
Accounts receivable - net 11,162,792 9,869,696
Accounts receivable acquired in the Beran Acquisition 3,532,343 4,653,831
Loan receivable 2,599,726 2,550,000
Prepaid expenses and other 336,389 228,758
------- -----------
Total current assets 19,022,297 18,808,408
---------- ----------
Property, Plant and Equipment - Net 9,079,602 9,578,807
--------- ---------
Deferred Tax Asset - Net 381,025 48,325
------- ------
Other Assets:
Due from officer 264,125 264,125
Deferred transaction and financing costs 1,161,594 1,215,364
Other 250,862 180,786
Goodwill - net 12,757,740 12,858,838
---------- ----------
Total other assets 14,434,321 14,519,113
---------- ----------
Total Assets $42,917,245 $42,954,653
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Borrowings under revolving line of credit $2,798,767 $ 2,838,275
Accounts payable and accrued expenses 2,268,285 2,122,916
Current portion of capital lease obligations 1,283,635 1,505,510
Bridge financing 13,982,184 14,000,000
Reserve for subleased equipment 86,522 294,790
Income taxes payable 67,528 106,582
------------- ------------
Total current liabilities 20,486,921 20,868,073
---------- ----------
Noncurrent Liabilities:
Capital lease obligations 3,250,959 3,440,890
--------- ---------
Minority Interests 984,324 896,404
------- -------------
Commitments and Contingencies
Stockholders' Equity:
Cumulative accelerating redeemable preferred stock,
871.743 shares outstanding at March 31, 1999 and
December 31, 1998 respectively ($10,500 per share
liquidation preference) 87 87
Common stock, $.01 par value: 50,000,000 shares
authorized, 11,356,974 outstanding at March 31, 1999
and December 31, 1998, respectively 113,570 113,570
Additional paid-in capital 23,050,076 23,050,076
Accumulated deficit (4,968,692) (5,414,447)
---------- ----------
Total stockholders' equity 18,195,041 17,749,286
---------- -----------
Total Liabilities and Stockholders' Equity $42,917,245 $42,954,653
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Revenues $6,022,502 $3,198,641
---------- ----------
OPERATING EXPENSES:
Salaries 1,741,835 771,386
Other operating expenses 1,741,477 1,009,956
Provision for bad debts 138,992 -
Consulting and marketing fees 117,996 250,449
Professional fees 176,738 95,424
Depreciation and amortization 802,409 424,871
Interest 846,365 194,599
------- -------
5,565,812 2,746,685
Income Before Minority Interests in Joint Ventures
and Income Taxes 456,690 451,956
Minority Interests in Joint Ventures (82,920) (136,130)
-------- -----------
Income Before Income Taxes 373,770 315,826
Income Tax (Benefit) Provision (300,818) 9,986
---------- ----------
Net Income 674,588 305,840
Preferred Dividends 228,833 -
------- ----------
Net Income Available to Common Shareholders $445,755 $ 305,840
======== =========
Net Income per Common Share - Basic $ .04 $ .03
=========== ==========
Weighted Average Common Shares
Outstanding - Basic 11,356,974 9,762,235
========== ==========
Net Income per Common Share- Diluted $ .03 $ .03
=========== ==========
Weighted Average Common Shares
Outstanding - Diluted 20,618,408 11,397,184
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional (Deficit) Total
Preferred Stock Common Stock Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 872 $87 11,356,974 $113,570 $23,050,076 $(5,414,447) $17,749,286
Net income 674,588 674,588
Preferred dividends (228,833) (228,833)
--- --- ---------- -------- ---------- -------- --------
BALANCE, MARCH 31, 1999 872 $87 11,356,974 $113,570 $23,050,076 $(4,968,692) $18,195,041
========= ======== =========== ========= =========== ========== ============
</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>
Three Months Ended
March 31,
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income available to common shareholders $445,755 $305,840
Adjustments to reconcile net income available
to common shareholders to net cash provided by
operating activities:
Depreciation and amortization 802,409 424,871
Minority interests in joint ventures 82,920 136,130
Allowance for doubtful accounts 190,000 182,000
Changes in Assets and Liabilities:
Accounts receivable (361,608) (739,050)
Prepaid expenses and other (107,631) (37,032)
Deferred taxes (332,700) -
Goodwill (44,699) -
Other (70,076) 57,582
Accounts payable and accrued expenses 145,369 376,898
Income taxes payable (39,054) 8,750
Deferred transaction and financing costs 53,770 (178,343)
------ ----------
Net cash provided by operating activities 764,455 537,646
------- ---------
Cash Flows from Investing Activities:
Loan receivable (49,726) -
Purchases of property, plant and equipment (157,407) (1,962)
--------- ----------
Net cash used in investing activities (207,133) (1,962)
--------- ----------
Cash Flows from Financing Activities:
(Payments) borrowings against the revolving line of
credit (39,508) 241,359
Capital contribution by minority investors 5,000 -
Distributions to limited partners of joint ventures - (42,789)
Payments on capital lease obligations (411,806) (396,375)
Payments on bridge financing (17,816) -
Payments on reserve for subleased equipment (208,268) (21,780)
--------- ----------
Net cash used in financing activities (672,398) (219,585)
--------- ----------
(Decrease) increase in cash and cash equivalents (115,076) 316,099
Cash and cash equivalents at beginning of period 1,506,123 70,626
--------- ----------
Cash and cash equivalents at end of period $1,391,047 $ 386,725
---------- ----------
Supplemental Cash Flow Information:
Interest paid during the period $ 644,524 $ 196,893
--------- ----------
Income taxes paid during the period $ 70,936 $ 1,236
----------- ----------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Capital leases principally for medical equipment $ - $ 774,226
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1999
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 March 31, 1999 and the related
statements of income and cash flows for the periods ended March 31, 1999 and
1998. There is no substantial income tax provision for the period ended March
31, 1998 due to the availability of net operating loss carryforwards. For the
period ended March 31, 1999 an income tax benefit has been recorded based on the
estimated effective income tax benefit rate for the full year. The income
tax benefit results from management's judgement that a valuation allowance
against deferred tax assets, which amounted to $2,428,888 at December 31, 1998,
will no longer be required at December 31, 1999 since the realization of the
deferred tax assets is considered more likely than not as a result of the
Company's achieving profitable operations.
The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results of operations expected for
the year ending December 31, 1999 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, 1998 which is on file
with the Securities and Exchange Commission.
Note 2. - Earnings Per Share
Basic earnings per common share are computed by dividing net
income available to common shareholders by the weighted average number of common
shares outstanding for the three months ended March 31, 1999 and 1998, as
applicable. Diluted earnings per common share are computed by dividing net
income available to common shareholders by the weighted average number of common
shares outstanding for the three months ended March 31, 1999 and 1998, 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 per share computations:
7
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<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998
------------------------------------ --------------------------------------
Per-
Income Share Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income Available to
Common Shareholders $445,755 11,356,974 $.04 $ 305,840 9,762,235 $.03
Add:
Preferred Dividends 228,833 - - -
Effect of Dilutive
Securities
Stock Options - 537,513 - 803,544
Series C Stock - - - 831,405
Series D Stock - 8,723,921 - -
-------------- ----------- ------------ -------------
Diluted EPS
Net Income $674,588 20,618,408 $.03 $ 305,840 11,397,184 $.03
============== =========== ========= ============ ============= ===========
</TABLE>
Note 3. - Beran Acquisition
- ---------------------------
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.)
a fixed-site MRI facility in Voorhees, New Jersey, (ii.) a multi-modality
diagnostic imaging facility in Northfield, New Jersey and a radiology facility
in Ocean City, New Jersey, (iii.) a multi-modality diagnostic imaging facility
in Bloomfield, New Jersey, and (iv.) 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 871.743 shares of
Series D Cumulative Accelerating Redeemable Preferred Stock of the Company (the
"Series D Stock") having an aggregate liquidation preference of $9,153,301.50
(i.e., $10,500 per share liquidation preference). The Company also assumed
certain contractual obligations of the Beran Entities on a going-forward basis
under the contracts assigned to the Company in the Beran Acquisition (including
operating leases and equipment maintenance agreements). 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, but in no event later then December 31, 1999. The Company used
the proceeds of a short-term $14.0 million bridge 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 Bridge Loan"). The DFS Bridge Loan
bears interest at 12% per annum with no payment due in month one (i.e., November
1998), interest only payments of $140,000 in each of months two through four
(i.e., December 1998, January 1999 and February 1999), principal and interest
payments of approximately $308,000 in each of months five and six (i.e., March
1999 and April 1999), with a balloon payment of $13,951,804 due in month seven
(i.e., May 1999). In addition, options to purchase 400,000 shares of common
stock, par value $.01 per share, of the Company at an exercise price of $1.03125
per share were issued to DFS for
8
<PAGE>
providing the DFS Bridge Loan. The Beran Acquisition is being accounted for as a
purchase. The Company has been notified by DFS that it is prepared to extend the
term of the DFS Bridge Loan until January 1, 2000 subject to the negotiation of
terms and conditions acceptable to DFS.
Note 4. - Deferred Transaction and Financing Costs
- --------------------------------------------------
Deferred transaction and financing costs relate to expenses
incurred in connection with the financing of the Beran Acquisition and in
connection with the Company's proposed acquisition of a management services
organization ("MSO"). Deferred financing costs are being expensed over the
applicable agreement term. In the event such proposed acquisition of an MSO is
not consummated, the related deferred transaction costs will be expensed.
Note 5. - Segment Information
- -----------------------------
The Company currently operates in two industry
segments--diagnostic imaging and physician practice management. The diagnostic
imaging segment involves primarily operating fixed-site diagnostic imaging
facilities. The physician practice management segment, which commenced
operations during the second quarter of fiscal 1998, consists of providing
management services to independent physician practices.
The following table shows net revenues and operating income by
industry segment for the three months ended March 31, 1999. Assets are not
identified by industry segment. Operating income consists of revenues less
direct operating expenses. All corporate operating expenses have been allocated
to the diagnostic imaging segment:
Net revenues:
Diagnostic imaging $5,754,659
Physician practice management 267,843
----------
Total $6,022,502
==========
Operating income:
Diagnostic imaging $326,206
Physician practice management 130,484
-------
Total $456,690
========
Note 6. - Subsequent Event
- --------------------------
Prior to May 1, 1999, the Company's MRI facility located in
Philadelphia, Pennsylvania was operated as a joint venture among a wholly-owned
subsidiary of the Company (as the general partner holding a 60% partnership
interest) and certain individual medical professionals and others (as limited
partners holding in the aggregate the remaining 40% partnership interests).
Effective May 1, 1999, the Company's subsidiary consummated the purchase of the
limited partners' 40% partnership interests for $100,000 in cash. At April 30,
1999, the net book value of this 40% partnership interest was $0. The $100,000
purchase price will be recorded by the Company as goodwill and amortized over a
period of ten years.
9
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Item 2. 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 Quarterly Report that are not historical facts
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 "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may," "should," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including, but not limited to, the
risk that the Company may not be able to implement its growth strategy in the
intended manner including the integration of acquisitions, risks associated with
the Company's need to refinance certain near-term debt maturities, risks
regarding currently unforeseen competitive pressures affecting participants in
the health care market and risks affecting the Company's industry, such as
increased regulatory compliance and changes in regulatory requirements, changes
in payor reimbursement levels and technological changes. In addition, the
Company's business, operations and financial conditions are subject to the
risks, uncertainties and assumptions which are described in the Company's
reports and statements filed from time to time with the Securities and Exchange
Commission.
For the Three Months Ended March 31, 1999 vs. March 31, 1998
- ------------------------------------------------------------
For the three months ended March 31, 1999, revenues were $6,022,502
as compared to $3,198,641 for the three months ended March 31, 1998, an increase
of approximately $2,824,000 or 88%. This increase was primarily due to (i)
revenues associated with the operation of five New Jersey-based diagnostic
imaging facilities (the "Beran Facilities") acquired effective as of October 1,
1998 (approximately $2,615,000) and (ii) revenues associated with the Company's
physician practice management operations (approximately $268,000), all of which
were partially offset by the closure of the Company's fixed-site MRI facility in
Secaucus, New Jersey (the "Secaucus Facility") in May 1998 (approximately
$238,000).
For the three months ended March 31, 1999, operating expenses were
$5,565,812 as compared to $2,746,685 for the three months ended March 31, 1998,
an increase of approximately $2,819,000 or 103%. This increase was primarily due
to (i) expenses incurred in connection with the operation of the Beran
Facilities acquired in October 1998 (approximately $2,190,000), (ii) increased
expenses associated with facilities that were operated by the Company for both
of the quarters ended March 31, 1999 and 1998 (approximately $533,000) primarily
due to increased salary expenses relating to new personnel and increased
depreciation and amortization relating to new equipment, (iii) increased
interest expense (approximately $240,000) relating to deferred financing costs
incurred in connection with the Beran Acquisition which are being expensed over
the applicable agreement term and to higher borrowings outstanding on the
Company's revolving line of credit and (iv) expenses relating to the Company's
physician practice management operations (approximately $137,000), all
10
<PAGE>
of which were partially offset by decreased consulting and marketing fees
(approximately $167,000) and the closure of the Secaucus Facility in May 1998
(approximately $163,000).
The operating results for the Company continue to be negatively
impacted by the Company's fixed-site MRI facility located in Brooklyn, New York
(the "Brooklyn Facility"). The Brooklyn Facility continues to operate at a loss,
even after the September 1998 restructuring of the lease arrangement with
respect to this facility which reduced the monthly lease payments by
approximately $13,500 per month. Although the Company is in the process of
implementing certain revenue enhancement measures, including excess capacity
arrangements, there can be no assurance that the procedures generated at the
Brooklyn Facility will be sufficient to better support the operations of the
Brooklyn Facility.
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 assessing affiliations with several primary care and multi-specialty
physician practices including Pavonia Medical Associates, P.A. ("PMA"), 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 (other than a merger agreement with PMA in January 1999,
which is subject to the approval of PMA's physician stockholders) or
administrative service agreements with respect to its physician practice
management operations. Given the significant declines in the financial
performance of many of the leading publicly-traded physician practice management
companies during the past year, the availability of financing for these ventures
has been extremely limited. This constriction in the financing market has had,
and is likely to continue to have, an adverse impact on the Company's ability to
effect its physician practice management acquisitions.
Liquidity and Capital Resources of the Company
- ----------------------------------------------
As of March 31, 1999, the Company had a cash balance of $1,391,047,
current assets of $19,022,297 and a working capital deficit of $1,464,624. The
working capital deficiency is a result of a short-term $14.0 million bridge loan
(the "DFS Bridge Loan") from DVI Financial Services Inc. ("DFS"). The DFS Bridge
Loan was funded in October 1998 in connection with the Beran Acquisition and
bears interest at 12% per annum with no payment due in month one (i.e., November
1998), interest only payments of $140,000 in each of months two through four
(i.e., December 1998, January 1999 and February 1999), principal and interest
payments of approximately $308,000 in each of months five and six (i.e., March
1999 and April 1999) with a balloon payment of $13,951,804 due in month seven
(i.e., May 1999). The Company has been notified by DFS that it is prepared to
extend the term of the DFS Bridge Loan until January 1, 2000 subject to the
negotiation of terms and conditions acceptable to DFS. The DFS Bridge Loan is
expected to be repaid from a longer-term financing to be obtained in connection
with the proposed acquisition of Jersey Integrated HealthPractice, Inc., which
provides management services to PMA ("JIHP"). In the event the acquisition of
JIHP is not consummated on or prior to January 1, 2000, management believes
(based on discussions to date with several financing sources) that the DFS
Bridge Loan can be refinanced on a longer term basis.
11
<PAGE>
Cash flows provided by operating activities were $764,455 for the
quarter ended March 31, 1999, which consisted primarily of (i) net income of
$445,755, (ii) depreciation and amortization of $802,409 primarily related to
equipment acquired in the Beran Acquisition in October 1998 and certain new
equipment installed in the Company's existing facilities, (iii) an increase in
the allowance for doubtful accounts receivable of $190,000 primarily related to
the aging of accounts receivables at certain of the Company's facilities and
(iv) minority interests in joint ventures of $82,920. Other significant
components of cash flows provided by operating activities include (x) an
increase in accounts receivable, net of $1,293,096, (y) an increase in prepaid
expenses and other of $107,631 and (z) an increase in deferred tax asset of
$332,700, all of which were partially offset by a decrease in the accounts
receivable acquired in the Beran Acquisition of $1,121,488 and an increase in
accounts payable and accrued expenses of $145,369.
Cash flows used in investing activities were $207,133, which
related to interest income of $49,726 associated with a $2.5 million loan to the
Beran Entities and purchases of property, plant and equipment of $157,407. The
loan to the Beran Entities bears interest at 8% per annum and matures upon the
terms and conditions contained in the related promissory notes, but in no event
later then December 31, 1999.
Cash flows used in financing activities were $672,398, which
consisted primarily of payments on capital lease obligations of $411,806,
payments on obligations related to subleased equipment of $208,268 and payments
on the Company's $3.0 million revolving line of credit of $39,508.
In December 1997, the Company agreed to guarantee a $1.0 million
loan from DFS to JIHP (the "JIHP Loan"). This loan was funded by DFS to JIHP on
January 8, 1998 and bears interest at 12% per annum and is repayable over 48
months commencing in February 1998 at $26,330 per month. At March 31, 1999,
approximately $755,000 of the loan was outstanding. PMA and each physician
stockholder of PMA have acknowledged that such extension of credit is for their
benefit and 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 PMA or
JIHP, and the acquisition by the Company of 100% of the outstanding capital
stock of JIHP is not consummated, then PMA and each physician stockholder of PMA
agree to indemnify and hold the Company harmless from and against any and all
such liabilities and obligations.
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 initially was $2.0 million, which amount
increased to $3.0 million in October 1998 in connection with the Beran
Acquisition, with advances limited to 75% of eligible accounts receivable, as
determined by DVIBC. Borrowings under the line of credit bear interest at the
rate of 3% over the prime lending rate and were repayable on May 1, 1999. The
Company has been notified by DFS that it is prepared to extend the term of the
revolving line of credit until January 1, 2000 subject to the negotiation of
terms and conditions acceptable to DFS. This revolving line of credit is
expected to be repaid from the longer-term financing to be obtained in
connection with the proposed acquisition of JIHP. In the event that this
transaction is not consummated on or prior to January 1, 2000, management
believes
12
<PAGE>
(based on discussions to date with several financing sources) that the revolving
line of credit can be refinanced on a longer-term basis or the repayment due
date can be further extended. 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 are used to fund working capital needs as well as acquiring
businesses which are complementary to the Company. At March 31, 1999 and
December 31, 1998, respectively, the Company had $2,798,767 and $2,838,275,
respectively, of borrowings under this credit facility.
Prior to May 1, 1999, the Company's MRI facility located in
Philadelphia, Pennsylvania was operated as a joint venture among a wholly-owned
subsidiary of the Company (as the general partner holding a 60% partnership
interest) and certain individual medical professionals and others (as limited
partners holding in the aggregate the remaining 40% partnership interests).
Effective May 1, 1999, the Company's subsidiary consummated the purchase of the
limited partners' 40% partnership interests for $100,000 in cash. At April 30,
1999, the net book value of this 40% partnership interest was $0. The $100,000
purchase price will be recorded by the Company as goodwill and amortized over a
period of ten years.
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. Both the DFS Bridge Loan and the revolving line
of credit had maturity dates of May 1, 1999. The Company has been notified by
DFS that it is prepared to extend the term of the DFS Bridge Loan and the
revolving line of credit until January 1, 2000 subject to the negotiation of
terms and conditions acceptable to DFS. These loans are expected to be repaid
from the longer-term financing to be obtained in connection with the proposed
acquisition of JIHP. In the event that this acquisition is not consummated on or
prior to January 1, 2000, management believes (based on discussions to date with
several financing sources) that the DFS Bridge Loan and the revolving line of
credit can be refinanced on a longer-term basis (and in the case of the
revolving line of credit, such repayment due date could be further extended).
Effect of Year 2000 Issue
- -------------------------
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
13
<PAGE>
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activity.
The Company is currently assessing the impact of the Year 2000
issue on its computer systems and technology, including (i) information
technology such as software and hardware relating to its medical billing
systems, accounting/finance systems, payroll systems, desktop applications and
servers, and (ii) non-information systems or embedded technology such as micro
controllers contained in various medical equipment, safety systems, facilities
and utilities (including telephones, facsimile machines, time clocks and postage
meters). The Company is evaluating its state of readiness through surveys of its
sites as well as through discussions with its significant vendors to determine
the readiness of those vendors whose failure to correct year 2000 issues would
materially impact the Company. The Company has completed its site assessments
and hopes to complete its assessment of the state of readiness of its
significant vendors by the end of the third quarter of fiscal 1999.
The cost to the Company to correct its internal Year 2000 issues is
estimated to be $88,500, consisting of $30,500 related to the upgrading of its
corporate server, $54,500 relating to the upgrading of personal computers and
$3,500 related to the upgrading of medical equipment. The Company has not yet
incurred any costs related to the Year 2000 compliance issue (other than costs
of, and time associated with, the site assessments and interfacing with vendors,
which costs are not significant and are not separately identifiable) but expects
to expense as incurred all such costs. The Company anticipates that these costs
will be funded through operating cash flows except as hereinafter described. The
Company expects to complete these upgrades by the end of the third quarter of
fiscal 1999.
In connection with the Company's strategic expansion into providing
physician practice management services, the Company has identified a state of
the art information system that is represented by the service provider to be
Year 2000 compliant which the Company intends to obtain and utilize in a wide
area network setting upon consummation of its acquisition of JIHP. The Company
intends to obtain financing for the new system in the form of an operating
lease. The costs relating to the integration of such new system are expected to
be funded with the proceeds of the financing to be obtained in connection with
the acquisition of JIHP.
While the Company believes its efforts are adequate to attain
internal Year 2000 compliance, the Year 2000 readiness of its vendors may lag
behind the Company's efforts and it has not yet determined the extent to which
the Company is vulnerable to the failure of its vendors to remediate their own
Year 2000 issues. There can be no guarantee that the systems of these third
parties will be timely converted or that a failure to convert will not have a
material impact on the Company's business, financial condition or results of
operations. The Company is not yet in a position to assess any such third
party's compliance efforts or the impact on the Company if any such efforts
fail.
The Company's current estimates of the amount of time and costs
necessary to modify and test its computer systems and technology and determine
its state of readiness are based on management's best estimates including
assumptions regarding future events, including the continued availability of
certain resources, Year 2000 modification plans and other factors. New
developments
14
<PAGE>
may occur that could affect the Company's estimates of the amount of time and
costs necessary to modify and test its systems for Year 2000 compliance,
including, but not limited to (i) the availability and cost of personnel trained
in this area, (ii) the ability to locate and correct all relevant computer codes
and equipment and (iii) the Year 2000 compliance attained by its significant
vendors. The Company has not developed, nor does it plan to develop, any
contingency plans for any unplanned noncompliance issues from internal or
external sources. There can be no guarantee any unplanned noncompliance issues
from internal or external sources will not have a material impact on the
Company's business, financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not Applicable.
15
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Items 1 through 4 have been omitted because the related information
is either inapplicable or has been previously reported.
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
16
<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: May 17, 1999 /s/ Elliott H. Vernon
-----------------------
Elliott H. Vernon
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 /s/ Scott P. McGrory
-----------------------
Scott P. McGrory
Vice President - Controller
(Principal Financial and
Accounting Officer)
17
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