<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
HEALTHCARE INTEGRATED SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
----------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
3) Filing Party:
----------------------------------------------------------------------
4) Date Filed:
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<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
SHREWSBURY EXECUTIVE CENTER II
1040 BROAD STREET
SHREWSBURY, NEW JERSEY 07702
----------------
October ___, 1999
Dear Fellow Stockholders:
You are cordially invited to attend the 1999 Annual Meeting of the
Stockholders of HealthCare Integrated Services, Inc. (the "Company") to be held
on November ___, 1999 at the offices of the Company, Shrewsbury Executive Center
II, 1040 Broad Street, Shrewsbury, New Jersey, 07702 at 10:00 a.m., local time.
Prior to August 1, 1999, the Company's name was Healthcare Imaging Services,
Inc. We look forward to having as many stockholders as possible present at that
time.
At the meeting, you will be asked to ratify and approve the issuance
(the "Beran Issuance") of convertible redeemable preferred stock of the Company
in connection with the acquisition in October 1998 by HIS Imaging LLC, a
wholly-owned subsidiary of the Company, of five multi-modality diagnostic
imaging centers located in Voorhees (two centers), Bloomfield, Northfield and
Williamstown, New Jersey. Stockholder ratification and approval of the Beran
Issuance is being solicited in order to increase the conversion and voting
rights of the holders of this preferred stock. If such stockholder ratification
and approval is not obtained, the preferred stock would remain duly authorized
and outstanding; however, the conversion and voting rights of the holders
thereof would be restricted as noted in the accompanying Proxy Statement. The
Board of Directors recommends that you vote FOR the ratification and approval of
the Beran Issuance.
In addition, at the meeting you will be asked to elect five directors
of the Company to hold office until the next annual meeting of stockholders and
until the election and qualification of their respective successors. The Board
of Directors recommends that you vote FOR the election of the five director
nominees named in the accompanying Proxy Statement (the "Director Nominees").
The accompanying Proxy Statement also provides detailed information
concerning the Beran Issuance and the Director Nominees, together with certain
additional information, all of which you are urged to read carefully.
It is important that your stock be represented at the meeting,
regardless of the number of shares you hold. Therefore, after reading the Proxy
Statement and considering the Beran Issuance and the Director Nominees, please
sign, date and return your proxy card as soon as possible, whether or not you
plan to attend the meeting. No postage is required if the proxy card is mailed
in the United States. Returning the proxy card will not prevent you from voting
your shares in person if you subsequently choose to attend the meeting. Your
prompt cooperation will be greatly appreciated.
Sincerely,
<PAGE>
ELLIOTT H. VERNON
Chairman of the Board and Chief Executive Officer
2
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
SHREWSBURY EXECUTIVE CENTER II
1040 BROAD STREET
SHREWSBURY, NEW JERSEY 07702
------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of
HealthCare Integrated Services, Inc.:
The Annual Meeting of Stockholders (the "Meeting") of HealthCare
Integrated Services, Inc. f/k/a Healthcare Imaging Services, Inc. (the
"Company") will be held on ________, November ___, 1999 at the offices of the
Company, Shrewsbury Executive Center II, 1040 Broad Street, Shrewsbury, New
Jersey 07702, at 10:00 a.m., local time, to consider and act upon the following
matters:
1. The ratification and approval of the issuance of an aggregate of
887.385 shares of Series D Cumulative Accelerating Redeemable
Preferred Stock of the Company which were issued in connection
with the acquisition in October 1998 by HIS Imaging LLC, a
wholly-owned subsidiary of the Company, of certain New Jersey-
based imaging facilities.*
2. The election of five directors of the Company to hold office until
the next annual meeting of stockholders and until the election and
qualification of their respective successors.
3. The ratification and approval of an option award to an executive
officer of the Company.
4. Such other business as may properly come before the Meeting or any
adjournment(s) or postponement(s) thereof.
The Board of Directors of the Company has fixed the close of business
on Wednesday, October 20, 1999, as the record date for determination of
stockholders entitled to notice of, and to vote at, the Meeting and any
adjournment(s) or postponement(s) thereof. Accordingly, only holders of record
of shares of the Company's voting securities at the close of business on such
date will be entitled to notice of, and to vote at, the Meeting and any
adjournment(s) or postponement(s) thereof.
- --------------
* Stockholder ratification and approval of this issuance is being solicited
in order to increase the conversion and voting rights of the holders of the
preferred stock so issued. If such ratification and approval is not granted at
the Meeting, the preferred stock would remain duly authorized and outstanding;
however, the conversion and voting rights of the holders thereof would be
restricted as noted in the accompanying Proxy Statement.
<PAGE>
By Order of the Board of Directors,
ELLIOTT H. VERNON
Chairman of the Board and Chief Executive Officer
October ___, 1999
Shrewsbury, New Jersey
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE RETURN
STAMPED ENVELOPE PROVIDED.
YOUR PROMPT RETURN OF A COMPLETED PROXY WILL HELP THE COMPANY
AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION TO
ASSURE A QUORUM AT THE MEETING.
2
<PAGE>
TABLE OF CONTENTS
General Information..........................................................-1-
Voting Securities............................................................-2-
Security Ownership of Certain Beneficial Owners and Management...............-3-
PROPOSAL 1 - THE BERAN ISSUANCE..............................................-9-
General ............................................................-9-
Terms of the Series D Stock........................................-10-
Reason for Issuance of Series D Stock; Recommendation of
the Board........................................................-13-
Recommendation of the Board........................................-13-
Interests of Certain Persons in Ratification and Approval
of Beran Issuance................................................-14-
Certain Factors....................................................-14-
Vote Required......................................................-16-
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS............................................-17-
DESCRIPTION OF CAPITAL STOCK................................................-24-
General ...........................................................-24-
Common Stock.......................................................-24-
Preferred Stock....................................................-24-
Section 203 of the Delaware General Corporation Law................-24-
Directors' Liability...............................................-25-
PROPOSAL 2 - ELECTION OF DIRECTORS..........................................-26-
Vote Required......................................................-28-
INFORMATION RELATING TO THE BOARD AND ITS COMMITTEES........................-29-
Meetings of the Board; Committees..................................-29-
Compensation of Directors..........................................-30-
Section 16(a) Beneficial Ownership Reporting Compliance............-31-
INFORMATION RELATING TO EXECUTIVE OFFICERS OF THE COMPANY...................-32-
Executive Officers.................................................-32-
Executive Compensation.............................................-33-
PROPOSAL 3 - THE BACA AWARD.................................................-41-
General ...........................................................-41-
The Baca Award.....................................................-41-
Federal Income Tax Consequences....................................-41-
Vote Required......................................................-42-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................-43-
INDEPENDENT PUBLIC ACCOUNTANTS..............................................-49-
STOCKHOLDER PROPOSALS.......................................................-49-
<PAGE>
OTHER MATTERS...............................................................-49-
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........................-49-
---------------
ENCLOSURES
ENCLOSURE 1 - HealthCare Integrated Services, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1998
ENCLOSURE 2 - HealthCare Integrated Services, Inc.'s Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1999
ENCLOSURE 3 - HealthCare Integrated Services, Inc.'s Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1999
ENCLOSURE 4 - Audited Financial Statements of Irving N. Beran, M..D., P.A. and
affiliates for the fiscal years ended December 31, 1997 and 1996
ENCLOSURE 5 - Unaudited Combined Financial Statements of Irving N. Beran,
M.D., P.A. for the nine months ended September 30, 1998 and 1997
---------------
CAUTIONARY STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Proxy Statement contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are based on the current beliefs of the Company and its management. When used in
this document, 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 associated with
competitive pressures currently affecting participants in the health care market
and risks affecting the Company's industry, such as increased regulatory
compliance, changes in payor reimbursement levels and technological changes. In
addition, the Company's business, operations and financial condition 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 (the "Commission"). Should one or more of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein.
<PAGE>
PROXY STATEMENT
-----------
HEALTHCARE INTEGRATED SERVICES, INC.
SHREWSBURY EXECUTIVE CENTER II
1040 BROAD STREET
SHREWSBURY, NEW JERSEY 07702
-----------
ANNUAL MEETING OF STOCKHOLDERS
To be Held on November __, 1999
GENERAL INFORMATION
This Proxy Statement is being furnished to the holders of record as of
the close of business on Wednesday, October 20, 1999 (the "Record Date"), of
shares of common stock, par value $0.01 per share (the "Common Stock"), of
HealthCare Integrated Services, Inc., a Delaware corporation f/k/a Healthcare
Imaging Services, Inc. (the "Company"), and shares of Series D Cumulative
Accelerating Redeemable Preferred Stock, par value $0.10 per share (the "Series
D Stock"), of the Company in connection with the solicitation of proxies by the
Board of Directors of the Company (the "Board") for use at the Annual Meeting of
Stockholders to be held on _______, November __, 1999 and at any adjournment(s)
or postponement(s) thereof (the "Meeting"), pursuant to the accompanying Notice
of Meeting of Stockholders (the "Notice"). A form of proxy for use at the
Meeting is also enclosed. This Proxy Statement and the accompanying Notice and
form of proxy are first being mailed to stockholders on or about October __,
1999.
A stockholder may revoke the authority granted by his execution of a
proxy at any time before the effective exercise of such proxy by delivering a
duly executed proxy bearing a later date or by filing a written revocation
thereof with the Assistant Secretary of the Company at its executive offices
located at Shrewsbury Executive Center II, 1040 Broad Street, Shrewsbury, New
Jersey, 07702. Presence at the Meeting does not of itself revoke the proxy
unless the stockholder so attending shall, in writing, so notify the Secretary
of the Meeting at any time prior to the voting of the proxy. All shares of
Common Stock and Series D Stock represented by executed and unrevoked proxies
will be voted in accordance with the specifications therein. Proxies submitted
without specification will be voted (i) (other than the shares of Series D
Stock) for the ratification and approval of the issuance (the "Beran Issuance")
of an aggregate of 887.385 shares of Series D Stock which were issued in
connection with the acquisition (the "Beran Acquisition") in October 1998 by HIS
Imaging LLC, a wholly-owned subsidiary of the Company ("HIS Imaging"), of
certain New Jersey-based imaging facilities and (ii) for the election of the
five nominees for director named herein (the "Director Nominees"). Management is
not aware at the date hereon of any other matter to be presented at the Meeting,
but if any other matter is properly presented, the persons named in the proxy
will vote thereon according to their judgment.
All costs and expenses of the Meeting and this solicitation, including
the cost of preparing and mailing this Proxy Statement, will be borne by the
Company. The Company has engaged the
<PAGE>
firm of Corporate Investor Communications, Inc. as proxy solicitors. The fee to
such firm for solicitation services is estimated to be approximately $3,500 plus
reimbursement of out-of-pocket expenses. In addition to solicitation by use of
mails, directors, officers and regular employees of the Company (who will not be
specifically compensated for such services) may solicit proxies personally or by
telephone or other means of communication. Although there is no formal agreement
to do so, the Company also will reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in forwarding
proxy materials to their principals.
Unless otherwise noted, as used herein, the terms "fiscal 1995,"
"fiscal 1996," "fiscal 1997," "fiscal 1998," "fiscal 1999," and "fiscal 2000"
refer to the Company's fiscal years ended December 31, 1995, 1996, 1997, 1998
and 1999 and its fiscal year ending December 31, 2000, respectively.
VOTING SECURITIES
Only holders of record on the books of the Company at the close of
business on the Record Date are entitled to notice of, and to vote at, the
Meeting. On the Record Date, there were outstanding 11,356,974 shares of Common
Stock and 871.743 shares of Series D Stock. Generally, the holders of the Common
Stock and Series D Stock vote together as a single class on all matters
submitted to a vote of stockholders, with each share of Common Stock outstanding
being entitled to one vote and each share of Series D Stock being entitled to
2,402.97 votes (which number will increase to approximately 10,007 votes per
share following stockholder ratification and approval of the issuance thereof).
At the Meeting, (i) approval of the Beran Issuance will require the affirmative
vote of the holders of a majority of the total number of shares of Common Stock
represented and entitled to be cast at the Meeting (because certain
pronouncements of The Nasdaq National Market ("Nasdaq NMS"), the exchange upon
which the Company's securities are included, provide that the holders of the
Series D Stock are not entitled to vote on the ratification and approval of the
Beran Issuance) and (ii) the election of the Director Nominees will require a
plurality of the votes entitled to be cast on the matter, in person or by proxy,
at the Meeting in favor of such persons. See "Security Ownership of Certain
Beneficial Owners and Management -- Series D Stock Ownership" for a discussion
of the issuance of the Series D Stock and the effect of stockholder ratification
and approval on such issuance. See "Proposal 1 - The Beran Issuance - Terms of
the Series D Stock for a list of certain matters which require the affirmative
vote of the holders of the Series D Stock voting separately as a class. Holders
of Common Stock and Series D Stock are not entitled to cumulate their votes on
any matter to be considered at the Meeting. The presence at the Meeting, in
person or by proxy, of the holders of a majority of the total number of votes
entitled to be cast on the matter by the holders of any class of securities
entitled to vote at the Meeting will constitute a quorum for the transaction of
business by such holders. Abstentions and broker non-votes are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. With respect to the ratification and approval of the Beran
Issuance, abstentions will have the same effect as votes cast against such
ratification and approval, however, broker non-votes will have no effect on the
outcome of such ratification and approval. Abstentions and broker non-votes will
have no effect on the outcome of the election of directors.
-2-
<PAGE>
Elliott H. Vernon, the Company's Chairman of the Board and Chief
Executive Officer, and George Braff, the Company's Medical Director, have agreed
to vote their aggregate 1,830,500 shares of Common Stock (representing 13.61% of
the votes entitled to be cast at the Meeting) to approve the Beran Issuance.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock Ownership
The table below sets forth the beneficial ownership of the outstanding
shares of Common Stock as of the Record Date of (i) each person known by the
Company to beneficially own 5% or more of the outstanding shares of Common
Stock, (ii) each of the Company's directors, (iii) each of the Company's
executive officers named in the Summary Compensation Table, and (iv) all of the
Company's directors and executive officers as a group. An asterisk indicates
beneficial ownership of less than 1% of the outstanding shares of Common Stock.
AS OF OCTOBER 20, 1999
----------------------
Number Percent
of Shares (1) of Class
------------- --------
Beran Entities (2) 2,094,768 15.57%
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Elliott H. Vernon (3) 1,530,500 12.69%
c/o HealthCare Integrated Services, Inc.
Shrewsbury Executive Center II
1040 Broad Street
Shrewsbury, New Jersey 07702
George Braff, M.D. 1,000,000 8.81%
43 West 13th Street
New York, New York 10011
Elliot Loewenstern (4) 868,000 7.4%
6700 North Andrews Avenue
Suite 401
Fort Lauderdale, FL 33309
Ulises C. Sabato, M.D. (5) 732,365 6.42%
106 Grand Avenue
Englewood, NJ 07631
-3-
<PAGE>
Shawn A. Friedkin (6) 37,000 *
Manmohan A. Patel, M.D.(6)(7) 312,000 2.74%
Joseph J. Raymond (6)(8) 187,000 1.62%
Michael S. Weiss (6) 22,000 *
Robert D. Baca (9) 183,333 1.6%
All directors and 2,430,933 19.29%
executive officers
as a group (8 persons) (10)
- --------------
(1) In no case was voting and investment power shared with others, other
than as expressly set forth herein. The information set forth in this
table regarding a person's/entity's beneficial ownership has been
derived from information provided by such person/entity (including, in
some instances, from information set forth in a Schedule 13D filed with
the SEC).
(2) Such shares represent beneficial ownership of shares of Common Stock
issuable upon conversion of all outstanding shares of Series D Stock
held by the liquidating trusts of the Beran Entities. See "- Series D
Stock Ownership" for additional information regarding these shares as
well as a listing of each entity's individual holdings. Samuel J.
Beran, M.D. and his mother, Phyllis Beran, are the co-trustees of the
liquidating trusts and may be deemed to be the beneficial owners of the
shares owned by the trusts. The address of Dr. Beran is Department of
Plastic Surgery, 5323 Harry Hines Boulevard, Dallas, TX 75235-9132 and
the address of Mrs. Beran is 10 Grove Street, Cherry Hill, NJ 08002.
(3) Includes beneficial ownership of an aggregate of 700,000 shares of
Common Stock issuable upon the exercise of certain currently
exercisable stock options. Does not include an aggregate of 550,000
shares of Common Stock issuable upon the exercise of certain stock
options which are not exercisable within 60 days of the Record Date.
See "Information Relating to Executive Officers of the Company --
Executive Compensation -- Employment Contracts and Termination of
Employment and Change in Control Arrangements."
(4) Includes beneficial ownership of an aggregate of (i) 184,000 shares of
Common Stock owned by the Stephanie Loewenstern Irrevocable Trust, (ii)
184,000 shares of Common Stock owned by the Brett Loewenstern
Irrevocable Trust, (iii) 125,000 shares of Common Stock owned by the
Victoria Loewenstern Irrevocable Trust, (iv) 125,000 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options owned by the Stephanie Loewenstern Irrevocable Trust, (v)
125,000 shares of Common Stock issuable upon the exercise of certain
currently exercisable stock options held by the Brett Loewenstern
Irrevocable Trust, and (vi) 125,000 shares of Common Stock issuable
upon the exercise of certain currently exercisable stock options held
by the Victoria Loewenstern Irrevocable Trust. Mr. Loewenstern is the
trustee of each of the aforementioned trusts.
(5) Includes beneficial ownership of an aggregate 50,000 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options. See "Certain Relationships and Related Transactions."
(6) Such shares include shares of Common Stock issuable upon exercise of
certain currently exercisable stock options granted pursuant to the
Company's 1996 Stock Option Plan for Non-Employee Directors (the
"Directors Plan").
-4-
<PAGE>
(7) Does not include an aggregate of 300,000 shares of Common Stock
issuable upon the exercise of certain stock options which are not
exercisable within 60 days of the Record Date. See " Certain
Relationships and Related Transactions."
(8) Includes an aggregate of 150,000 shares of Common Stock issuable upon
the exercise of certain currently exercisable stock options. See
"Certain Relationships and Related Transactions."
(9) Includes an aggregate of 133,333 shares of Common Stock issuable upon
the exercise of certain currently exercisable stock options. Does not
include an aggregate of 366,667 shares of Common Stock issuable upon
the exercise of stock options which are not exercisable within 60 days
of the Record Date. See "Information Relating to Executive Officers of
the Company -- Executive Compensation -- Employment Contracts and
Termination of Employment and Change in Control Arrangements."
(10) Includes an aggregate of 1,244,433 shares of Common Stock issuable upon
the exercise of stock options exercisable within 60 days of the Record
Date. See footnotes (3), (6), (8) and (9) above. Does not include an
aggregate of 1,401,167 shares of Common Stock issuable upon the
exercise of stock options which are not exercisable within 60 days of
the Record Date. See footnotes (3), (7) and (9) above.
Series D Stock Ownership
The table below sets forth the beneficial ownership of the outstanding
shares of Series D Stock (and the beneficial ownership of Common Stock issuable
upon conversion of the Series D Stock) as of the Record Date. None of the
Company's directors or executive officers own any shares of Series D Stock. An
asterisk indicates beneficial ownership of less than 1% of the shares.
An aggregate of 887.385 shares of Series D Stock having an aggregate
liquidation preference of $9,317,542.50 (i.e., $10,500 per share liquidation
preference) were issued by the Company in connection with the consummation of
the Beran Acquisition in October 1998. The companies that received these shares
are in the process of being dissolved and liquidating their assets, and the
shares of Series D Stock currently are held by their respective liquidating
trusts. Ownership of the assets acquired by the Company in October 1998 in the
Beran Acquisition from these companies is fully vested in the Company and will
not be affected by the outcome of the stockholders' vote on the ratification and
approval of the Beran Issuance. There are currently an aggregate of 871.743
shares of Series D Stock outstanding having an aggregate liquidation preference
of $9,153,301.50 (i.e., $10,500 per share liquidation preference) as a result of
an adjustment in the purchase price of these assets. See "Proposal 1 - The Beran
Issuance."
The holders of the Series D Stock are entitled to convert the Series D
Stock into that number of shares of Common Stock equal to the quotient obtained
by dividing (i) the aggregate liquidation preference of the Series D Stock being
converted by (ii) $1.049 (subject to adjustment in certain circumstances) (i.e.,
approximately 8,723,921 shares of Common Stock in the event of the conversion of
all outstanding shares of Series D Stock); provided that until the Company
obtains stockholder approval of the Beran Issuance (as required by the rules of
the Nasdaq NMS), the holders of the Series D Stock only will be able to convert
such shares into Common Stock representing in the aggregate 19.9% of the
outstanding Common Stock as of the date of issuance of the Series D Stock (i.e.,
approximately 2,094,768 shares). The holders of the Series D Stock are 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 Company stockholders (other than the
ratification and approval of the
-5-
<PAGE>
Beran Issuance in accordance with certain pronouncements of the Nasdaq NMS);
provided that until the Company obtains stockholder approval of the Beran
Issuance (as required by the rules of the Nasdaq NMS), the aggregate voting
rights of the holders of the Series D Stock shall not exceed 19.9% of the
outstanding Common Stock as of the date of issuance of the Series D Stock (i.e.,
approximately 2,094,768 shares). In addition, certain matters also require the
affirmative vote of the holders of the Series D Stock voting separately as a
class in addition to the affirmative vote of the holders of the Common Stock and
Series D Stock voting together as a single class (see "Proposal 1 -- The Beran
Issuance -- Terms of the Series D Stock"). Due to timing constraints,
stockholder approval of the Beran Issuance was not solicited prior to the
consummation of the Beran Acquisition and such issuance of preferred stock in
October 1998.
Stockholder ratification and approval of the Beran Issuance is being
solicited at the Meeting in order to increase the conversion and voting rights
of the holders of the Series D Stock. If such stockholder ratification and
approval is not granted at the Meeting, the Series D Stock would remain duly
authorized and outstanding; however, the conversion and voting rights of the
holders thereof would not be increased.
Upon certain events (as described more fully in the Certificate of
Designations, Preferences and Rights of the Series D Stock), including the
Company's failure to redeem the Series D Stock prior to March 1, 1999, the
holders of the Series D Stock have the right to cause the Company to call a
special meeting of stockholders for the purpose of electing directors. Upon
stockholder ratification and approval of the Beran Issuance, assuming the
holders of the Series D Stock were to act collectively, such holders would be in
a position to influence the election of the Company's directors and other
matters requiring stockholder approval. Dr. Samuel J. Beran and his mother,
Phyllis Beran, are currently the co-trustees of each of the holders of the
Series D Stock and as such share voting and dispositive power with respect to
the shares owned by these holders. The information set forth in the following
table regarding a person's/entity's beneficial ownership has been derived from a
Schedule 13D filed by such person/entity with the Commission.
AS OF OCTOBER 20, 1999
----------------------
Number of Percent Number of Percent
Shares of of Shares of of
Series D Stock Class Common Stock(1) Class (1)
-------------- ----- --------------- ---------
Beran/Bloomfield IV 61.022 7% 146,633.76 1.09%
Shareholders Trust(2)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/Echelon I 453.306 52% 1,089,278.66 8.1%
Shareholders Trust(3)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/INB V 26.153 3% 62,844.76 *
-6-
<PAGE>
Shareholders Trust(4)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/Mainland II 95.891 11% 230,422.76 1.71%
Shareholders Trust(5)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Beran/Management III 235.371 27% 565,588.39 4.2%
Shareholders Trust
Associates, L.P.(6)
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
- --------------
(1) Does not take into account stockholder ratification and approval of the
Beran Issuance which will increase the number of shares of Common Stock
issuable upon conversion of the Series D Stock and the voting rights
thereof. Percent of Class calculated based upon 11,356,974 shares of
Common Stock outstanding as of the Record Date and 2,094,768 shares of
Common Stock issuable upon conversion of all outstanding shares of
Series D Stock (assuming no stockholder approval of the Beran
Issuance).
(2) Includes 18 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $175,000 promissory note issued by
Bloomfield Imaging Associates, P.A. to the Company and 1.145 shares of
Series D Stock held in escrow in respect of certain post-closing
adjustments in connection with the Beran Acquisition. The holder
currently has the right to vote such shares. Samuel J. Beran, M.D. and
Phyllis Beran, the co-trustees of the holder, may be deemed to be the
beneficial owners of the shares owned by the holder.
(3) Includes 133.7 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $1.3 million promissory note issued
by Echelon MRI, P.C. to the Company and 8.508 shares of Series D Stock
held in escrow in respect of certain post-closing adjustments in
connection with the Beran Acquisition. The holder currently has the
right to vote such shares. Samuel J. Beran, M.D. and Phyllis Beran, the
co-trustees of the holder, may be deemed to be the beneficial owners of
the shares owned by the holder.
(4) Includes 7.7 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $75,000 promissory note issued by
Irving N. Beran, M.D., P.A. to the Company and 0.491 shares of Series D
Stock held in escrow in respect of certain post-closing adjustments in
connection with the Beran Acquisition. The holder currently has the
right to vote such shares. Samuel J. Beran, M.D. and Phyllis Beran, the
co-trustees of the holder, may be deemed to be the beneficial owners of
the shares owned by the holder.
(5) Includes 28.3 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $275,000 promissory note issued by
Mainland Imaging Center, P.C. to the Company and 1.8 shares of Series D
Stock held in escrow in respect of certain post-closing adjustments in
connection with the Beran Acquisition. The holder currently has the
right to vote such shares. Samuel J. Beran, M.D. and Phyllis Beran, the
co-trustees of the holder, may be deemed to be the beneficial owners of
the shares owned by the holder.
(6) Includes 69.4 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $675,000 promissory note issued by
North Jersey Imaging Management Associates, L.P. to the Company and
4.418 shares of Series D Stock hold in escrow in respect of certain
post-closing adjustments in connection with the Beran Acquisition. The
holder currently has the right to vote such shares. Samuel J. Beran,
M.D. and Phyllis
-7-
<PAGE>
Beran, the co-trustees of the holder, may be deemed to be the
beneficial owners of the shares owned by the holder.
-8-
<PAGE>
PROPOSAL 1 - THE BERAN ISSUANCE
GENERAL
In order to expand the geographic breadth of its diagnostic imaging
operations, on March 6, 1998, the Company signed a non-binding letter of intent
(the "Beran LOI") with the Estate of Irving N. Beran and certain related
entities and persons which set forth the principal terms and conditions upon
which the Company would acquire, subject to the conditions contained therein,
substantially all of the assets of five multi-modality diagnostic imaging
centers located in Voorhees (two centers), Bloomfield, Northfield and
Williamstown, New Jersey, owned principally by such estate for an aggregate of
$22.0 million in cash (subject to adjustment). On September 16, 1998, an asset
purchase agreement (the "Beran Purchase Agreement") relating to the Beran
Acquisition was executed by the Company, the owners of such facilities (i.e.,
Echelon MRI, P.C., Mainland Imaging Center, P.C., North Jersey Imaging
Management Associates, L.P., Bloomfield Imaging Associates, P.A., Irving N.
Beran, M.D., P.A. (collectively, the "Beran Entities")), and certain affiliates
of the Beran Entities (i.e., the estate of Irving N. Beran, Deceased, Mrs.
Phyllis Beran and Samuel J. Beran, M.D. (collectively, the "Beran
Stockholders")).
The Beran Acquisition was consummated by HIS Imaging on October 2,
1998, effective as of October 1, 1998. The consideration given by the Company
for the Beran Entities' assets was (i) cash in the amount of $11.5 million and
(ii) the issuance of 887.385 shares of Series D Stock having an aggregate
liquidation preference of $9,317,542.50 (i.e., $10,500 per share liquidation
preference). The purchase price was subject to an adjustment based on the value
of the Beran Entities' accounts receivable as of the closing date and, in
accordance therewith, 15.642 shares of Series D Stock having an aggregate
liquidation preference of $164,241 were transferred back to the Company and
cancelled. 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). Pursuant to the Beran LOI, the purchase price was to be paid solely
in cash, however, due to timing constraints, the parties agreed to the payment
of a portion of the purchase price in Series D Stock. It is the intention of the
Beran Entities and the Company to redeem the Series D Stock as soon as
practicable. 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 earliest
to occur of (a) the redemption by the Company of all outstanding shares of
Series D Stock, (b) December 31, 1999, or (c) the conversion into Common Stock
of a majority of the shares of Series D Stock issued pursuant to the Beran
Acquisition. The Company used the proceeds of a $14.0 million bridge loan (the
"DFS 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 Company recently consolidated the separate billing operations of
the acquired facilities, which was located at 108 Somerdale Road in Voorhees,
N.J., with its own larger and more sophisticated billing center located at the
Company's facility in Ocean Township, N.J. This consolidation of the billing
operations will enable the Company to combine (by the first quarter of fiscal
2000) the two facilities located in Voorhees, N.J. into the 108 Somerdale Road
location in Voorhees, N.J. and to close the other Voorhees Facility located at
600 Somerdale Road in Voorhees,
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<PAGE>
N.J. The Company had anticipated that this consolidation, as well as the
Company's closure in July 1999 of the Monroe Facility located in Williamstown,
N.J., would occur as soon as practicable after the consummation of the Beran
Acquisition.
TERMS OF THE SERIES D STOCK
The following is a summary of certain of the terms of the 887.385
shares of Series D Stock issued to the Beran Entities in connection with the
Beran Acquisition (which number was reduced to 871.743 shares following an
adjustment in the purchase price).
Securities: o Series D Cumulative Accelerating Redeemable
Preferred Stock
Aggregate Amount: o $9,317,542.50 aggregate liquidation preference
(i.e., $10,500 per share) ($9,153,301.50 following
the adjustment in the purchase price)
Dividends: o Cumulative dividends on the Series D Stock accrue
at a rate of 8% of the liquidation preference from
the date of issuance. Such initial dividend rate
will increase by an additional 2% upon each three
month anniversary of the date of the issuance;
provided, however, that in no event will the
dividend rate be in excess of 15% of the
liquidation preference. The dividend rate is
currently 15% of the liquidation preference. All
accrued and unpaid dividends are payable quarterly
in cash commencing January 10, 1999. The Company
has paid all such accrued dividends to date.
o The Series D Stock will participate ratably on an
as-converted basis with the Common Stock in any
dividends paid by Company on the Common Stock.
Rank: o The Series D Stock will rank senior in right of
payment to all other classes of equity, including
other classes of preferred stock.
Voting Rights: o The holders of the Series D Stock are entitled to
vote, on an as- converted basis, with the holders
of the Common Stock and any other voting securities
of the Company as one class on all matters
submitted to a vote of Company stockholders (other
than the ratification and approval of the Beran
Issuance in accordance with certain pronouncements
of the Nasdaq NMS); provided that until the Company
obtains stockholder approval of the issuance of the
Series D Stock, the holders of the Series D Stock
will not be able to exercise their aggregate voting
rights in excess of 19.9% of outstanding Common
Stock as of the initial date of issuance of the
Series D Stock.
-10-
<PAGE>
o As long as the Series D Stock is outstanding, the
affirmative vote of the holders of the Series D
Stock, voting as a class, will be required with
respect to, among other things and in some cases
subject to certain prescribed exceptions and other
qualifications, (i) the incurrence of additional
indebtedness; (ii) any material change in the
nature of the Company's business; (iii) any
material acquisitions or dispositions by the
Company; (iv) any amendment to the Company's
charter; (v) any material amendment to the
Company's By-laws; (vi) any dissolution or
liquidation of the Company; (vii) any refinancing
or prepayment of any material indebtedness; (viii)
changing the size of the Board or requirements for
service as a director; (ix) any merger or
consolidation of the Company or other
reorganization; (x) any issuances or redemptions of
the Company's securities or declaration of
dividends thereon; (xi) any material capital
expenditures and (xii) any material transactions
with affiliates.
o In the event of the occurrence of an Event of
Default (as defined below) or the Series D Stock is
not redeemed by March 1, 1999, any holder of Series
D Stock will have the right to cause the Company to
convene a special meeting of the Company
stockholders as soon as practicable after such
occurrence for the purpose of electing directors.
o An "Event of Default" is defined to have occurred
if, subject to certain prescribed exceptions and
other qualifications: (i) the Company has breached
any material term of the Certificate of
Designations, Preferences and Rights of the Series
D Stock, the Beran Purchase Agreement or any other
agreement executed in connection therewith; (ii)
the Company fails to pay any dividend on the Series
D Stock; (iii) the Company defaults in making any
redemption payment in respect of the Series D
Stock; (iv) any judgments, orders or decrees for
the payment of money in excess of $375,000, either
individually or in an aggregate amount, shall be
entered against the Company or any of its
subsidiaries or any of their respective properties
and shall not be discharged; (v) the Company has
breached any representation, warranty, covenant,
obligation or agreement set forth in any material
agreement which results in a current payment
liability of the Company in excess of $375,000;
(vi) the Company or any of its subsidiaries: (A)
commences a voluntary case or proceeding with
respect to itself under any bankruptcy law, (B)
consents to the entry of an order for relief
against it in an involuntary case or proceeding
under any bankruptcy law, (C) consents to the
appointment of a receiver, trustee, assignee,
liquidator, sequestrator or similar official of it
or for all or any material part of its property
under any bankruptcy law, (D) makes a general
assignment for the benefit of its creditors under
any bankruptcy law, (E) consents to or acquiesces
in
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<PAGE>
the institution of bankruptcy or insolvency
proceedings against it, (F) shall generally not pay
its debts when such debts become due or shall admit
in writing its inability to pay its debts
generally, or (G) takes any corporate action in
furtherance of or to facilitate, conditionally or
otherwise, any of the foregoing; or (vii) a court
enters a decree, judgment or order under any
bankruptcy law that: (1) is for relief against the
Company or any subsidiary in an involuntary case or
proceeding, (2) appoints a custodian of the Company
or any subsidiary for all or substantially all of
its properties, or (3) orders the winding up or
liquidation of the Company or any subsidiary.
Redemption: o The Company may redeem the Series D Stock, in whole
but not in part, at any time at its aggregate
liquidation preference plus all unpaid and accrued
dividends to the date of redemption.
o Upon the occurrence of any Event of Default, any
holder of the Series D Stock shall have the right
to demand immediate redemption of all or any
portion of the Series D Stock owned by such holder
at a price per share equal to 100% of the
liquidation preference plus an amount equal to all
unpaid and accrued dividends on the shares of
Series D Stock to be so redeemed to the date fixed
for such redemption.
Conversion o The holders of the Series D Stock are entitled to
convert the Series D Stock into that number of
shares of Common Stock equal to the quotient
obtained by dividing (i) the aggregate liquidation
preference of the Series D Stock being converted by
(ii) $1.049 (subject to adjustment in certain
circumstances) (i.e., approximately 8,723,921
shares of Common Stock in the event of the
conversion of all outstanding shares of Series D
Stock); provided that until the Company obtains
stockholder approval of the Beran Issuance (as
required by the rules of the Nasdaq NMS), the
holders of the Series D Stock only will be able to
convert such shares into Common Stock representing
in the aggregate 19.9% of the outstanding Common
Stock as of the date of issuance of the Series D
Stock (i.e., approximately 2,094,768 shares).
Registration Rights: o The holders of the Series D Stock have unlimited
piggyback registration rights and have the right,
on two occasions, to demand that the Company file a
registration statement covering the offer and sale
of the shares of Common Stock issuable upon
conversion of the Series D Stock.
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<PAGE>
REASON FOR ISSUANCE OF SERIES D STOCK; RECOMMENDATION OF THE BOARD
The primary reason that the Board approved the Beran Acquisition (and
determined that the acquisition was fair to, and in the best interests of, the
Company and its stockholders) and is recommending approval of the Beran Issuance
is that the acquisition expands the geographic breadth of the Company's
diagnostic imaging operations and provides the Company with the critical mass
necessary to implement its business plan in the area of diagnostic imaging and
expand its strategic direction into the area of physician practice management in
the New Jersey, New York and Philadelphia regions. The Beran Facilities had
gross revenues of approximately $12.0 million, $11.2 million and $7.7 million,
and net income of approximately $2.9 million, $2.2 million and $911,000 for the
fiscal years ended December 31, 1997 and December 31, 1998 and the nine months
ended September 30, 1998, respectively. The acquisition of these strategically
located diagnostic imaging centers has significantly increased the Company's
revenues and pre-tax profits. Over $3.0 million in revenues for fiscal 1998 were
associated with the operation of the Beran Facilities. In conjunction with the
Beran Acquisition, the Company also acquired approximately $6.0 million in
accounts receivable.
Prior to its approval of the Beran Acquisition on September 30, 1998,
the Board reviewed the proposed terms and conditions of the acquisition
(including the terms of the Series D Stock) and considered, among other things,
(i) information concerning the business, prospects, financial performance and
operations of the Beran Entities, (ii) an analysis of the value that the
acquisition might contribute to the Company, including pro forma historical and
projected revenue information, (iii) the current financial market conditions,
(iv) the consideration to be issued to the Beran Entities and the relationship
between the value of such consideration and the Beran Entities' projected
revenues. A variety of potentially negative factors were also considered by the
Board, including those risks described below under " -- Certain Factors."
These represent all of the material factors considered by the Board in
reviewing the Beran Acquisition, and the Board concluded that the anticipated
benefits of the acquisition outweighed the risks associated therewith.
Due to timing constraints, stockholder approval of the issuance of the
Series D Stock was not solicited prior to the consummation of the Beran
Acquisition and the issuance of such stock in October 1998. The Company's
ownership of the assets purchased pursuant to the Beran Acquisition is fully
vested and will not be affected by the outcome of the stockholders' vote on the
ratification and approval of the Beran Issuance.
RECOMMENDATION OF THE BOARD
The Board has unanimously approved, and voted to recommend that the
stockholders ratify and approve, the Beran Issuance. Prior to such approval, the
Board had determined that the Beran Acquisition (including the Beran Issuance)
was fair to, and in the best interests of, the Company and its stockholders. IF
SUCH RATIFICATION AND APPROVAL IS NOT GRANTED AT THE MEETING, THE SERIES D STOCK
WOULD REMAIN DULY AUTHORIZED AND OUTSTANDING; HOWEVER, THE CONVERSION AND VOTING
RIGHTS OF THE HOLDERS THEREOF WOULD BE RESTRICTED AS NOTED ABOVE. Pursuant to
the Beran Purchase
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<PAGE>
Agreement, the Company agreed to recommend for approval at the Meeting a
proposal to approve the Beran Issuance. Elliott H. Vernon, the Company's
Chairman of the Board and Chief Executive Officer, and George Braff, the
Company's Medical Director, have agreed to vote their aggregate 1,830,500 shares
of Common Stock (representing 13.61% of the votes entitled to be cast at the
Meeting) to approve the Beran Issuance. See "Voting Securities."
INTERESTS OF CERTAIN PERSONS IN RATIFICATION AND APPROVAL OF BERAN ISSUANCE
As previously noted, if the Beran Issuance is ratified and approved by
the stockholders at the Meeting, the Series D Stock would be convertible into an
aggregate of 8,723,921 shares of Common Stock, representing approximately 43.44%
of the outstanding shares of Common Stock as of the Record Date. Assuming the
holders of the Series D Stock were to act collectively, such holders would
likely be able to determine the affairs and policies of the Company. Dr. Samuel
J. Beran and his mother, Mrs. Phyllis Beran, are currently the co-trustees of
each of the holders of the Series D Stock and as such share voting and
dispositive power with respect to the shares owned by these holders. See " --
Certain Factors -- Control of the Company." If the Beran Issuance is not
ratified and approved, the conversion of the Series D Stock into Common Stock
would still dilute the percentage ownership of the existing stockholders;
however, the number of shares of Common Stock issuable upon conversion of the
Series D Stock will be reduced. Stockholder ratification and approval of the
Beran Issuance also would increase the voting rights of the holders of the
Series D Stock from an aggregate of 2,094,768.33 votes (representing 15.57% of
the votes entitled to be cast at the Meeting) to an aggregate of 8,723,921 votes
(representing 43.44% of the votes entitled to be cast at the Meeting). If the
Beran Issuance is not ratified and approved, the holders of the Series D Stock
still would be entitled to voting rights as hereinbefore described.
CERTAIN FACTORS
In addition to the other information in this Proxy Statement, the
following factors should be considered carefully before voting on the Beran
Issuance.
Need for Financing. The Company needs substantial capital resources to
implement its strategy, and its capital requirements over the next several years
may exceed the cash to be provided by the Company's operating activities and the
availability under its current revolving line of credit. To finance its capital
requirements, the Company will need to issue equity securities and/or incur
additional debt. There can be no assurance that the Company will be able to
obtain additional required capital on satisfactory terms or at all. The
inability to obtain such financing would limit the Company's growth.
History of Operating Losses. The Company had a net loss of $861,796 for
fiscal 1996 and a net loss of $804,305 for fiscal 1997. However, the Company
recognized net income of $1,978,703 for fiscal 1998 (and recognized net income
for the first and second quarters of fiscal 1999) and anticipates reporting net
income for fiscal 1999. Nonetheless, there can be no assurance that historical
losses will not be recognized in the future.
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<PAGE>
Inability to Effect Growth Strategy and Manage Growth. There can be no
assurance that the Company will be successful in managing its growth
effectively. As the Company grows, it will need to employ additional management
and administrative personnel, and expand its information systems to support its
growth. Management of such growth will place significant demands on the
Company's management and technical, financial and other resources, and require
the Company to maintain a high level of operational quality and efficiency. The
Company has not been successful in managing its growth in the past. In the past,
the Company has had to close several operations due to, among other things,
competitive pressures and ineffective partnerships, including its mobile MRI
operations, its lithotripsy operations, and its fixed-site MRI facilities in
Catonsville, Maryland and adjacent to the Meadowlands Hospital Medical Center,
and has suffered continuing losses at certain of its other fixed-site MRI
facilities. The Company's failure to manage its growth effectively could have a
material adverse effect on the Company.
Reliance on Key Personnel. The Company is dependent upon the ability
and experience of its executive officers and key management and technical
personnel for the management of the Company (especially for the successful
management of its anticipated growth) and the implementation of its business
strategy. The loss of the services of one or more of its key personnel, in
particular Elliott H. Vernon (the Company's Chairman of the Board and Chief
Executive Officer), or the inability to attract and retain additional key
personnel in the future, could have a material adverse effect on the Company,
including its plans for future development. Competition for such personnel is
intense, and the Company will compete for qualified personnel with numerous
other employers, some of whom have greater financial and other resources than
the Company. There can be no assurance that the Company will be successful in
attracting or retaining such personnel.
Reimbursement of Health Care Costs. In most cases, the ability of a
patient to pay for the services which the Company provides depends upon
governmental and private insurer reimbursement policies. Consequently, those
policies have a direct effect on the ability of patients to utilize the
Company's services and the level of payment patients are able to make for such
services. As a result, any significant adverse change in such reimbursement
policies are likely to adversely affect the Company's business. Third party
payors are increasingly negotiating the prices charged for medical services,
pharmaceuticals and other supplies, with the goal of lowering reimbursement and
controlling utilization rates. Third party payors can also deny reimbursement
for medical services, pharmaceuticals and other supplies if they determine that
the treatment was not performed in accordance with treatment protocols
established by such payors or for other reasons. Recent federal and state legal
and regulatory action and proposed action has affected referral patterns in
respect of the Company's MRI operations, and the trend in the industry towards
more patients receiving health care coverage through managed care and health
maintenance organizations has resulted in lower reimbursement rates for the
medical procedures performed.
Health Care Regulation. The health care industry is highly regulated at
the federal and state levels. The Company believes that its business is (and
will continue to be) in material compliance with applicable laws, rules and
regulations. There can be no assurance, however, that a review of the Company's
business by courts or by health care, tax, labor or other regulatory authorities
would not result in determinations that could adversely affect the Company's
operations or that the health
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<PAGE>
care regulatory environment will not change so as to restrict the Company's
operations or its potential for expansion.
Numerous legislative proposals have been introduced or proposed in the
U.S. Congress and in certain state legislatures that would effect major changes
in the U.S. health care system nationally or at the state level. It is not clear
at this time what proposals, if any, will be adopted or, if adopted, what
effect, if any, such proposals would have on the Company's business. Certain
proposals, such as reducing Medicare and Medicaid expenditures, implementing
price controls and permitting greater flexibility of states' administration of
Medicaid, could adversely affect the Company's growth and anticipated
performance. There can be no assurance that currently proposed or future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
Company.
Competition. The health care industry in general, and the market for
diagnostic imaging services in particular, are highly competitive. Certain
competitors operate fixed-site MRI centers and mobile MRI units in the Company's
current service area. Certain of these competitors have financial resources
substantially greater than those of the Company which may give them advantages
in negotiating equipment acquisitions and responding quickly to new demand or
new technology. Hospitals, private clinics and radiology practices in the
Company's service area which have in-house MRI units also compete with the
Company. MRI also competes with less expensive imaging diagnostic devices and
procedures which may provide similar information to the physician.
Control of the Company. Upon stockholder ratification and approval of
the Beran Issuance, Dr. Samuel J. Beran, and his mother, Phyllis Beran, who are
the co-trustees of each of the holders of the Series D Stock and as such share
voting and dispositive power with respect to the shares owned by these holders,
will control approximately 43.44% of the aggregate voting power of the
outstanding voting securities of the Company as of the Record Date.
Consequently, Dr. Beran and Mrs. Beran will control the largest block of the
Company's outstanding voting securities and, therefore, will be in a position to
influence the election of the Company's directors and other matters requiring
stockholder approval. It is the intention of the Beran Entities and the Company
to redeem the Series D Stock as soon as practicable.
VOTE REQUIRED
Ratification and approval of the Beran Issuance requires the
affirmative vote of the holders of a majority of the total number of shares of
Common Stock represented and entitled to be cast at the Meeting on the matter.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE RATIFICATION AND APPROVAL OF THE BERAN ISSUANCE.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated condensed statement of
operations for the year ended December 31, 1998 (the "Pro Forma Statement") is
based on (i) the historical consolidated financial statements of the Company
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998 and (ii) the historical financial statements of Irving N. Beran, M.D.,
P.A. and Affiliates for the nine months ended September 30, 1998 accompanying
this Proxy Statement. The Pro Forma Statement and the Notes thereto should be
read in conjunction with such historical financial statements (and the notes
thereto) and such other historical financial statements of the Company (and the
notes thereto) incorporated by reference in this Proxy Statement.
The Pro Forma Statement gives effect to the Beran Acquisition as if it
occurred on January 1, 1998. The Beran Acquisition was accounted for as a
purchase for accounting and financial reporting purposes with the net assets
acquired upon the Beran Acquisition recorded at fair value. Assumptions
necessary to reflect the Beran Acquisition and to restate historical amounts are
presented in the "Pro Forma Adjustments" column, which assumptions are further
described below and in the accompanying Notes to the Pro Forma Statement.
In the opinion of the Company's management, all adjustments necessary
to present fairly the Pro Forma Statement have been made. The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The Pro Forma Statement does not purport to
represent what the Company's financial position and results of operations would
actually have been had the Beran Acquisition in fact occurred on such date or to
project the Company's financial position or results of operations for any future
period.
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<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Irving N. Consolidated Pro
Beran, M.D., Forma Income
Company P.A. and Pro Forma Statement December
Historical Affiliates Adjustments 31, 1998
---------------------------------------------- ------------------
<S> <C> <C> <C> <C>
Revenues $16,451,057 $ 7,683,613 $ - $24,134,670
Operating expenses:
Salaries 4,547,363 2,417,056 (195,488) (A) 6,768,931
Other operating expenses 4,587,734 2,149,215 (23,868) (B) 6,713,081
Provision for doubtful accounts 148,269 - - 148,269
Consulting and marketing fees 620,361 - - 620,361
Professional fees 534,060 96,226 (58,726) (C) 571,560
Depreciation and amortization 2,029,723 781,891 252,065 (D) 3,063,679
Interest expense 1,427,267 73,062 1,305,984 (E) 2,806,313
Gain on disposal (317,937) - - (317,937)
Non-cash compensation charge 135,617 - - 135,617
---------------------------------------------- ------------------
Total operating expenses 13,712,457 5,517,450 1,279,967 20,509,874
Income (loss) before minority
interest, income taxes and preferred
dividend requirement 2,738,600 2,166,163 (1,279,967) 3,624,796
Minority interest in joint ventures (479,170) (229,066) 229,066 (F) (479,170)
---------------------------------------------- ------------------
Income (loss) before income taxes
and preferred dividend requirement 2,259,430 1,937,097 (1,050,901) 3,145,626
Provision for income taxes 97,661 1,025,717 (757,444) (G) 365,934
---------------------------------------------- ------------------
Income (loss) before preferred
dividend requirement 2,161,769 911,380 (293,457) 2,779,692
Preferred dividend requirement 183,066 - 823,798 (H) 1,006,864
---------------------------------------------- ------------------
Income (loss) available to common
shareholders $1,978,703 $911,380 $(1,117,255) $1,772,828
============================================== ==================
Net income per common
share - basic $0.19 (I) $0.16
============ ==================
</TABLE>
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<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Irving N. Consolidated Pro
Beran, M.D., Forma Income
Company P.A. and Pro Forma Statement December
Historical Affiliates Adjustments 31, 1998
---------------------------------------------- ------------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic 10,511,893 11,072,852
============ ==================
Net income per common
share - diluted $ 0.10 (I) $ 0.13
============ ==================
Weighted average common shares
outstanding - diluted 21,461,901 22,022,860
============ ==================
</TABLE>
-19-
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 31, 1998
(A) The following table provides a breakdown of the pro forma
adjustments to salary expense for the twelve months ended December
31, 1998:
Adjustment to eliminate salaries paid to Beran family members
who did not become employees of the Company after the
transaction. The services provided by these family members
will be performed by current employees of the Company and,
accordingly, the Company will not need to retain additional
employees to perform such services. (306,500)
Adjustment to record transaction bonus in connection with the
acquisition. 100,000
Adjustment to record the effect of the Beran Acquisition on
the Company's bonus plan as if the Beran Acquisition occurred
at the beginning of the year. 11,012
-----------
Total pro forma adjustments to salary expense. (195,488)
===========
(B) Adjustment to record the payroll tax effect of the
elimination of salaries paid to Beran family members who did
not become employees of the Company after the transaction. (23,868)
===========
(C) Adjustment to eliminate professional fees incurred by the
Beran Entities that were directly in connection with the sale
of their business to the Company and will not recur after
consummation of the transaction. (58,726)
===========
(D) The following table provides a breakdown of the pro forma
adjustments to depreciation and amortization for the twelve
months ended December 31, 1998:
Adjustment to eliminate historical depreciation expense. (781,891)
Adjustment to record depreciation using the straight-line
method based on the fair market value of the property, plant
and equipment acquired in the transaction over the expected
period of benefit, which in this case is three to six years. 605,880
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<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 31, 1998
Adjustment to record amortization of goodwill incurred in the transaction
over the expected period of benefit of 20 years.
Amounts assigned to goodwill 11,415,400
Period of benefit (in months) 240
----------
Monthly amortization 47,564
Months outstanding 9
----------
Pro forma adjustment for amortization of goodwill 428,076
-----------
Total pro forma adjustments to depreciation and amortization 252,065
===========
(E) The following table provides a breakdown of the pro forma
adjustments to interest expense for the twelve months ended
December 31, 1998:
Adjustment to eliminate historical expense as the debt was
not assumed in the transaction. (73,062)
Adjustment to record interest expense for the twelve months
ended December 31, 1998 relating to the $14,000,000 bridge
loan used to consummate the acquisition. The loan bears
interest at the rate of 12% per annum. 1,260,000
Adjustment to record interest income relating to the
aggregate $2,500,000 secured promissory notes of the Beran
Entities in favor of the Company. The loan bears interest at
the rate of 8% per annum and requires quarterly interest
payments in arrears to commence October 1, 1999. The
principal amount will become due and payable upon the earlier
of (i) the redemption of the Series D Stock, (ii) December
31, 1999 or (iii) the conversion of a majority of the shares
of Series D Stock into Common Stock. The loan is secured by
shares of Series D Stock. (149,589)
Adjustment to record amortization of the $150,000 commitment
fee incurred in connection with the financing of the
$14,000,000 bridge loan. The commitment fee was paid to DVI
Financial Services Inc. and has been treated as a component
of the financing and was amortized to interest expense over
the initial seven month term of the bridge loan. 85,714
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<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 31, 1998
Adjustment to record amortization of the financing costs
relating to warrants issued to DVI Financial Services Inc. in
connection with the financing of the $14,000,000 bridge loan.
These warrants, which were valued at $320,111, entitle the
holder to purchase up to 450,000 shares of Common Stock at
exercise prices of $0.90625 per share (with respect to 50,000
shares) and $1.03125 per share (with respect to 400,000
shares) over a five year term. The fair value of the warrants
issued was determined in accordance with the Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" utilizing the Black-Scholes model,
which assumptions included a dividend yield of 0%, expected
volatility of 87%, expected life of five years and a
risk-free interest rate of 3.77%. The financing costs have
been treated as a component of the financing and were
amortized to interest expense over the initial seven month
term of the bridge loan. 182,921
-----------
Total pro forma adjustments to interest expense 1,305,984
===========
(F) Adjustment to eliminate minority interest expense resulting
from the acquisition of 100% of the business and assets of
the Beran Entities. 229,066
===========
(G) Adjustment to reflect the tax effect of the Beran Acquisition
as if it was consummated as of January 1, 1998. Any income
recognized by the Beran Entities during the year would have
been offset by the Company's net loss carryforwards for
Federal tax purposes. The balance after the pro forma
adjustment represents the provision for state income taxes. (757,444)
===========
(H) Adjustment to record the dividend requirement on the Series D
Stock for the twelve month period ended December 31, 1998.
The dividend is calculated at 8% for the first three months
and increases by 2% on each three month anniversary, but in
no event will exceed 15%.
Preferred stock consideration 9,153,302
Second three month period (10%) 228,833
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<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 31, 1998
Third three month period (12%) 274,599
Fourth three month period (14%) 320,366
---------
Total preferred dividend requirement 823,798
===========
(I) The following sets forth the basic and diluted net income per common share
for the twelve month period ended December 31, 1998 both before and after
taking into account the Beran acquisition. Basic net income per common share
is computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the twelve month
period ended December 31, 1998. Diluted net income per common share are
computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the twelve month
period ended December 31, 1998, 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 $1.0625 closing sales per share
price of the Common Stock on January 29, 1999 was used to determine the
number of shares of Common Stock issuable upon conversion of the Series D
Stock.)
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
Before Beran Acquisition After Beran Acquisition
----------------------------------- -----------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE: $1,978,703 10,511,893 $1,772,828 10,511,893
========== ========== ========== ==========
EFFECT OF ACQUISITION-
Issuance - financial advisor - - - 560,959
----------
BASIC NET INCOME PER SHARE $1,978,703 10,511,893 $0.19 $1,772,828 11,072,852 $0.16
========== ========== ===== ========== ========== =====
EFFECT OF DILUTIVE SECURITIES-
ADD:
Preferred Dividends 183,066 1,006,864
EFFECT OF ACQUISITION-
Stock Options - 638,163 - 638,163
Series C Stock - 280,835 - 280,835
Series D Stock - 10,031,010 - 10,031,010
------------------------- -------------------------
DILUTED NET INCOME PER SHARE $2,161,769 21,461,901 $0.10 $2,779,692 22,022,860 $0.13
=================================== ===================================
</TABLE>
-23-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company presently consists of 50.0
million shares of Common Stock and 1.0 million shares of preferred stock, par
value $0.10 per share (the "Preferred Stock").
COMMON STOCK
Each outstanding share of Common Stock entitles the holder to one vote,
either in person or by proxy, on all matters presented to the Company's
stockholders for a vote. Holders of Common Stock are entitled to receive ratably
such distributions as may be declared on the Common Stock by the Board in its
discretion from funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets of the Company legally available for
distribution to such holders after the payment of all debts and other
liabilities and after distribution to preferred stockholders legally entitled
thereto. Holders of Common Stock have no subscription, redemption, conversion or
preemptive rights. Matters submitted for stockholder approval generally require
a majority vote of the shares present and voting thereon. The outstanding shares
of Common Stock are, and the Common Stock to be outstanding after the
acquisitions described herein will be, fully paid and nonassessable.
PREFERRED STOCK
The Charter authorizes the Board (without further action by
stockholders unless such action is required by applicable law or regulation or
the rules of any exchange on which the Company's securities may be included) to
issue from time to time, in one or more series, shares of Preferred Stock with
such designations and preferences, relative voting rights, redemption,
conversion, participation and other rights and qualifications, limitations and
restrictions as permitted by law. The Board, by its approval of certain series
of Preferred Stock, could adversely affect the voting power of the holders of
Common Stock, and, by issuing shares of Preferred Stock with certain voting,
conversion, redemption rights or other terms, could delay, discourage or make
more difficult changes of control or management of the Company. Currently, there
are no outstanding shares of Preferred Stock other than the Series D Stock. See
"Proposal 1 - The Beran Issuance."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General
Corporation Law (the "DGCL"). In general, Section 203 prohibits certain
publicly-held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
of the transaction in which the person or entity became an interested
stockholder, unless the business combination is approved in a prescribed manner
or certain other exemptions apply. For purposes of Section 203, "business
combination" is defined broadly to include mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is any person or entity who, together
with affiliates and
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<PAGE>
associates, owns (or within the three immediately preceding years did own) 15%
or more of the corporation's voting stock.
DIRECTORS' LIABILITY
As authorized by the DGCL, the Charter provides that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (to the
extent required by applicable law, including the DGCL) for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of the provision in the Charter is to eliminate the rights of the Company
and its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described in
clauses (i) through (iv) above. This provision does not limit nor eliminate the
rights of the Company or any stockholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, the Charter provides that if the DGCL is amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of the directors shall be eliminated or limited to the fullest extent
permitted by the DGCL as so amended. These provisions will not alter the
liability of directors under federal securities laws.
-25-
<PAGE>
PROPOSAL 2 - ELECTION OF DIRECTORS
The By-laws of the Company provide that the number of directors shall
be fixed from time to time by the Board. The Board has fixed the number of
directors at five, and five directors will be elected at the Meeting, each
director to hold office until the next annual meeting of stockholders and until
his successor is elected and is qualified. The Company intends to hold the next
annual meeting of stockholders in 2000. All of the five nominees are presently
directors of the Company.
Unless otherwise directed, all proxies (unless revoked or suspended)
will be voted for the Director Nominees. If any Director Nominee shall be
unavailable for election or upon election should be unable to serve, the proxies
will be voted for the election of such other person as shall be determined by
the persons named in the proxy in accordance with their judgment. The Company is
not aware of any reason why any Director Nominee should become unavailable for
election, or, if elected, should be unable to serve as a director.
The names of the Director Nominees, and certain information about them,
are set forth below.
HAS BEEN A DIRECTOR
NAME AGE OF THE COMPANY FROM
---- --- -------------------
Shawn A. Friedkin 34 May 1996 - Present
Manmohan A. Patel 50 December 1998 - Present
Joseph J. Raymond 64 December 1995 - Present
Michael S. Weiss 33 July 1998 - Present
Elliott H. Vernon 56 July 1991 - Present
Shawn A. Friedkin has been the President of Paramount Funding
Corporation, a Florida based factoring company which he founded, since its
formation in July 1992. Since its formation in 1997, Mr. Friedkin has also been
the President of SB Capital Group, a Florida-based venture investment company he
founded which has investments in the private education sector and medical
devices. From January 1990 through June 1992, Mr. Friedkin was the Vice
President of Friedkin Industries, a Florida company engaged in the aluminum
extrusion and eyeglass manufacturing businesses. Mr. Friedkin is the founder of
Stand Among Friends, a non-profit public charity focused on promoting the
research, education and advocacy of neurological disorders and also is the
Secretary of the National Council on Spinal Cord Injury. Mr. Friedkin is a
graduate of Syracuse University School of Management.
Manmohan A. Patel, M.D. has been the Chairman of Jersey Integrated
HealthPractice, Inc. a privately-held management services organization ("JIHP")
which provides management services to Pavonia Medical Associates, P.A. ("PMA"),
since August 1995. Dr. Patel was one of the founders
-26-
<PAGE>
of PMA, which is one of the largest independent multi-specialty medical group in
New Jersey, and currently is its President. Dr. Patel is a practicing internist
specializing in pulmonary diseases and critical care and has received board
certifications in the following five specialties: internal medicine, pulmonary
diseases, critical care, emergency medicine and geriatric medicine. Dr. Patel
received his M.D. from Mahatma Gandhi Medical College in India in 1973. He was
an intern at the M.M. Medical College in India, at West Middlesex Hospital in
Britain, at Loyola University, at the Stitch Medical School in Chicago, Illinois
and at the Catholic Medical Center of Brooklyn and Queens in New York and had
fellowships with Bellevue Hospital and New York University Medical Center. Since
1994, Dr. Patel has been a member of the Board of Trustees of the Meadowlands
Hospital Medical Center in Secaucus, New Jersey, and since 1995, Dr. Patel has
been a member of the Board of Trustees of Liberty HealthCare System, Inc. which
is a New Jersey-based teaching hospital system that is affiliated with Mt. Sinai
Health System in New York.
Joseph J. Raymond has been the Chairman, Chief Executive Officer and
President of Stratus Services Group, Inc., a staffing company, since September
1997. From July 1992 through August 1996, Mr. Raymond was the Chairman of the
Board, Chief Executive Officer and President of Transworld Home HealthCare, Inc.
("THH"), a publicly-held regional supplier of a broad range of alternate site
healthcare services and products including respiratory therapy, drug infusion
therapy, nursing and para-professional services, home medical equipment,
radiation and oncology therapy and a nationwide specialized mail order pharmacy.
Prior thereto, he was the Chairman of the Board and President of Transworld
Nursing, Inc. ("TNI"), a wholly-owned subsidiary (and predecessor) of THH, from
its inception in 1987. Mr. Raymond received an M.S. degree in management from
the New Jersey Institute of Technology ("NJIT") in 1968 and received a B.S.
degree in electrical engineering from NJIT in 1961.
Michael S. Weiss, Esq. has been the Chairman and Chief Executive
Officer of CancerEducation.com, Inc., an Internet-based health information
company, since April 1999. Prior thereto, from November 1993 until April 1999,
he was a Senior Managing Director of Paramount Capital, Inc. (a private
investment banking firm) ("Paramount") and held various other positions with
Paramount and certain of its affiliates. Mr. Weiss is also the Vice Chairman of
Genta Incorporated and Chairman of Procept, Inc. ("Procept"), both of which are
publicly-traded biotechnology companies. In addition, Mr. Weiss is also a member
of the Board of Directors of AVAX Technologies, Inc. and Palatin Technologies,
Inc. and is the Secretary of Atlantic Pharmaceuticals, Inc., each of which is a
publicly-traded biotechnology company. Additionally, Mr. Weiss is a member of
the Board of Directors of several privately-held biotechnology companies. Prior
to joining Paramount, Mr. Weiss was an attorney with the law firm of Cravath,
Swaine & Moore. Mr. Weiss received his J.D. from Columbia University School of
Law and his B.S. in Finance from the State University of New York at Albany.
Elliott H. Vernon, Esq. has been the Chairman of the Board and Chief
Executive Officer of the Company since the Company's inception in July 1991. He
also was the President of the Company from July 1991 until August 1999. For over
ten years, Mr. Vernon has also been the managing partner of MR General
Associates, a New Jersey general partnership which is the general partner of DMR
Associates, L.P., a Delaware limited partnership. See "Certain Relationships and
Related Transactions." From December 1995 until it merged with Procept in March
1999, Mr.
-27-
<PAGE>
Vernon was a director of Pacific Pharmaceuticals, Inc., a publicly-traded
company engaged in the development and commercialization of medical products
with a primary focus on cancer treatment. Mr. Vernon has been a director of
Procept, a publicly traded company engaged in the development of novel drugs for
the prevention of infectious diseases, with a primary focus on the HIV disease,
since December 1997. Mr. Vernon is also one of the founders of TNI and was,
until April 1997, a director THH. Mr. Vernon is also a principal of HealthCare
Financial Corp., LLC, a healthcare financial consulting company engaged
primarily in FDA matters. From January 1990 to December 1994, Mr. Vernon was a
director and the Executive Vice President and General Counsel of the Wall Street
firm of Aegis Holdings Corporation which offered financial services through its
investment management subsidiary and its capital markets consulting subsidiary
on an international basis. Prior to entering the healthcare field on a full-time
basis, Mr. Vernon was in private practice as a trial attorney specializing in
federal white collar criminal and federal regulatory matters. Prior to founding
his own law firm in 1973, Mr. Vernon was commissioned as a Regular Army infantry
officer in the United States Army (1964). He is a former paratrooper and Vietnam
War veteran with service in the 82nd Airborne Division and 173rd Airborne
Brigade. Upon his return from Vietnam in 1970, Mr. Vernon served as Chief
Prosecutor and Director of Legal Services at the United States Army
Communications and Electronics Command until 1973.
VOTE REQUIRED
Directors are elected by a plurality of the votes cast at the Meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE ELECTION OF THE DIRECTOR NOMINEES.
-28-
<PAGE>
INFORMATION RELATING TO THE BOARD AND ITS COMMITTEES
MEETINGS OF THE BOARD; COMMITTEES
During fiscal 1998, the Board held two meetings and acted pursuant to
unanimous written consent on 15 occasions. During fiscal 1998, no incumbent
director attended less than 75% of the aggregate number of meetings of the Board
and committees of the Board on which he served for such year. The Board
currently has four standing committees: the Audit Committee, the Stock Option
Committee, the Compensation Committee and the Executive Committee.
Audit Committee
The current members of the Audit Committee are Messrs. Friedkin and
Weiss. The Audit Committee held ___ meetings and acted pursuant to unanimous
written consent on ____ occasions during fiscal 1998. The general functions of
the Audit Committee include selecting the independent auditors (or recommending
such action to the Board); evaluating the performance of the independent
auditors and their fees for services and considering the effect, if any, of
their independence; reviewing the scope of the annual audit with the independent
auditors and the results thereof with management and the independent auditors;
consulting with management, internal audit personnel, if any, and the
independent auditors as to the Company's systems of internal accounting
controls; and reviewing the non-audit services performed by the independent
auditors.
Stock Option Committee
The current members of the Stock Option Committee are Messrs. Friedkin
and Weiss. The Stock Option Committee held three meetings and acted pursuant to
unanimous written consent on eight occasions during fiscal 1998. The Stock
Option Committee considers and recommends actions of the Board relating to
matters affecting the Company's stock option plans and is authorized to make
grants under the Company's 1991 Stock Option Plan (the "1991 Plan"), 1997
Omnibus Incentive Plan (the "Omnibus Plan"), 1997 Employee Stock Purchase Plan
(the "Stock Purchase Plan") and otherwise.
Compensation Committee
The current members of the Compensation Committee are Messrs. Raymond
and Weiss. The Compensation Committee held two meetings and acted pursuant to
unanimous written consent on two occasions during fiscal 1998. The general
functions of the Compensation Committee include approval (or recommendations to
the Board) of the compensation arrangements for senior management, directors and
other key employees; review of benefit plans in which officers and directors are
eligible to participate; and periodic review of the equity compensation plans of
the Company and the grants under such plans.
-29-
<PAGE>
Executive Committee
The current members of the Executive Committee are Messrs. Raymond and
Vernon. The Executive Committee held ____ meetings and acted pursuant to
unanimous written consent on ____ occasions during fiscal 1998. The Executive
Committee is empowered to exercise all powers of the Board in the management and
affairs of the Company with certain exceptions. In practice, it meets only
infrequently to take formal action on specific matters when it would be
impractical to call a meeting of the Board.
COMPENSATION OF DIRECTORS
The Company does not presently pay non-employee directors any cash fees
in connection with their services as such; however, the Company reimburses them
for all costs and expenses incident to their participation in meetings of the
Board and its committees. In addition, non-employee directors are entitled to
participate in the Directors Plan and the Omnibus Plan (other than members of
the Stock Option Committee). Pursuant to the Directors Plan, stock options
exercisable to purchase an aggregate of 25,000 shares of Common Stock
automatically are granted to newly- elected or appointed non-employee directors
of the Company. In addition, as approved by the stockholders at the 1998 annual
meeting of stockholders, the Directors Plan further provides that non-employee
directors are entitled to receive stock options to purchase 5,000 shares of
Common Stock (the "Fee Options") for a Plan Year (as defined in the plan) in the
event no annual cash director's fees are paid by the Company for such Plan Year
and may also elect to receive the Fee Options in lieu of any cash director's fee
otherwise payable by the Company to such director for such Plan Year. The
Company has determined that no cash director's fees will be paid for the 1999
Plan Year, and, therefore, Fee Options have been issued to each of the current
non-employee directors.
The purchase price of the shares of Common Stock subject to stock
options issued under the Directors Plan is equal to the fair market value of
such shares on the date of the grant, as determined in accordance with the plan.
Stock options awarded under the Directors Plan vest in increments of 40% after
the sixth month, 80% after the eighteenth month and 100% after the thirtieth
month anniversary of the date of grant. Upon termination of a non-employee
director's service on the Board, any stock options vested as of the date of
termination may be exercised until the first anniversary of such date (unless
such options expire earlier in accordance with their terms); provided that if
such termination is a result of such director's removal from the Board other
than due to his death or disability, all stock options will terminate
immediately.
At the 1998 annual meeting of stockholders, the stockholders approved
an amendment to the Directors Plan providing for an additional automatic grant
of stock options to purchase 25,000 shares of Common Stock in accordance with
the terms and provisions of the Plan to the then non-employee directors of the
Company (i.e., Messrs. Friedkin, Raymond and Weiss).
No remuneration is paid to executive officers of the Company for
services rendered in their capacities as directors of the Company.
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<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than 10% of the outstanding shares of Common Stock, to file
with the Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company
(collectively, "Section 16 reports") on a timely basis. Directors, executive
officers and greater than 10% stockholders are required by Commission regulation
to furnish the Company with copies of all Section 16 reports. To the Company's
knowledge, based solely on a review of the copies of such reports furnished to
the Company and certain written representations that no other reports were
required, during fiscal 1998, all Section 16(a) filing requirements applicable
to its directors, executive officers and greater than 10% beneficial owners were
complied with on a timely basis, except that (i) each of Michael S. Weiss and
Manmohan A. Patel did not timely file a Form 3 with respect to his becoming a
member of the Board, (ii) Scott P. McGrory, an executive officer of the Company,
did not timely file a Form 4 with respect to one transaction, (iii) Joseph J.
Raymond, a director of the Company, did not timely file a Form 4 with respect to
two transactions, and (iii) Shawn A. Friedkin, Joseph J. Raymond, Manmohan A.
Patel and Michael S. Weiss, directors of the Company, did not timely file a Form
5 with respect to two transactions each for Messrs. Friedkin, Raymond and Weiss
and one transaction for Mr. Patel.
-31-
<PAGE>
INFORMATION RELATING TO EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS
The names of the current executive officers of the Company, and certain
information about them, are set forth below.
Name Age Position
---- --- --------
Elliott H. Vernon (1) 56 Chairman of the Board and Chief
Executive Officer
Robert D. Baca 43 President and Chief Operating Officer
Mark R. Vernon (1) 52 Senior Vice President
Scott P. McGrory 34 Vice President, Controller
- --------------
(1) Elliott H. Vernon and Mark R. Vernon are brothers.
See above for information regarding Mr. Vernon.
Robert D. Baca, C.P.A., became the President and Chief Operating
Officer of HIS PPM Co., a Delaware corporation and wholly-owned subsidiary of
the Company formed to engage in the physician practice management business ("HIS
PPM") in April 1998, and in August 1999 he was elevated to the position of the
President and Chief Operating Officer of the Company. From May 1997 to March
1998, Mr. Baca was the Senior Vice President of Corporate Development for
Medical Resources, Inc. ("Medical Resources"), a publicly-held diagnostic
imaging company. Mr. Baca was a founder of Capstone Management, Inc.
("Capstone"), a diagnostic imaging company which was acquired by Medical
Resources in May 1997, and was, from June 1993 to May 1997, the Chief Executive
Officer and Chief Financial Officer of Capstone. Mr. Baca received a M.S. in
Taxation from Villanova Law School in 1985 and received a B.S. in Accounting
from the University of Delaware in 1978. Mr. Baca is a certified public
accountant.
Mark R. Vernon has been a Senior Vice President of the Company since
April 1999 and has been the President of Atlantic Imaging Group, LLC., the
Company's joint venture with HealthMark Alliance, Inc. formed to develop, market
and manage statewide networks of diagnostic imaging facilities, since its
formation in April 1999. From April 1997 until April 1999, he was employed as an
officer of the Company in charge of field operations. Since September 1994, he
also has served as the Chairman of the Board, President and Chief Executive
Officer of Omni Medical Imaging, Inc., which company subleased the Company's
mobile MRI units from September 1994 until July 1996. See "Certain Relationships
and Related Transactions." From January 1991 until August 1994, he was the Vice
President of Field Operations of the Company. From February 1981 until November
1989, he was the President of National Labor Service, Inc. and from November
1975 until January 1981, he was the President of Country Wide Personnel, Inc.,
which are employment support
-32-
<PAGE>
companies that supplied employees to Fortune 500 and other corporations. From
1966 until 1971, Mr. Vernon was a Staff Sergeant in the United States Army and
served in Vietnam from 1966 until 1967.
Scott P. McGrory, C.P.A., has been the Vice President, Controller of
the Company (as well as the Assistant Secretary of the Company) since October
1996. As the Vice President, Controller of the Company, Mr. McGrory is the
Principal Financial and Accounting Officer of the Company and is responsible for
overseeing all financial reporting aspects of the Company. Mr. McGrory was the
Company's Controller from August 1995 to October 1996; the Company's Manager of
Accounting from January 1994 to August 1995; and the Company's Manager of
Budgeting from December 1992 to January 1994. From April 1988 to December 1992,
Mr. McGrory was employed as a Senior Accountant by NMR of America, Inc., a
provider of outpatient services in the field of advanced diagnostic imaging. Mr.
McGrory is a licensed certified public accountant in the State of New Jersey.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid to, the Chief Executive Officer and each other executive officer of the
Company and its subsidiaries (whose total annual salary and bonus exceed
$100,000) for services rendered in all capacities to the Company and its
subsidiaries during fiscal 1998, 1997 and 1996 (the "named executive officers"):
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<PAGE>
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
------
ANNUAL COMPENSATION
-------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING OTHER
POSITION YEAR SALARY ($) BONUS ($) ($)1 AWARD(S)($) OPTIONS (#) COMPENSATION
- -------- ---- ---------- --------- ---- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ELLIOTT H.
VERNON................ 1998 $244,272 $328,829 $19,249(2) -- -- --
(Chairman of the
Board and Chief 1997 $100,415 -- $29,359(2) -- 500,000 $88,076(4)
Executive Officer)
1996 $181,923 $111,710 $28,121(2) $468,750(3) 500,000 --
ROBERT D.
BACA ....................
(President and Chief 1998 $165,808(5) $32,588 -- -- 350,000 --
Operating Officer)
</TABLE>
- --------------
(1) Unless noted, the value of prerequisites and other personal benefits,
securities and other property paid to or accrued for the named
executive officers did not exceed $50,000 for each such officer, or 10%
of such officer's total reported salary and bonus, and thus are not
included in the table.
(2) Represent payments for personal life and disability insurance made by
the Company on behalf of Mr. Vernon pursuant to Mr. Vernon's employment
agreement.
(3) This restricted stock award vested on October 2, 1998 upon consummation
by the Company of the Beran Acquisition. At December 31, 1998, the
restricted stock award had a value of $281,250 and at October 2, 1998,
the restricted stock award had a value of $226,563.
(4) Represents a non-interest bearing advance made to Mr. Vernon during
fiscal 1997. See "Certain Relationships and Related Transactions."
(5) Represents compensation beginning on April 13, 1998, the commencement
date of Mr. Baca's employment with HIS PPM. He became the President and
Chief Operating Officer of the Company in August 1999.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Elliott H. Vernon. In October 1991, the Company entered into a five
year employment agreement with Elliott H. Vernon, pursuant to which Mr. Vernon
agreed to serve as the Chairman of the Board, President and Chief Executive
Officer of the Company at an annual base salary of $200,000. The employment
agreement provided that if a "constructive termination of employment" would
occur, Mr. Vernon would be entitled to a continuation of full salary and bonus
compensation for a period equal to the remainder of the term. "Constructive
termination of employment" was defined in the employment agreement to include a
material change in Mr. Vernon's responsibilities,
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<PAGE>
removal of Mr. Vernon from his position as the Company's Chairman of the Board,
President and Chief Executive Officer (other then for "Cause," as defined in the
employment agreement) or a "Change in Control." A "Change in Control" was
defined to include a change in the majority of the Board which was not approved
by the incumbent directors or an accumulation by any person or group, other than
Mr. Vernon, of in excess of 30% of the outstanding voting securities of the
Company. The employment agreement further provided that a constructive
termination of employment would not include (i) any sale of the business of the
Company, whether through merger, sale of stock or sale of assets, which is
approved by the vote of two-thirds of the full Board or (ii) a change in Mr.
Vernon's title and/or the person or persons to whom Mr. Vernon reports resulting
from a Change of Control approved by the affirmative vote of two-thirds of the
full Board, so long as it does not result in any other event constituting a
constructive termination of employment.
Mr. Vernon's employment agreement provided for annual profit sharing
with other executive level employees of a bonus pool consisting of 15% of the
Company's consolidated income before taxes, determined in accordance with
generally accepted accounting principles (the "Bonus Pool"). During the first
year of the term, Mr. Vernon was entitled to not less than two-thirds of the
first $300,000 of the Bonus Pool and one-third of the next $300,000 of the Bonus
Pool, and, for the remainder of the term, he was entitled to not less than 50%
of the Bonus Pool. Mr. Vernon was entitled to monthly bonus payments, based upon
an estimate of his full years' entitlement, subject to adjustment at the end of
each fiscal quarter and at the end of each fiscal year. The entitlement of Mr.
Vernon and the other officers of the Company to the remainder of the Bonus Pool
was made by Mr. Vernon as the Chairman of the Board, President and Chief
Executive Officer of the Company, subject to any applicable employment
agreements.
As of February 1, 1996, the Company amended its then current employment
agreement with Mr. Vernon. Pursuant to such amendment, the employment
agreement's expiration date of October 22, 1996 was extended to October 22, 1997
and during such one year extension Mr. Vernon's annual base compensation was
reduced from $200,000 to $100,000. In addition, upon execution of such
amendment, options that Mr. Vernon held as of such date exercisable to purchase
an aggregate of 270,000 shares of Common Stock under the Company's 1991 Stock
Option Plan (the "1991 Plan") (at exercise prices ranging from $1.50 to $5.00
per share) were terminated and the Company granted him options exercisable to
purchase an aggregate of 500,000 shares of Common Stock at a cash exercise price
of $0.75 per share (the "Vernon New Options"). Furthermore, as additional
incentive compensation, upon execution of such amendment, Mr. Vernon received
from the Company a restricted stock award of 250,000 shares of Common Stock. The
restrictions thereon lapsed upon consummation by the Company of the Beran
Acquisition on October 2, 1998. Mr. Vernon is entitled to certain demand and
"piggyback" registration rights with respect to such 250,000 shares and the
500,000 shares of Common Stock issuable upon exercise of the Vernon New Options.
At any time commencing April 16, 1996 and ending April 16, 2000, Mr. Vernon has
the right to demand that the Company prepare and file, and use its best efforts
to cause to become effective, a registration statement under the Act to permit
the sale of such shares. The Company will be obligated to file one such
registration statement for which all expenses (other than fees of counsel for
such holders and underwriting discounts) will be payable by the Company.
-35-
<PAGE>
Effective in November 1997, the Company entered into a new three year
employment agreement with Mr. Vernon (which was extended to five years in August
1999). Pursuant to such new employment agreement, Mr. Vernon agreed to continue
to serve as the Chairman of the Board, President and Chief Executive Officer of
the Company at an annual base of $250,000, subject to annual increases equal to
the greater of (a) 10% or (b) the same percentage as the increase during the
immediately preceding calendar year in the United States Department of Labor,
Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers
(1962-1984=100) (the "CPI") or (c) such greater amount as may be determined by
the Board. As of October 20, 1999, Mr. Vernon's base salary was $275,000. The
employment agreement provides that, upon the consummation by the Company of the
proposed acquisition of JIHP, Mr. Vernon will receive (i) a cash bonus of
$250,000 and (ii) stock options to purchase 250,000 shares of Common Stock at an
exercise price equal to the average of the fair market value (as defined in the
Omnibus Plan) of the Common Stock for the ten consecutive trading days
immediately preceding the closing date of such acquisition (which stock options
will vest in 25% increments over four years from the date of grant). (In August
1999, these stock options were issued to Mr. Vernon at an exercise price of
$1.06 per share, subject to consummation of the JIHP acquisition on or prior to
December 31, 2000). On each anniversary of the commencement date of the
employment agreement, the term is extended for an additional one year. The
employment agreement also provides that if Mr. Vernon resigns for "Good Reason"
(as defined in the employment agreement), Mr. Vernon will be entitled to receive
a payment of 2.99 times his highest annual salary and bonus pursuant to the
employment agreement. In the event Mr. Vernon's employment is terminated for
"Disability" (as defined in the employment agreement), Mr. Vernon will continue
to be paid his base salary for a period of six months after such date (which
amount will be reduced by any disability payments received by him). Mr. Vernon's
employment agreement also provides that in the event his employment is
terminated for "Cause" or because of his death, Mr. Vernon or his designated
beneficiaries, as the case may be, shall only be entitled to be paid his base
salary through the month in which such termination occurred.
Mr. Vernon's new employment agreement also provides for annual profit
sharing with other executive level employees of a bonus pool consisting of 15%
of the Company's consolidated income before taxes. Mr. Vernon is entitled to not
less than 50% of such bonus pool, and the Board or a duly constituted committee
thereof may allocate additional amounts of the bonus pool to Mr. Vernon. It is
expected that the entitlement of the other officers of the Company to the
remainder of such bonus pool (if any) will be made by Mr. Vernon in his capacity
as the Chairman of the Board and Chief Executive Officer of the Company, subject
to the contractual rights of other persons entitled to participate in such bonus
pool, and to the concurrence of the Board or a duly constituted committee
thereof. (The Company has guaranteed Mr. Vernon a cash bonus of $325,000 for
fiscal 1999). In addition, the employment agreement provides for certain
insurance and automobile benefits for Mr. Vernon and his participation in the
Company's other benefit plans. The employment agreement provides that Mr. Vernon
will be entitled to reimbursement of up to $10,000 per annum for medical
expenses not covered by insurance for himself and his immediate family. In
connection with the Board's approval in November 1997 of the material terms of
this new employment agreement, Mr. Vernon was granted stock options to purchase
471,200 shares of Common Stock under the 1991 Plan and 28,800 shares of Common
Stock under the Omnibus Plan at an exercise price of $1.0625 per share. Such
options vest in 25% increments upon the Common Stock attaining, for a period of
20 consecutive trading days, a fair market value (as defined in the applicable
plan)
-36-
<PAGE>
of $2.50, $5.00, $7.50 and $10.00, respectively. Notwithstanding the foregoing,
each such option shall become fully vested upon the earlier to occur of (x) the
fifth anniversary of the grant date of such option and (y) a "Change in Control"
(as defined in the Omnibus Plan). (In August 1999, these options were amended to
provide for automatic vesting in 20% increments on each anniversary of the grant
date.)
In August 1999, Mr. Vernon resigned as President of the Company and Mr.
Baca became the President and Chief Operating Officer of the Company.
Robert D. Baca. As of April 13, 1998, HIS PPM entered into a three year
employment agreement with Robert D. Baca, pursuant to which Mr. Baca agreed to
serve as its President and Chief Operating Officer at an annual base salary of
$225,000 (subject to annual increases by the same percentage as the increase
during the immediately preceding calendar year in the CPI or such greater amount
as may be determined by the Board). As of October 20, 1999, Mr. Baca's base
salary was $228,627. The employment agreement is subject to successive one year
renewal periods and provides for Mr. Baca's participation in the employee
benefit programs and plans of HIS PPM as well as a monthly automobile allowance.
As incentive compensation, in connection with the execution of the employment
agreement, Mr. Baca received (i) a stock option under the Omnibus Plan to
purchase 200,000 shares of Common Stock at an exercise price of $1.3125 per
share (which option vested 50% on the date of grant and the remaining 100,000
shares will vest in increments of one-third upon the Common Stock attaining,
during the Term (as defined in the employment agreement), an average Fair Market
Value (as defined in the Omnibus Plan) for a period of 20 consecutive trading
days, and a Fair Market Value on the last day of such 20 day period, of $5.00,
$8.00 and $12.00 per share, respectively; provided, however, that in any event
the remaining 100,000 shares shall vest in increments of one-third on each
subsequent anniversary of the grant date of the option, and the option will
become fully vested immediately upon a Change in Control (as defined in the
Omnibus Plan)) and (ii) subject to ratification and approval of the Company's
stockholders, a stock option, not issued under the Omnibus Plan (since at the
time of grant there were not enough shares available for issuance under the
Omnibus Plan to allow for such issuance thereunder) but which shall,
nonetheless, be subject to the terms and conditions of the Omnibus Plan, to
purchase 150,000 shares of Common Stock at an exercise price of $7.50 per share
(with respect to 50,000 of the shares subject to the options), $10.00 per share
(with respect to 50,000 of the shares subject to the option) and $12.50 per
share (with respect to 50,000 of the shares subject to the option) (which option
will vest upon the attainment of any two of the three following objectives: (a)
the Company achieving gross revenues of $100.0 million in any fiscal year during
the Term, (b) the Company achieving net income of $12.0 million in any fiscal
year during the Term or (3) the Common Stock attaining, during the Term, an
average Fair Market Value (as defined in the option) for a period of 20
consecutive trading days, and a Fair Market Value on the last day of such 20 day
period, of $20.00 per share; provided, however, that in any event the option
will vest on the third anniversary of the grant date of the option, and the
option will become fully vested immediately upon a Change in Control of HIS PPM
(as defined in the option)). Stockholder ratification and approval of such stock
option was obtained at the 1998 annual meeting of stockholders. See "-- Option
Grants in Fiscal 1998."
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<PAGE>
The employment agreement provides that if Mr. Baca resigns for "Good
Reason" (as defined in the employment agreement) or if HIS PPM terminates his
employment other than as provided in the employment agreement, Mr. Baca will be
entitled to receive his full base salary through the date of termination, as
well as all accrued incentive compensation through the date of termination, plus
an amount (payable over a period of months equal to the lesser of the number of
months remaining in the Term and 18) equal to the product of (a) the sum of (i)
the base salary in effect as of the date of termination and (ii) the average of
the bonus compensation paid or payable to Mr. Baca with respect to the three
years preceding the year in which the date of termination occurs (or such lesser
period as he may have been employed) and (b) the lesser of (i) the number of
months remaining in the Term divided by 12 and (ii) one and one-half (the
"Severance Amount"). In the event that, within one year after the occurrence of
a Change of Control (as defined in the employment agreement), HIS PPM terminates
Mr. Baca's employment other than as provided in the employment agreement or Mr.
Baca resigns for "Good Reason," Mr. Baca will be entitled to receive his full
base salary through the date of termination, as well as all accrued incentive
compensation through the date of termination, plus the present value (as defined
in the employment agreement) of the Severance Amount on or before the tenth day
following the date of termination.
The employment agreement further provides that in the event HIS PPM
terminates Mr. Baca's employment because of his death, Mr. Baca (or his
designated beneficiary, estate or other legal representative, as applicable,
(the "Estate")) will be entitled to be paid his base salary through the month in
which such termination occurred, as well as all unpaid and accrued incentive
compensation through the date of termination, and the Estate shall be entitled
to continue to participate (to the extent permissible under the terms and
provisions of such programs and plans) in HIS PPM's benefit programs and plans
until the end of the Term on the same terms and conditions as Mr. Baca
participated immediately prior to the date of termination. If Mr. Baca's
employment is terminated for Disability (as defined in the employment
agreement), Mr. Baca will continue to be paid his base salary for a period of
six months after such date (which amount will be reduced by any disability
benefits received by him from disability policies paid for by HIS PPM).
Upon termination of Mr. Baca's employment for Cause (as defined in the
employment agreement) or in the event Mr. Baca's employment is terminated
because of a court order restricting his employment by HIS PPM, Mr. Baca only
will be entitled to be paid his base salary through the date the Notice of
Termination (as defined in the employment agreement) is given, as well as all
accrued and unpaid incentive compensation through the date the Notice of
Termination is given.
In August 1999, Mr. Vernon resigned as President of the Company and Mr.
Baca became the President and Chief Operating Officer of the Company. In
connection with such elevation, Mr. Baca was granted an option to purchase
150,000 shares of Common Stock at an exercise price of $1.3125 per share
(subject to consummation of the JIHP acquisition on or prior to December 31,
2000).
-38-
<PAGE>
Option Grants in Fiscal 1998
The following table sets forth each grant of stock options made by the
Company during fiscal 1998 to each of the named executive officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL RATES
SECURITIES % OF TOTAL OPTIONS EXERCISE OF STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE PRICE OPTION TERM 3
OPTIONS EMPLOYEE IN ($/SHARE) EXPIRATION
NAME GRANTED($) FISCAL YEAR RANGE DATE RANGE 5%($) 10%($)
- ---- ---------- ----------- ----- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert D. Baca 200,000(1) 47.9% $1.3125 Apr. 2008 $165,085 $418,357
150,000(2) 35.9% (3) Dec. 2008 $ -0- $ -0-
</TABLE>
- --------------
(1) This option vested 50% (i.e., 100,000 shares) on the initial date of
grant and the remaining 100,000 shares will vest in increments of
one-third (i.e., 33,333 shares) upon the Common Stock attaining, during
the Term (as defined in Mr. Baca's employment agreement with HIS PPM),
an average Fair Market Value (as defined in the Omnibus Plan) for a
period of 20 consecutive trading days, and a Fair Market Value on the
last day of such 20 day period, of $5.00, $8.00 and $12.00 per share,
respectively; provided, however, that in any event the remaining
100,000 shares shall vest in increments of one-third (i.e., 33,333
shares) on each subsequent anniversary of the grant date of the option,
and the option will become fully vested immediately upon a Change in
Control (as defined in the Omnibus Plan).
(2) The exercise price of this option is as follows: $7.50 per share (with
respect to 50,000 of the shares subject to the option), $10.00 per
share (with respect to 50,000 of the shares subject to the option) and
$12.50 per share (with respect to 50,000 of the shares subject to the
option). This option will vest upon the attainment of any two of the
three following objectives: (a) the Company achieving gross revenues of
$100.0 million in any fiscal year during the Term, (b) the Company
achieving net income of $12.0 million in any fiscal year during the
Term or (c) the Common Stock attaining, during the Term, an average
Fair Market Value (as defined in the option) for a period of 20
consecutive trading days, and a Fair Market Value on the last day of
such 20 day period, of $20.00 per share; provided, however, that in any
event the option will vest on the third anniversary of the grant date
of the option and the option will become fully vested immediately upon
a Change in Control of HIS PPM (as defined in the option).
(3) The potential realizable values represent future opportunity and have
not been reduced to present value in 1998 dollars. The dollar amounts
included in these columns are the result of calculations at assumed
rates set by the SEC for illustration purposes, and these rates are not
intended to be a forecast of the Common Stock price and are not
necessarily indicative of the values that may be realized by the named
executive officer.
Aggregated Option Exercises in Fiscal 1998 and 1998 Fiscal Year End Option
Values
The following table summarizes for each of the named executive officers
the total number of unexercised stock options held at December 31, 1998 and the
aggregate dollar value of in-the-money, unexercised options held at December 31,
1998. No options were exercised by such persons during fiscal 1998. The value of
unexercised, in-the-money options at fiscal year-end is the difference between
its exercise or base price and the fair market value (i.e., the closing sale
price on such date) of the underlying Common Stock on December 31, 1998 (the
last trading day in fiscal 1998), which was $1.1250 per share. These values,
unlike the amounts set forth in the column
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<PAGE>
headed "Value Realized," have not been, and may never be, realized. The stock
options have not been, and may never be, exercised; and actual gains, if any, on
exercise will depend on the value of the Common Stock on the date of exercise.
There can be no assurance that these values will be realized.
The Company does not have any stock appreciation rights ("SARs")
outstanding.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FISCAL YEAR END FISCAL YEAR END
------------------ ---------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Elliott H.
Vernon -0- N/A 500,000/500,000 $187,500/$31,250
Robert D.
Baca -0- N/A 100,000/250,000 $0/$0
</TABLE>
-40-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998 and 1997, Elliott H. Vernon (the Company's
Chairman of the Board and Chief Executive Officer) (the "CEO") owed the Company
$264,125 in connection with certain non-interest bearing advances under the
Company's bonus plan. (The largest aggregate amount of the CEO's indebtedness to
the Company during such fiscal years was $276,050 at April 30, 1997 and May 31,
1997). In accordance with this bonus plan and Mr. Vernon's employment agreement
with the Company, Mr. Vernon is entitled to monthly bonus payments based upon an
estimate of his full years' bonus entitlement, subject to adjustment. These
advances represent such payments which were determined not to have been earned
by Mr. Vernon under the terms of the bonus plan and are repayable to the
Company.
The Company entered into an arrangement, effective September 1, 1994
until July 1996, pursuant to which it operated solely as a sublessor of its four
mobile MRI units rather than as an operator of such equipment. Mark R. Vernon,
the brother of the CEO and an officer of the Company since April 1997, is the
President and a significant stockholder of such sublessee of the Company's
mobile MRI equipment. The other stockholders of the sublessee include certain
former customers of the Company. The sublease provided for monthly payments to
the Company, which commenced September 1, 1994, in the amount of $50,000 per
month for the first three months and $115,000 per month for the next 45 months.
These monthly payments included maintenance and insurance of approximately
$44,000 per month paid directly by the Company. The total monthly sublease
payments due to the Company were collateralized by the accounts receivable due
to the sublessee by the sublessee's mobile MRI customers. Effective May 1, 1995,
the sublease agreement was amended to provide for monthly payments to the
Company in the amount of $76,373 per month for the next 40 months excluding
maintenance of $38,627 per month originally paid directly by the Company since
the sublessee entered into a maintenance agreement with an unrelated third party
and began paying the equipment maintenance directly for the subleased mobile MRI
units. At December 31, 1994, the sublessee was current with its monthly payment
obligations. However, for fiscal 1995, the Company was entitled to receive from
the sublessee approximately $1,047,000 in rental income of which it received
approximately $685,000 resulting in past due amounts of approximately $362,000.
The Company, due to the sublessee's failure to remain current with its 1995
monthly payment obligations, notified the sublessee that it was in default of
the sublease agreement. As a result, after assessing the sublease business
arrangement, the Company sold one of its mobile MRI units for $625,000 in
December 1995, which in turn reduced the sublessee's monthly payment obligation
to the Company from $76,373 to $52,582 a month for the remaining 33 months of
the sublease. As a result of the sale of the mobile MRI unit, the Company
incurred a loss of approximately $31,000 representing the difference between the
remaining sublease income attributable to such mobile MRI unit and the sale
proceeds received. In February 1996, the Company terminated the master agreement
with the sublessee and repossessed the remaining three mobile MRI units from the
sublessee as a result of the failure of the sublessee and its customers to
satisfy their obligations thereunder to the Company. At such time, the sublessee
owed the Company approximately $456,000. In an attempt to satisfy the past due
amounts owed to the Company, the sublessee and its customers provided the
Company with cash (aggregating approximately $75,000) and additional patient
receivable claims (aggregating approximately $504,000) to partially offset the
amounts they owed to the Company. The additional patient receivable claims were
to supplement
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<PAGE>
the amounts previously submitted to the Company to satisfy prior past due
indebtedness from the sublessee and its customers. The Company soon after
returned the three mobile MRI units to the sublessee. Effective July 27, 1996,
the Company again repossessed the three mobile MRI units due to the sublessee's
continuing failure to meet its obligations to the Company. At such time, the
sublessee owed the Company approximately $532,000. In August 1996, the Company
entered into a lease purchase agreement with respect to the sale of one of the
Company's mobile MRI units. The lease purchase agreement provided for a $20,000
down payment upon execution of the agreement, 11 monthly installments of $5,000
each which commenced October 1, 1996 and a final payment of $35,000 due in
September 1997. Such amounts have been paid. The Company has entered into an
agreement with certain other creditors of the sublessee in respect of the
collection of the sublessee's receivables. As of December 31, 1998 and June 30,
1999, the amount of the sublessee's past due indebtedness was approximately
$257,000 and $196,000, respectively (which amount has been fully reserved for by
the Company in its financial statements).
As of January 30, 1996, the Company entered into a one year consulting
agreement (the "Consulting Agreement") with Biltmore Securities, Inc.
("Biltmore"). In January 1997, the Company extended the term of the Consulting
Agreement for an additional year, and in November 1997, the Company further
extended the term of the Consulting Agreement for an additional year, through
January 1999. 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 seek to find business
partners suitable for the Company and assist in the structuring, negotiating and
financing of such transactions. During fiscal 1996, Biltmore was issued options
(the "Biltmore Options") exercisable to purchase 750,000 shares of Common Stock
at a cash exercise price of $0.75 per share under the Consulting Agreement and
during fiscal 1998, upon consummation of the Beran Acquisition, certain
transferees of Biltmore were issued 750,000 shares (the Biltmore Fee Shares") of
Common Stock under the Consulting Agreement. The holders of the Biltmore Options
and the Biltmore Fee Shares are entitled to certain demand and "piggyback"
registration rights with respect to the shares of Common Stock issuable upon
exercise of the Biltmore Options and the Biltmore Fee Shares. Furthermore, in
consideration of Biltmore's placement agent services with respect to the sale of
the Company's Series C Convertible Preferred Stock in February 1996, the Company
issued Biltmore 60,000 shares of Series C Convertible Preferred Stock at such
time.
During fiscal 1998, Dr. George Braff, a director of the Company from
December 1995 until April 1997, the Company's Medical Director since October
1997 and the supervising radiologist at three of the Company's MRI facilities,
was the majority shareholder and officer of three of the Company's Medical
Licensees: M.R. Radiology Imaging of Lower Manhattan, P.C. ("NYC MRI" or the
"New York City Facility"), Monmouth Diagnostic Imaging, P.A. ("Monmouth"), and
Kings Medical Diagnostic Imaging, P.C. ("Kings Medical" or the "Brooklyn
Facility"). For fiscal 1998, NYC MRI, Monmouth and Kings Medical paid the
Company approximately $753,290, $3,869,117 and $1,306,254, respectively, in fees
for services previously rendered. In addition, revenues generated to the Company
by NYC MRI, Monmouth and Kings Medical accounted for 6%, 27%, and 6%,
respectively, of the Company's total revenues in fiscal 1998. For fiscal 1998,
NYC MRI, Monmouth and Kings Medical paid Dr. Braff approximately $53,865,
$442,026 and $119,150, respectively, in fees for professional services rendered
by him on their behalf. Such entities have
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<PAGE>
continued to be Medical Licensees of the Company in fiscal 1999. Prior to
October 1997, Dr. Braff was also a majority shareholder and officer of another
of the Company's Medical Licensees, Edgewater Diagnostic Imaging, P.A., which
paid the Company approximately $1,400,000 in fees during fiscal 1997 and
generated revenues to the Company in fiscal 1997 representing 18% of the
Company's total revenues for such fiscal year.
On November 4, 1997, the Company acquired substantially all of the
assets of NYC MRI. The consideration for the acquisition was (i) the assumption
of certain obligations and liabilities of NYC MRI, including payments to be made
under a certain capital lease of up to approximately $300,000, (ii) cash in the
amount of $900,000, (iii) the issuance of 1.0 million shares of Common Stock,
and (iv) the issuance of a $300,000 promissory note that was due and paid on
December 31, 1997. The Company also assumed certain contractual obligations of
NYC MRI on a going-forward basis under the contracts assigned to the Company in
the acquisition (including operating leases and equipment maintenance
agreements). In connection with the acquisition, the Company also entered into a
consulting services agreement with NYC MRI, which, among other things, provides
that Dr. Braff will continue to provide all medical services at the New York
City Facility.
Prior to September 1998, the Company leased the Brooklyn Facility from
DMR Associates, L.P., a limited partnership ("DMR") which is owned by MR General
Associates, L.P., as the general partner ("MR Associates"), and DFS, as a
limited partner. MR Associates is in turn owned by the CEO and Joseph J.
Raymond, another director of the Company. The Company leases the MRI equipment
at such facility from DFS. For fiscal 1997 and the nine months ended September
30, 1998, the Company paid DMR an aggregate of approximately $407,000 and
$208,000, respectively, in lease payments for the Brooklyn Facility. The
Company's lease payments to DMR were structured to fully satisfy DMR's costs and
expenses related to the facility, including mortgage payments, taxes and other
related costs. However, Messrs. Vernon and Raymond were still required to pay
taxes in respect of these lease payments even though they did not recognize any
profit from such arrangement and participated in such arrangement as an
accommodation to the Company without any reimbursement therefor. Effective
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
12% per annum and was repayable over 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 the Brooklyn Facility to an
affiliate of DFS, which, in turn, has entered into a lease arrangement (the "DFS
Lease") with the Company in respect of this facility. All of the proceeds from
such sale were used to repay the outstanding balance of the DFS Loan which was
approximately $145,000. In consideration for Mr. Raymond's agreement to such
sale (as well as in appreciation of his participation in the original lease
transaction), the Company granted Mr. Raymond (subject to stockholder
ratification and approval) a ten year stock option to purchase 150,000 shares of
Common Stock at an exercise price per share equal to $1.00 (the closing sales
price of the Common Stock on the Nasdaq NMS on December 22, 1998, the date of
stockholder ratification and approval of such stock option grant), which option
is 100% exercisable. In addition, the Company has agreed that, to the extent the
Company exercises its purchase option under the DFS Lease and sells such
facility to an unrelated third party (other than
-43-
<PAGE>
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 addition to the DFS Lease, the Company has numerous other financing
arrangements with DFS and its affiliates relating to equipment financing, as
well as the DFS Bridge Loan provided in connection with the Beran Acquisition
and the Company's $3.0 million secured revolving line of credit provided by
another affiliate of DFS. DFS was a significant stockholder of the Company from
its inception until April 1996 and is a leading provider of medical equipment
financing. In October 1998, in connection with the DFS Bridge Loan the Company
entered into a five-year financial advisory and consulting services agreement
with DFS. In accordance with the terms of such agreement, the Company granted
DFS stock options immediately exercisable for a five-year period (subject to
certain prescribed restrictions) to purchase an aggregate of 500,000 shares of
Common Stock at an exercise price of $0.90625 per share (with respect to 50,000
of the shares subject to the options), $1.03125 per share (with respect to
400,000 of the shares subject to the options), $1.28125 per share (with respect
to 20,000 of the shares subject to the options), $1.25 per share (with respect
to 10,000 of the shares subject to the options) and $1.46875 (with respect to
20,000 shares subject to the options). The Company is also a guarantor of the
JIHP Loan (as hereinafter defined). All of the Company's arrangements with DFS
and its affiliates are on an arms'-length basis.
In May 1997, the Company entered into a consulting agreement with Munr
Kazmir, M.D., a former director of the Company, for a one year term commencing
June 1, 1997. In January 1998, such agreement was terminated and a new
consulting agreement for a one year term commenced effective as of January 1,
1998. Pursuant to such agreement, Dr. Kazmir agreed to provide such consultation
and advice as the Company may reasonably request, including advice in respect of
new developments in the diagnostic imaging market and the Company's
relationships with current and potential referral sources, and assistance in the
development of Company newsletters and the preparation and arrangement of
seminars, luncheons and other training and education vehicles for current and
potential referral sources. Dr. Kazmir also provided assistance to the Company
in the expansion of its business into physician practice management. Dr. Kazmir
was entitled to an annual consulting fee of $72,000 under such consulting
agreement. The consulting agreement was terminated in October 1998. During
fiscal 1997 and 1998, Dr. Kazmir was paid an aggregate of $35,000 and $54,000,
respectively, in consulting fees under the consulting agreement.
In October 1996, the Company entered into a consulting agreement with
Ulises C. Sabato, M.D., a significant stockholder of the Company, for a one year
term which commenced on October 15, 1996. Pursuant to such agreement, Dr. Sabato
agreed to provide such consultation and advice as the Company may reasonable
request, including advice in respect of new developments in the diagnostic
imaging market and the Company's relationships with current and potential
referral sources, and assistance in the development of Company newsletters and
the preparation and arrangement of seminars, luncheons and other training and
education vehicles for current and potential referral sources. Dr. Sabato also
provided assistance to the Company in the expansion of its business into
physician practice management. Pursuant to such agreement, Dr. Sabato was
entitled to an annual consulting fee of $48,000. In addition, upon execution of
such agreement, the
-44-
<PAGE>
Company granted Dr. Sabato, stock options exercisable to purchase an aggregate
of 50,000 shares of Common Stock over a five year period at an exercise price of
$1.0625 per share. The options vested quarterly in equal installments over the
term of the one year consulting agreement. In December 1997, the term of the
consulting agreement was extended until October 16, 1998 at which time it
expired. During fiscal 1997 and 1998, Dr. Sabato was paid an aggregate of
$44,000 and $48,000, respectively, in consulting fees under the consulting
agreement. Dr. Sabato also was a limited partner in Edgewater Imaging
Associates, L.P., which leased real estate and equipment to the Company in
respect of its fixed-site MRI facility in Edgewater, New Jersey. Edgewater
Imaging Associates, L.P. was dissolved as of January 1, 1998. The Company
entered into another one-year consulting agreement with Dr. Sabato in May 1999
providing for an annual consulting fee of $48,000.
In February 1998, the Company entered into a consulting agreement with
Dr. Manmohan A. Patel, a director of the Company since December 1998, for a one
year term commencing February 27, 1998. Such agreement has been extended until
December 31, 1999. Pursuant to such agreement, Dr. Patel will provide such
consultation and advice as the Company may reasonably request, including advice
in respect of the Company's development of its physician management operations.
Such agreement shall be terminated upon the earlier to occur of (i) the
negotiation and execution of an employment agreement between the Company and Dr.
Patel on terms and conditions satisfactory to the parties thereto (the "Patel
Employment Agreement"), or (ii) the expiration or termination of such agreement
pursuant to the terms thereof. Pursuant to such agreement, and in contemplation
of the services to be rendered pursuant to the Patel Employment Agreement, the
Company granted Dr. Patel stock options exercisable to purchase an aggregate of
300,000 shares of Common Stock under the terms and conditions of the Omnibus
Plan. Such stock options are exercisable at $1.71875 per share, the closing
sales price of the Common Stock on the Nasdaq NMS on the date of grant, and vest
in increments of 25% (i.e., 75,000 shares) upon the Common Stock attaining , for
a period of 20 consecutive trading days, a fair market value (as defined in the
Omnibus Plan) of $2.50, $5.00, $7.50 and $10.00, respectively. Notwithstanding
the foregoing, such stock options shall become fully vested upon the earlier to
occur of (x) the fifth anniversary of the grant date of the stock options and
(y) a "Change in Control" as defined in the Omnibus Plan: provided, however,
that in no event shall any shares be purchasable under such stock options unless
and until Dr. Patel has become a full-time employee of the Company. (In August
1999, these options were amended to provide for automatic vesting in 20%
increments on each anniversary of the grant date.)
In January 1998, the Company and Pavonia Medical Associates, P.A.
("PMA") and its physician stockholders (including Dr. Patel, a director of the
Company who owns an aggregate of 11,500 shares of PMA's common stock,
representing 20.44% of such outstanding common stock) signed a non-binding
letter of intent with respect to the Company's acquisition of all of the capital
stock held by PMA of Jersey Integrated HealthPractice, Inc. ("JIHP"), a
management services organization formed and owned by PMA and Liberty HealthCare
Systems, Inc. The terms of this acquisition were a result of arm's-length
negotiations among the parties. A merger agreement between the Company and PMA
was executed effective January 29, 1999 (subject to the approval of the
physician stockholders of PMA). Such letter (as well as the merger agreement)
states that the Company intends to appoint Dr. Patel to the Board upon
consummation of such acquisition.
-45-
<PAGE>
Notwithstanding the foregoing, the election of Dr. Patel as a director (as well
as his current nomination for election as a director) was not made in connection
with such provision.
In December 1997, the Company agreed to guarantee a loan of $1.0
million from DFS to JIHP (the "JIHP Loan"). This loan was funded by DFS to JIHP
on January 8, 1998 and the loan bears interest at 12% per annum and is repayable
over 48 months commencing in February 1998 at $26,330 per month. At December 31,
1998 and September 30, 1999, approximately $810,000 and $639,000 of the loan was
outstanding, respectively. PMA and each physician stockholders 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.
-46-
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The Company's financial statements as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, which is incorporated by reference in this Proxy Statement, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing therein. The engagement of Deloitte & Touche LLP is not being
presented for approval of the stockholders at the Meeting. Representatives of
Deloitte & Touche LLP are expected to be present at the Meeting and to be
available to respond to appropriate questions and will be given the opportunity
to make a statement if they so desire.
STOCKHOLDER PROPOSALS
Stockholder proposals for presentation at the Company's next annual
meeting of stockholders to be held in 2000 must be received by the Company at
its principal executive offices for inclusion in its proxy statement and form of
proxy relating to that meeting no later than ____, 2000. Such proposals must
also meet the other requirements of the rules of the Commission relating to
stockholders' proposals. A proxy will confer discretionary authority to
management of the Company to vote on any matter other than matters for which the
Company received notice by a stockholder prior to _____, 2000.
OTHER MATTERS
It is not expected that any other matters will be brought before the
Meeting. However, if any other matters are presented, it is the intention of the
persons named in the proxy to vote the proxy in accordance with their judgment.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
hereby incorporated by reference into this Proxy Statement and made a part
hereof, and are being furnished simultaneously herewith: (a) the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (filed
effective March 31, 1999; file number 000-19636); (b) the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1999 (filed on May
17, 1999; file number 000-19636); and (c) the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1999 (filed effective August 16,
1999; file number 000-19636). The Company will furnish to any stockholder a copy
of any exhibit to any of the foregoing documents as listed therein, upon request
and upon payment of the Company's reasonable expenses for furnishing such
exhibit. Requests should be directed to HealthCare Integrated Services, Inc.,
Shrewsbury Executive Center II, 1040 Broad Street, Shrewsbury, New Jersey,
07702, Attention: Scott P. McGrory.
Any statement contained herein or incorporated herein by reference
concerning the provisions of documents are summaries of such documents and each
statement is qualified in its entirety by reference to the copy of the
applicable document if filed with the Commission or attached as an appendix
hereto.
-47-
<PAGE>
ALL STOCKHOLDERS ARE URGED TO MARK, SIGN AND SEND IN
THEIR PROXIES WITHOUT DELAY IN THE ENCLOSED
ENVELOPE. PROMPT RESPONSE IS HELPFUL
AND YOUR COOPERATION WILL BE
APPRECIATED.
By Order of The Board of Directors,
ELLIOTT H. VERNON
Chairman of the Board and Chief Executive Officer
October __, 1999
-48-
<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF HEALTHCARE INTEGRATED SERVICES, INC.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL
MEETING OF STOCKHOLDERS AND PROXY STATEMENT, EACH DATED OCTOBER __, 1999, AND
DOES HEREBY APPOINT ELLIOTT H. VERNON AND SCOTT P. MCGRORY, OR EITHER OF THEM,
WITH FULL POWER OF SUBSTITUTION, AS PROXY OR PROXIES OF THE UNDERSIGNED TO
REPRESENT THE UNDERSIGNED AND TO VOTE ALL SHARES OF VOTING SECURITIES OF
HEALTHCARE INTEGRATED SERVICES, INC. (THE "COMPANY") WHICH THE UNDERSIGNED WOULD
BE ENTITLED TO VOTE IF PERSONALLY PRESENT AT THE ANNUAL MEETING OF STOCKHOLDERS
OF THE COMPANY TO BE HELD AT 10:00 A.M. (EDT) ON NOVEMBER __, 1999 AT THE
OFFICES OF THE COMPANY, SHREWSBURY EXECUTIVE CENTER II, 1040 BROAD STREET,
SHREWSBURY, NEW JERSEY, 07702, AND AT ANY ADJOURNMENT(S) OR POSTPONEMENT(S)
THEREOF, HEREBY REVOKING ALL PROXIES HERETOFORE GIVEN WITH RESPECT TO SUCH
STOCK:
1. RATIFICATION AND APPROVAL OF THE BERAN ISSUANCE.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. ELECTION OF DIRECTORS.
[ ] FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY
(EXCEPT AS MARKED TO THE CONTRARY BELOW) TO VOTE FOR ALL NOMINEES
LISTED BELOW
NOMINEES: SHAWN A. FRIEDKIN, MANMOHAN A. PATEL, JOSEPH J. RAYMOND, MICHAEL S.
WEISS AND ELLIOTT H. VERNON (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR
ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED.)
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE ON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT(S) OR
POSTPONEMENT(S) THEREOF.
TO BE SIGNED ON OTHER SIDE
<PAGE>
(CONTINUED FROM FRONT)
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH
THE DIRECTIONS GIVEN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, IT
WILL BE VOTED IN FAVOR OF THE RATIFICATION AND APPROVAL OF THE BERAN ISSUANCE
AND THE ELECTION OF THE NOMINEES FOR DIRECTOR NAMED HEREIN.
(SIGNATURE(S))
----------------------------------
----------------------------------
----------------------------------
DATED:
----------------------------
PLEASE SIGN EXACTLY AS NAME(S)
APPEARS HEREON, AND WHEN SIGNING
AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR
GUARDIAN, GIVE YOUR FULL TITLE AS
SUCH. IF THE SIGNATORY IS A
CORPORATION, SIGN THE FULL
CORPORATE NAME BY A DULY
AUTHORIZED OFFICER. WHEN SHARES
ARE HELD BY JOINT TENANTS, BOTH
SHOULD SIGN.
<PAGE>
ENCLOSURE 1
HealthCare Intergrated Services, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1998
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------------
Commission
For the fiscal year ended December 31, 1998 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)
Registrant's telephone number, including area code: (732) 224-9292
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant based upon the last reported sale price of the Common Stock on March
26, 1999 was approximately $12,513,000. As of March 26, 1999 there were
11,356,974 shares of Common Stock outstanding.
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
1998 Annual Report on Form 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 21
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 25
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management 49
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K 61
Signatures 71
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Since its formation in 1991, HealthCare Imaging Services, Inc. and its
subsidiaries (hereinafter referred to collectively as the "Company," unless the
context indicates otherwise) have been principally engaged in the business of
establishing and operating fixed-site diagnostic imaging facilities. As of
December 31, 1998, the Company operated 11 fixed-site diagnostic imaging
facilities. Almost all of the Company's facilities provide magnetic resonance
imaging ("MRI") which involves the utilization of high strength magnetic fields
and applied radio waves to provide cross sectional images of the anatomy. MRI
has become a preferred diagnostic tool of the medical profession because its
images are generally better defined and more precise than those produced by
other diagnostic imaging tests, without the use of harmful ionizing radiation.
Five of the Company's facilities also provide additional imaging technologies,
including computerized axial tomography ("CAT"), nuclear medicine, bone
densitometry, mammography, ultrasound and x-ray/fluoroscopy services (each of
these facilities is hereinafter referred to as a "Multi-Modality" facility and
each of the facilities which only provide MRI is hereinafter referred to as an
"MRI" facility). See "--The Facilities."
The Company has decided to expand its strategic focus into the area of
physician practice management and, in connection therewith, the Company has
entered into letters of intent with respect to the acquisition of all of the
outstanding capital stock of Jersey Integrated HealthPractice, Inc. ("JIHP"), a
management services organization ("MSO") formed and owned by Pavonia Medical
Associates, P.A. ("PMA") and Liberty HealthCare Systems, Inc. ("Liberty"). JIHP
provides management services to PMA. PMA, one of the largest independent,
multi-specialty practices in New Jersey, is comprised of over 55 physicians
servicing over 75,000 patients in 5 locations in New Jersey. In consideration
for the acquisition, the related letters of intent provide, among other things,
that the Company will pay and/or issue to PMA and Liberty, in the aggregate, (i)
$7.0 million in cash, (ii) 5.5 million shares of the Company's common stock,
$.01 par value per share ("Common Stock") (500,000 shares of which may be
subject to certain post-closing adjustments), and (iii) convertible redeemable
preferred stock of the Company having an aggregate liquidation preference of
$5.0 million. The preferred stock is redeemable by the Company at any time and
is convertible, after the second anniversary of issuance, at the election of the
Company or the holder at the then fair market value of the Common Stock. The
consummation of the transaction is subject to several material conditions
including, among others, the receipt of necessary financing, the approval of the
issuance of the stock by the Company's stockholders, the negotiation of
definitive documentation, the absence of adverse changes and the satisfactory
completion of due diligence. Although, there can be no assurance that the
transaction will be completed, the Company expects, subject to the satisfaction
of all conditions, to consummate the acquisition during 1999. A merger agreement
with PMA (the "PMA Merger Agreement") was executed as of January 29, 1999
(subject to the approval
3
<PAGE>
of its physician stockholders), and the Company hopes to execute a merger
agreement with Liberty within the next several weeks.
In furtherance of its objective of establishing physician practice
management operations in New Jersey, New York and Philadelphia, Pennsylvania,
the Company is assessing additional 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 (other than
the PMA Merger Agreement) 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.
The Company's 11 fixed-site facilities are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COMMENCEMENT
OF OPERATIONS
NAME LOCATION BY THE COMPANY SERVICES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kings Medical Diagnostic 2095 Flatbush Avenue October 1991 MRI
Imaging, P.C. Brooklyn, NY
(the "Brooklyn Facility")
- -----------------------------------------------------------------------------------------------------------------------
Edgewater Diagnostic Imaging, 725 River Road July 1991 MRI, X-ray
P.A. Suite 103
(the "Edgewater Facility") Edgewater, NJ
(Northern NJ)
- -----------------------------------------------------------------------------------------------------------------------
Wayne MRI, P.A.* 516 Hamburg Turnpike April 1992 MRI
(the "Wayne Facility") Suite 6
Wayne, NJ
(Northern, NJ)
- -----------------------------------------------------------------------------------------------------------------------
Rittenhouse Square Imaging 1705 Rittenhouse Square November 1992 MRI
Associates, L.P. * Philadelphia, PA
(the "Philadelphia Facility")
- -----------------------------------------------------------------------------------------------------------------------
Monmouth Diagnostic Imaging, 733 Route 35 December 1993 MRI,
P.A. Ocean Township, NJ Mammography,
(the "Ocean Township" Facility) Ultrasound, CAT
Scan, X-ray -
Fluoroscopy and
Bone Densitometer
- -----------------------------------------------------------------------------------------------------------------------
4
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------
M.R. Radiology Imaging of 45 Beekman Street November 1997 MRI and
Lower Manhattan, P.C. New York, NY Ultrasound
(the "New York City Facility")
- -----------------------------------------------------------------------------------------------------------------------
Bloomfield Diagnostic Imaging 350 Bloomfield Avenue October 1998 MRI, X-ray,
(the "Bloomfield Facility") Bloomfield, NJ Ultrasound and
(Northern, NJ) CAT Scan
- -----------------------------------------------------------------------------------------------------------------------
Echelon Diagnostic Imaging 108 Somerdale Road October 1998 MRI
(the "Voorhees Facility") Voorhees, NJ
(Southern, NJ)
- -----------------------------------------------------------------------------------------------------------------------
Echelon Diagnostic Imaging 600 Somerdale Road October 1998 Mammography,
(the "Voorhees Multi-Modality Voorhees, NJ Ultrasound, X-ray
Facility"} (Southern, NJ) - Fluoroscopy,
Nuclear Medicine
and CAT Scan
- -----------------------------------------------------------------------------------------------------------------------
Mainland Diagnostic Imaging 1418 New Road October 1998 MRI, X-ray,
(the "Mainland Facility") Northfield, NJ Mammography,
(Southern, NJ) Bone
Densitometry,
Ultrasound and
CAT Scan
- -----------------------------------------------------------------------------------------------------------------------
Monroe Diagnostic Imaging 640 Black Horse Pike October 1998 Mammography, X-
(the "Williamstown Facility") Williamstown, NJ ray, Ultrasound
(Southern, NJ) and CAT Scan
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Denotes facility operated as a joint venture with the Company acting as the
general partner. The Company owns 51% and 60%, respectively, of the Wayne
Facility and Philadelphia Facility.
In the operation of its facilities, the Company generally licenses use
of its diagnostic imaging equipment to health care providers, consisting
primarily of individual physicians and private group medical practices ("Medical
Licensees"), in New Jersey, New York and Pennsylvania who, in turn, use the
equipment to provide diagnostic imaging services to their patients or patients
of other health care providers with whom they or the Company have contractual
relationships. The Company provides administrative, management and billing and
collection services, as well as equipment and real property, to the Medical
Licensees, and they typically pay the Company a flat fee on a monthly, daily or
per scan basis for the use of the equipment and property, and an administrative
charge for these support services. The Medical Licensees utilizing the Company's
services have a need for diagnostic imaging services but typically do not own
their own equipment due to insufficient patient volume, the high cost of owning
and operating such equipment or the lack of expertise in this highly specialized
field. For certain licensed facilities in New Jersey owned by the Company, the
Company
5
<PAGE>
is itself the provider of the diagnostic imaging services and, as such, directly
bills and collects from patients and third party payors for such services. In
such facilities, qualified radiologists are either employed by the Company or
are retained and compensated by the Company as independent contractors.
Over the past few years, the Company's results of operations have been
negatively impacted by several developments in the health care field. Among
other things, the trend in the industry towards managed care and HMOs ("Health
Maintenance Organizations") has resulted in lower reimbursement rates for
medical procedures and an increased demand for lower overall health care costs.
The Company is addressing this trend by actively pursuing contracts that contain
favorable reimbursement rates and eliminating agreements with payors who have
reduced reimbursement rates significantly below the current Medicare fee
schedule. See "--Managed Care."
MRI TECHNOLOGY
MRI, which was first introduced for medical imaging in 1983, uses radio
frequencies and high strength magnetic field technology to produce images in all
anatomic planes and of varying thin sections or slices. Once acquired, these
images are viewed on video screens and stored on x-ray film and optical disc
storage for long term retention. MRI has become a powerful tool for diagnostic
imaging because it does not use harmful ionizing radiation to provide images
(unlike CAT scans and conventional X-ray studies) and it permits visualization
of small, similar structures without surgical intervention. It has also proven
to be superior in certain circumstances to other diagnostic imaging procedures
for diagnosing many medical problems by providing superior contrast resolution
between normal/abnormal structures and has become the modality of choice for the
diagnosis of lesions and tumors of the central nervous system and muscular
system, as well as for orthopedic applications such as tears of structures in
the joints. Among other things, it is also being used to monitor brain activity
(e.g., magnetic resonance spectroscopic imaging) with the hope of gaining
greater insight into abnormalities such as epilepsy, AIDS, brain tumors and
Alzheimer's disease, and in the diagnosis of gynecologic disorders, such as
recurring endometriosis, liver metastases, pelvic diseases and certain vascular
abnormalities through the use of magnetic resonance angiography.
As new uses of MRI are being discovered (including breast imaging for
implants and carcinomas, as well as abdominal and cardiac imaging),improvements
also are being made to existing MRI equipment in order to support such new uses
as well as enhance current applications. Fast spin echo ("FSE")has been
developed to increase the speed at which a scan may be performed without
compromising quality, thereby increasing patient comfort, patient throughput and
the ability to visualize pathology more effectively. In addition, the surface
coils which act as an antenna to the MRI system have been improved, and
quadrature surface coils have been developed which increase the signal produced
by the system and help provide better image quality, faster scantimes and
greater information available to the radiologist for interpretation."Open" MRI
systems are now being provided for large and claustrophobic patients and
additional improvements are being made to the surface coils to provide even
higher quality scans.
6
<PAGE>
The Company upgrades its equipment as new improvements are offered in
order to provide state-of-the-art diagnostic imaging technology. Currently,
three of the Company's MRI systems have been upgraded to include FSE, allowing
faster scan times with improved imaging, as well as the improvement of
throughput at the facilities using such systems. These systems also have been
upgraded to include quadrature surface coils to provide superior image quality.
In addition, the Company has installed new Hitachi Airis MRI units at its Ocean
Township Facility and Edgewater Facility which are "open" to help eliminate
patient claustrophobia and facilitates performing procedures on large patients.
The magnet used in these units is 1.5 times stronger than most other
open-air-type MRIs, resulting in greater image detail, comparable to that of
tunnel-type "closed" units. The Company plans to continue to provide the medical
community with state-of-the-art diagnostic imaging equipment.
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THE FACILITIES
Brooklyn Facility
The Company's longest operating facility is the Brooklyn Facility. The
Company leased the facility from DMR Associates, L.P., a limited partnership
("DMR"), until September 1998. DMR is owned by MR General Associates, L.P., as
the general partner ("MR Associates"), and DVI Financial Services Inc. ("DFS"),
as a limited partner. MR Associates is in turn owned by the Company's Chairman
of the Board, President and Chief Executive Officer (the "CEO") and another
director of the Company. DFS is a former significant stockholder of the Company.
See "Item 13. Certain Relationships and Related Transactions." In September
1998, DMR sold the facility to an affiliate of DFS, and in turn such DFS
affiliate entered into a lease agreement with the Company. In addition, the
Company leases the MRI equipment at such facility from DFS. The Company
subleases the premises and the necessary MRI equipment to Kings Medical
Diagnostic Imaging, P.C. ("Kings Medical"), one of the Company's Medical
Licensees. In return, Kings Medical pays the Company monthly lease payments for
the use of the facility and equipment, a flat fee per patient scan and an
administrative charge.
The Beran Facilities
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 the Voorhees Facility, (ii) Mainland Imaging
Center, P.C., which operated the Mainland Facility and a radiology facility in
Ocean City, New Jersey, (iii) Bloomfield Imaging Associates, P.A., which
operated the Bloomfield Facility, (iv) North Jersey Imaging Management
Associates, L.P., which managed the Bloomfield Facility and (v) Irving N. Beran,
M.D., P.A., which operated the Voorhees Multi-Modality Facility and the
Williamstown Facility and a radiology facility in each of Atco and Williamstown,
New Jersey (collectively, the "Beran Entities"). The consideration given by the
Company in the Beran Acquisition was (x) the assumption of certain obligations
and liabilities of the Beran Entities, (y) cash in the amount of $11.5 million
and (z) the issuance of 887.385 shares of Series D Cumulative Accelerating
Redeemable Preferred Stock of the Company (the "Series D Stock") having an
aggregate liquidation preference of $9,317,542.50 (i.e., $10,500 per share
liquidation preference). The purchase price was subject to an adjustment based
on the value of the Beran Entities' accounts receivable as of the closing date
and, in accordance therewith, 15.642 shares of Series D Stock having an
aggregate liquidation preference of $164,241 were transferred back to the
Company and canceled. 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 $14.0 bridge
loan from DFS to pay the cash portion of the purchase price and to fund the loan
to the Beran Entities (the
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"DFS Bridge Loan"). The Series D Stock accrues dividends at the rate of 8% of
the liquidation preference and increases 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 are payable quarterly in cash commencing January
10, 1999. After March 1, 1999, the holders of the Series D Stock became entitled
to convert the Series D Stock into Common Stock equal to the quotient obtained
by dividing (A) the aggregate liquidation preference of the Series D Stock being
converted by (B) $1.049 (subject to adjustment in certain circumstances) (i.e.,
approximately 8,723,921 shares of Common Stock in the event of the conversion of
all outstanding shares of Series D Stock); provided that until the Company
obtains stockholder approval of the issuance of the Series D Stock, the holders
of the Series D Stock only will be able to convert into Common Stock
representing in the aggregate 19.9% of the outstanding Common Stock as of
October 2, 1998 (i.e., approximately 2,094,768 shares). The holders of the
Series D Stock are 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 until the Company obtains stockholder
approval of the issuance of the Series D Stock, the holders of the Series D
Stock will not be able to exercise their aggregate voting rights in excess of
19.9% of the outstanding Common Stock as of October 2, 1998 (i.e., approximately
2,094,768 shares). The Company may redeem the Series D 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 Company expects to solicit stockholder
approval of the issuance of the Series D Stock during the second quarter of
fiscal 1999.
The Company has recorded the Beran Acquisition in accordance with the
purchase method of accounting whereby assets acquired and liabilities assumed
were recorded at their fair values. The fair value of accounts receivable
acquired in the Beran Acquisition have been recorded at their estimated net
collectible value based upon the Company's analysis of the number of open
accounts at that date, the past collection experience of the Beran Entities, the
Company's experience in collecting similar accounts, and actual collections
subsequent to October 1, 1998. As collections are made on these acquired
accounts receivable, the carrying value thereof is reduced. If the Company's
actual experience in collecting these receivables differs significantly from the
Company's estimates, the Company will adjust the estimated net collectible value
of the acquired accounts receivable through an adjustment to goodwill. The
excess of the cost of the acquisition (including transaction costs) over the
fair value of net assets acquired is reflected as goodwill in the accompanying
balance sheet of the Company as of December 31, 1998 and is being amortized over
a period of 20 years.
New York City Facility
On November 4, 1997, the Company acquired substantially all of the
assets of M.R. Radiology Imaging of Lower Manhattan, P.C. ("NYC MRI"), a
professional corporation owned by Dr. George Braff, a related party. This
professional corporation operated the New York City Facility. The consideration
for the acquisition was (i) the assumption of certain obligations and
liabilities of NYC MRI, including payments to be made under a capital lease of
up to approximately $300,000, (ii) cash in the amount of $900,000, (iii) the
issuance of 1.0 million shares of Common
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Stock, and (iv) the issuance of a $300,000 promissory note that was due and paid
on December 31, 1997. The Company also assumed certain contractual obligations
of NYC MRI on a going-forward basis under the contracts assigned to the Company
in the acquisition (including operating leases and equipment maintenance
agreements). The Company allocated the total purchase price for the acquisition
of the New York City Facility to tangible and identifiable intangible assets and
liabilities based upon their respective fair market values with the excess of
cost over fair market value of net assets acquired allocated to goodwill. In
connection with the acquisition, the Company also entered into a consulting
services agreement with NYC MRI which, among other things, provides that Dr.
Braff will continue to provide all medical services at the New York City
Facility. Dr. Braff is a former director of the Company and currently is the
Medical Director of the Company and the supervising radiologist, majority
shareholder and officer of three of the Company's Medical Licensees: Monmouth
Diagnostic Imaging, P.A. ("Monmouth"), Kings Medical and NYC MRI. See "Item 13.
Certain Relationships and Related Transactions."
Philadelphia Facility
The Philadelphia Facility, which has been operating since November
1992, continues to operate at a loss resulting in negative cash flows. The
overall operating results of the Company were affected during the years ended
December 31, 1998, 1997 and 1996 due to the operational results of the
Philadelphia Facility which incurred losses of $54,064, $175,247 and $374,969,
respectively. In order to become profitable, this facility must attain a
certain volume of business and it is uncertain whether such business level will
ever be attained. The Company's expanded advertising and marketing efforts on
behalf of the Philadelphia Facility has resulted in a significantly reduced
loss for the years ended December 31, 1998 and 1997 as compared to December 31,
1996. The Company is negotiating the purchase of the present limited partners'
interests in such joint venture which it expects to consummate during the
second quarter of fiscal 1999. However, there can be no assurance that these
negotiations will be successfully concluded.
Catonsville Facility
In July 1994, the Company's MRI facility in Catonsville, Maryland (the
"Catonsville Facility") ceased operations. This facility was operated by a joint
venture in which the Company owned 60% and the limited partners owned the
remaining 40%. The Company entered into a sublease arrangement with a radiology
group, of which one of the members was among the limited partners in this joint
venture, to sublease the medical equipment and facility from the Company. This
sublease arrangement commenced April 1, 1995 and provided for 60 monthly
payments of $10,000 commencing on June 15, 1995. In addition, the sublessee was
responsible for paying the rent for the office space and for all future
operating costs incurred. In December 1998, the Company
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terminated the sublease arrangement and sold the medical equipment to the
sublessee for an aggregate of $189,000, representing: (i) a payment for the
Company's agreement to terminate the sublease agreement ($116,400), (ii)
reimbursement for personal property tax payments made by the Company on the
sublessee's behalf ($42,600) and (iii) the purchase price for the medical
equipment ($30,000). As a result of the cessation of the sublease arrangement
and sale of the equipment, the Company recorded a gain on sale of property,
plant and equipment of $166,170 in December 1998, which primarily is due to a
reversal of an early sublease termination reserve established in 1994 and the
recoupment of taxes paid by the Company on the sublessee's behalf.
Secaucus Facility
In November 1996, the Company, with Practice Management Corporation
("PMC"), formed a limited liability company, of which the Company owned 60% and
PMC owned 40% , to provide on-site diagnostic imaging services to Meadowlands
Hospital Medical Center (the "Secaucus Facility") located in Secaucus, New
Jersey. In forming this joint venture, the parties agreed that the Company would
fund the working capital of the joint venture and PMC would provide marketing
services. The facility commenced operations on May 8, 1997 utilizing one of the
Company's mobile MRI units. Based upon losses sustained at such site and the
expectation of continuing losses, the Company decided to sell the mobile MRI
unit and to close the Secaucus 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 40% joint venture interest owned by PMC
effective as of December 31, 1997. In May 1998, the Company sold this mobile MRI
unit to an unaffiliated third party. As a result of the sale of the mobile MRI
unit, the Company recorded a gain on sale of property, plant and equipment of
$151,767, which was recorded in the second quarter of fiscal 1998.
MOBILE MRI DIVISION
Prior to September 1994, the Company operated four mobile MRI units in
addition to its fixed-site facilities. Effective September 1, 1994, the Company
entered into an arrangement pursuant to which it operated solely as a sublessor
of its mobile MRI equipment rather than as an operator of such equipment. Mark
R. Vernon, the President and a significant stockholder of such sublessee, Omni
Medical Imaging, Inc. (the "sublessee"), has been an officer of the Company
since April 1997 and is the brother of the CEO. The other stockholders of the
sublessee include certain former customers of the Company with whom the Company
had agreements for the use of the mobile MRI equipment. The Company decided to
enter into this arrangement due to the competitive pressures associated with the
mobile MRI business and in order to focus its energy and management expertise on
fixed-site imaging sites as well as further diversification in the health care
industry. As a result of the arrangement, the Company recorded a reserve for
subleased equipment in fiscal 1994 in the amount of $2,375,000. At December 31,
1994, the sublessee was current with its monthly payment obligations. During
fiscal 1995, the Company was entitled to receive from the sublessee
approximately $1,047,000 in rental income of which it received approximately
$685,000, resulting in past due amounts of approximately $362,000. Due to the
sublessee's failure to remain current
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with its 1995 monthly payment obligations in December 1995, the Company
repossessed and sold one of its mobile MRI units for $625,000. As a result of
the sale of the mobile MRI unit, the Company incurred a loss of approximately
$31,000 representing the difference between the remaining sublease income
attributable to such mobile MRI unit and the sale proceeds received. In February
1996, the Company terminated its master agreement with the sublessee and
repossessed the remaining three mobile MRI units from the sublessee as a result
of the failure of the sublessee and certain of its customers to satisfy their
obligations to the Company. At such time, the sublessee owed the Company
approximately $456,000. In an attempt to satisfy the past due amounts, the
sublessee and its customers provided the Company with cash (aggregating
approximately $75,000) and additional patient receivable claims (aggregating
approximately $504,000) to partially offset the amounts owed to the Company. The
additional patient receivable claims were to supplement the amounts previously
submitted to the Company to satisfy prior past due indebtedness. The Company
soon after returned the three mobile MRI units to the sublessee. Effective July
27, 1996, the Company again repossessed the three mobile MRI units due to the
sublessee's continuing failure to meet its obligations to the Company. At such
time, the sublessee owed the Company approximately $532,000. In August 1996, the
Company sold another one of its mobile MRI units. There was no significant gain
or loss resulting from such disposition. In October 1996, the Company entered
into an agreement with certain other creditors of the sublessee (the "Creditors
Agreement") with respect to the collection and application of the sublessee's
receivables. At December 31, 1996, in connection with collection efforts on
behalf of the parties to the Creditors Agreement, together with the Company's
intended use of one of its two remaining mobile MRI units at the Secaucus
Facility, the Company recorded a recovery on accounts receivable (approximately
$392,000) relating to a provision for bad debts that had been recorded at the
time of the restructuring of the Company's mobile MRI operations. In May 1997,
the Company sold one of its two remaining mobile MRI units to an unaffiliated
third party for $105,000. As of December 31, 1997 and 1998, the amount of the
sublessee's past due indebtedness was approximately $347,000 and $257,000,
respectively (which amount has been fully reserved for by the Company in its
financial statements). As previously discussed, in May 1998 the Company sold its
remaining mobile MRI unit to an unaffiliated third party. See "Item 1. Business
- - The Facilities - Secaucus Facility." At December 31, 1998, the Company
reevaluated its future obligations under a note payable which was due (and paid)
in February 1999 relating to this mobile equipment and concluded that the
remaining reserve at December 31, 1998 was adequate.
RELATIONSHIP WITH MEDICAL LICENSEES
As previously noted, the Company generally leases its medical equipment
and premises (directly or through joint ventures) to Medical Licensees primarily
located in New Jersey, New York and Pennsylvania who, in turn, use the equipment
to provide services to their patients and patients of other health care
providers (including individual physicians, physicians' groups and other health
care providers consisting of managed care organizations, labor unions and
self-funded corporations) with whom they or the Company have relationships. For
the years ended December 31, 1998, 1997 and 1996, the Company had five Medical
Licensees which accounted for more than 5% of its total revenues: Monmouth,
which accounted for 27%, 30% and 30% of total revenues in fiscal 1998, 1997
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and 1996, respectively; Edgewater Diagnostic Imaging, P.A. ("Edgewater"), which
accounted for 14%, 18% and 19% of total revenues in fiscal 1998, 1997 and 1996,
respectively; Wayne MRI, P.A. ("Wayne"), which accounted for 14%, 17% and 21% of
total revenues in fiscal 1998, 1997 and 1996, respectively; Rittenhouse Square
Imaging Associates, L.P. ("Rittenhouse"), which accounted for 9%, 15% and 12% of
total revenues in fiscal 1998, 1997 and 1996, respectively; and Kings Medical,
which accounted for 6%, 12% and 18% of total revenues in fiscal 1998, 1997 and
1996, respectively. To the extent the Company were to lose any of its existing
Medical Licensees, the impact on revenues and operations would not be materially
affected because the Company believes it will be readily able to replace any
such Medical Licensee.
Many health care providers do not own MRI or other diagnostic imaging
technology equipment because of insufficient patient volume to justify the costs
associated with the acquisition and operation of the technology, as well as the
strict regulatory environment and management and marketing considerations.
Depending upon features and options selected, an MRI unit costs between
approximately $800,000 and $1.6 million. Many health care providers cannot
afford a capital investment of this size or cannot utilize the equipment in a
cost-effective manner. Moreover, a health care provider with sufficient patient
volume and resources to purchase an in-house MRI unit or other diagnostic
imaging technology may still contract for the use of the Company's services.
Among the reasons for such use of the Company's MRI units and other technologies
are: avoidance of the risk of technological obsolescence of the equipment;
elimination of the need to recruit and employ qualified technicians;
establishment of a patient base before an in-house MRI unit or other technology
is installed; provision of additional coverage when patient demand exceeds
in-house capacity; lack of a suitable interior location; changes in Medicare
reimbursement systems resulting in declining profit margins for many hospitals
and other health care providers, thereby reducing capital available to purchase
new and expensive equipment; and lessening the risks of medical malpractice
suits by utilizing state of the art medical technology and related services.
MANAGED CARE
As the number of managed healthcare enrollees continues to proliferate
in the New Jersey Tri-State region, radiology providers face new opportunities
and challenges as they negotiate and manage various contractual relationships.
In the past few years, consolidation and integration among hospitals and health
systems has accelerated, as with traditional insurers and HMOs. In heavily
concentrated markets, some radiology practices have received more than 20% to
30% of their patient volume from capitated managed care contracts.
What the future holds for health care reform is uncertain. However,
many imaging centers have tried to prepare themselves for anticipated reforms.
Many are focusing on forming alliances with insurance companies and health care
networks in order to be assured a steady patient base. In an effort to form
these alliances, these imaging centers are trying to cut their costs and offer
the highest quality of care available.
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With its extensive experience of negotiating over 150 managed care
contracts, the Company believes it is better positioned than most of its
competitors to compete in the fast growing managed care market. In 1998, over
27% of the Company's total revenue was derived from its managed care contracts.
In addition, the Company has gained a significant market share at the Ocean
Township Facility through its capitated agreement with Aetna U.S. Healthcare. To
date, this facility has provided services to nearly 17,000 of the 40,000 Aetna
U.S. Healthcare members in the county in which it is located. Although the payor
mix varies with each of the Company's facilities, managed care revenue as a
percentage of total revenue has increased each year. The Company is in the
process of negotiating additional capitated arrangements with several major
HMOs, as well as aggressively pursuing direct fee-for-service contracts with
self-insured employers and unions. The Company believes it is poised for long
term success and growth in the managed care industry by continuing to maintain
and adapt to the changing health care market place.
MARKETING/SALES
As of December 31, 1998, the Company employed one full-time marketing
and managed care executive, one part-time assistant director of marketing and
nine full-time sales representatives. The Company has also employed other
part-time marketing representatives from time to time. These personnel identify
and contact health care providers, managed care organizations and corporate
subscribers which may require the Company's services. In addition, the Company
enters into excess capacity arrangements whereby the Company provides, during
"off-hours", the use of certain of its facilities and all ancillary services
with respect to such facilities to various licensees. The Company recognizes
revenue on a fixed fee per procedure basis from these arrangements.
A significant resource for the Company has been existing customer
referrals. Based on historical data, there are approximately over 13,000
physicians who have referred patients to the Company's 11 facilities. A
significant amount of these referrals have been generated through the efforts of
the Company's sales and marketing representatives, who directly call on both
existing referring physicians and potential referrers. The Company also employs
consumer advertising, such as local radio spots and print advertisements, as a
marketing tool to attract not only physicians, but the patient population as
well.
COMPETITION
The health care industry in general, and the market for advanced
diagnostic imaging services in particular, are highly competitive. In addition
to direct competition from other diagnostic imaging providers, the Company must
compete with larger health care providers as well as hospitals, private clinics
and radiology practices that own MRI units or other diagnostic imaging equipment
and with equipment manufacturers which sell equipment to health care providers
for in-house installation.
A number of competitors operate fixed-site MRI and other multi-modality
facilities in New Jersey, New York and Pennsylvania, the Company's service
areas. Moreover, certain of these competitors have substantially greater
financial resources than those of the Company, which may
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give them advantages in negotiating equipment acquisitions, advertising and
responding quickly to new demand. The Company believes that it competes
effectively against other fixed-site providers based on the reputation of the
Company and the physicians with whom the Company has relationships, the location
of the Company's facilities, the state of the art equipment the Company uses,
and the ability of the Company to quickly respond to demand.
MRI competes with less expensive diagnostic imaging devices and
procedures which may provide similar information to the physician. Alternative
diagnostic imaging technologies include CAT scans, nuclear medicine,
radiography/fluoroscopy, ultrasound, mammography and conventional x-ray. The
Company believes that MRI's significant benefits justify the pricing
differential between MRI and other diagnostic imaging modalities.
Existing health care providers who are customers of the Company may
purchase MRI equipment if their patient volume increases to the point where it
becomes cost effective to own and operate their own MRI equipment. Ownership and
operation of MRI equipment and the provision of related services does not
require proprietary information, trade secrets or similar nonpublic intellectual
property but does require in most states satisfaction of certain licensure and
certification requirements with the state/local health departments, which are
not necessarily easily obtained. Consequently, there are no significant barriers
to entry other than the costs of the equipment, hiring of qualified technicians
and management and, where applicable, compliance with licensure and
certification requirements and other regulatory or legislative constraints.
EQUIPMENT
The diagnostic imaging equipment currently operated by the Company is
located in fixed-site facilities, is technologically sophisticated and complex,
requires regular maintenance and is subject to unpredictable malfunctions and
breakdowns. The Company contracts with equipment manufacturers for comprehensive
maintenance programs for its equipment to minimize downtime (the period of time
equipment is unavailable during scheduled use hours because of malfunctions). On
most equipment, the maintenance contract provides that such repairs will be
performed during regular operating hours. Although the maintenance contracts
provide for inspections and maintenance of the equipment on a fixed-fee basis,
equipment servicing adversely affects revenue generation by reducing the number
of regular operating hours the equipment is available for use. Additionally,
medical equipment is generally warranted by the equipment manufacturer for a
specified period of time, usually one year from the date of purchase, during
which the Company receives uptime guarantees (a guarantee that the equipment
will function for a specified percentage of scheduled use hours) from the
manufacturer of the equipment. However, these guarantees are not expected to
substantially compensate the Company for loss of revenue for downtime, scheduled
maintenance and software updates (upgrading of the computer program which aids
the generation of the scanned image). The Company carries business interruption
insurance which provides for $750,000 of coverage for each fixed-site facility,
after five days of downtime, to help protect itself from unexpected long-term
equipment failures.
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REIMBURSEMENT
Many of the Company's customers are health care providers that are
subject to extensive federal and state legislation and regulation relating to
the reimbursement and control of health care costs. As a result of federal
cost-containment legislation currently in effect, hospital in-patients covered
by Medicare are classified into diagnostic related groups ("DRGs") in accordance
with the patient's diagnosis, and reimbursement is limited to predetermined
amounts assigned to particular DRGs based upon the diagnosis of the ailment of a
patient. Generally, free-standing diagnostic imaging facilities that provide
services for hospital in-patients must look to the referring hospital for
payment, which the hospital must take out of its DRG reimbursement. For
out-patients who are not admitted to a hospital, the Medicare approved
reimbursement for single MRI scans generally range between $482 and $1,212,
depending on the type of scan performed. Because Medicare reimbursement for
diagnostic imaging services is limited, it does not necessarily cover all of the
costs of the medical services provided. Therefore, the physicians who provide
professional services at the Company's facilities may be prevented, to the
extent they rely on Medicare reimbursement, from using diagnostic imaging
equipment profitably after they pay use fees to the Company and other expenses
of operations. However, Medicare billings currently are not a material component
of the Company's revenues, and revenues associated with Medicare claims
accounted for less than 8% of the Company's revenues for the year ended December
31, 1998.
Currently, DRGs are not applicable to out-patient services that a
physician may provide to non-Medicare patients at a diagnostic imaging facility.
When patients are directly billed for services, most of their health care
insurers, including Blue Cross/Blue Shield, reimburse service providers for 80%
to 100% of the physician's charge for diagnostic imaging services as long as
this fee is "reasonable and customary" for that geographical area. Any
difference is due from the patient. The health care insurer determines what is
considered "reasonable and customary." Some insurers have adopted DRG-type
reimbursement schedules and others may be investigating the possibility of
implementing such schedules, however, the Company believes that such private
reimbursement schedules are not and will not be as stringent as those under the
Medicare DRG program. Since patient reimbursement affects the levels of fees the
Company can charge a Medical Licensee, widespread application of DRG-type
reimbursement schedules could adversely affect the Company's business. In
addition, the Company has entered into many contracts with managed care
organizations which generally provide for lower reimbursement rates than those
received from other insurance carriers.
GOVERNMENT REGULATION
Licensing and Certification Law
All states in which the Company currently operates have laws that may
require licensing of facilities and personnel, compliance with standards of
testing and obtainment of Certificates of Need ("CON") and other required
certificates for certain types of health care facilities and major medical
equipment, such as an outpatient diagnostic imaging center using MRI or other
diagnostic imaging
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equipment. At the present time, the licensing and certification laws of New
Jersey, New York and Pennsylvania pertain to the Company's operations. Effective
December 1996, the CON requirements in the State of Pennsylvania expired, and to
date no new CON requirements have been implemented, but there can be no
assurance that new rules or regulations will not be enacted which may affect or
restrict the Company's operations in Pennsylvania, as well as affect expansion
plans in Pennsylvania, if any.
Although the licensing and certification law programs vary from state
to state, generally such programs require state approval before acquiring and
operating major medical equipment or establishing new inpatient services, but
various exceptions apply. In New York, for example, the acquisition of MRI
equipment to be placed outside of a hospital or other licensed health care
facility which is leased and operated by an independent physician or group of
physicians (such as the New York City Facility) does not require a CON. Where a
CON is required, approval of the acquisition of MRI equipment may be tied to the
satisfaction of various criteria relative to costs, need for the services and
quality of construction and operation. In New Jersey, CON approval formerly
required for MRI equipment has been eliminated; however instead New Jersey has
implemented licensure requirements for most facilities offering MRI services.
The licensure requirements include standards for building compliance, equipment
compliance and certain operational standards. The Company believes it is in
compliance with these standards at all sites it operates in New Jersey. The
certification and licensure requirements of these states can serve as a barrier
to entry and can increase the costs of and delays in certain expansions or
renovations or the addition of health care services in the areas covered by such
requirements.
The Company also has to comply with certain federal certification
requirements. For example, the Ocean Township Facility, which offers
mammography, must be certified by the federal government, which certification
has been received. Further, additional certification requirements may affect the
Company's facilities, but such certifications generally will follow specific
standards and requirements set forth in public documents.
Although the Company believes that currently it has obtained all
necessary licenses and certifications, the failure to obtain a required license
or certification could have a material adverse effect on the Company's business.
The Company believes that the provision of health care services will continue to
be subject to intense regulation at the federal and state levels and cannot
predict the scope and affect thereof nor the cost to the Company of compliance.
Corporate Practice of Medicine: Fee Splitting
The laws of many states, including all of the states in which the
Company currently operates, prohibit business corporations, such as the Company,
from exercising control over the medical judgements or decisions of physicians
and from engaging in certain financial arrangements, such as fee-splitting with
physicians. These laws and their interpretations vary from state to state. These
laws are interpreted by both the courts and regulatory authorities. The
Company's strategy in its expansion into physician practice management is to
acquire certain assets and assume certain
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liabilities of, and to enter into service agreements with, affiliated physicians
and other health care practitioners. Pursuant to these service agreements the
Company will provide management, administrative, technical and other non-medical
services to the affiliated practitioners in exchange for a fee. The Company
intends to structure its relationships with the affiliated practitioners
(including the purchase of assets and the provision of services under the
service agreements) to keep the Company from engaging in the unlicensed
corporate practice of medicine or exercising control over the medical judgements
or decisions of the affiliated practitioners. There can be no assurance that
regulatory authorities or other parties will not assert that the Company is
engaged in the unlicensed corporate practice of medicine in such states or that
the payment of service fees to the Company by the affiliated practitioners under
the service agreements constitutes fee-splitting or the unlicensed corporate
practice of medicine. If such a claim were successfully asserted, the Company
(and affiliated practitioners) could be subject to civil and criminal penalties
and could be required to restructure or terminate its contractual arrangements.
Such results could have a material adverse effect on the Company's business,
financial condition and results of operations.
Several of the diagnostic imaging facilities in New Jersey owned by the
Company have sought and been granted a license to operate MRI and other
diagnostic imaging modalities by the State. At such facilities, for billing
purposes the service provider is deemed to be the facility owner and bills are
issued in the name of such owner. Irrespective of these billing arrangements,
the radiologists or other licensed physicians who furnish professional services
at the facility exercise complete independence in medical decisions and medical
oversight of the facility.
DRG Method of Reimbursement
At present, the Company receives little reimbursement for MRI and other
radiology services provided on behalf of hospital inpatients. As such, little of
its reimbursement comes from a DRG-type system. The Company does not anticipate
that there will be an appreciable increase in hospital inpatient imaging
services provided by the Company or any other imaging services that would come
under a DRG-type reimbursement system. No insurers or other payors with which
the Company does business has adopted DRG-type reimbursement. The Company has
relationships with several hospitals for inpatient services where the hospital
is reimbursed under the DRG system, but the Company receives payment on a
discounted fee for service basis, not under a DRG. It is impossible for the
Company to estimate the impact on the Company if payors try to implement a
DRG-type system, as radiology is only one component of a bundle of services that
would likely be covered. See "--Reimbursement."
Anti-Kickback Statute under Federal Medicare Program
The federal Anti-Kickback Statute, which is included in the Social
Security Act, prohibits the offering, payment, solicitation or receipt of any
form of remuneration in return for the referral of Medicare or Medicaid patient
or patient care opportunities, or in return for the purchase, lease or order or
provision of any item or service that is covered by Medicare or Medicaid.
Violations of the Anti-Kickback Statute, which is a criminal statute, are
punishable by fines and/or imprisonment.
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<PAGE>
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, persons convicted of violating the Anti-Kickback Statute may be excluded
from the Medicare or Medicaid programs. Scrutiny by the federal government of
possible unlawful arrangements between health care providers and referral
sources extends to indirect payments which have the potential of inducing
patient referrals, such as situations in which physicians hold investment
interests in companies which benefit from their Medicare referrals.
Beginning in 1991, the Office of the Inspector General ("OIG") of the
U.S. Department of Health and Human Services ("HHS") published safe harbor
regulations that specify the conditions under which certain types of financial
relationships, including investment interests in public companies, management
and personal service contracts and leases of space and equipment, will be
protected from criminal or civil sanctions under the Anti-Kickback Statute if
the standards set forth in the regulations are strictly followed. Although the
Company believes that the financial arrangements involved in the operation of
its facilities qualify for protection under the applicable safe harbor
protections, given the complexity of these regulations there can be no assurance
that all applicable provisions are being satisfied. The OIG has stated that
failure to satisfy the conditions of an applicable safe harbor does not
necessarily indicate that the arrangement violates the Anti-Kickback Statute,
but such arrangements are not among those that the safe harbor regulations
protect from criminal and civil sanctions. Due to the broad and sometimes vague
nature of these laws and requirements, there can be no assurance that an
enforcement action will not be brought against the Company or that the Company
will not be found to be in violation of the Anti-Kickback Statute. Further,
there can be no assurance that new laws or regulations will not be enacted or
existing laws or regulations interpreted or applied in the future in such a way
as to have a material adverse impact on the Company, or that federal or state
governments will not impose additional restrictions upon all or a portion of the
Company's activities which might adversely affect the Company's business.
Stark Law
Sections of the Omnibus Budget Reconciliation Act of 1989 ("Stark I")
and the Omnibus Budget Reconciliation Act of 1993 ("Stark II"), as amended,
prohibit physicians (including medical doctors, osteopaths, dentists,
chiropractors and podiatrists) from referring their patients for the provision
of "designated health services" (including diagnostic imaging, clinical
laboratory, physical therapy and other services) to an entity with which such
physician (or an immediate family member) has a financial relationship. Stark I
and Stark II (collectively, the "Stark Law") also prohibit the provider entity
from presenting or causing to be presented a claim or bill to any individual,
third-party payor or other entity for designated health services furnished under
a prohibited referral. A violation of the Stark Law by the Company or an
affiliated medical practice could result in significant civil penalties, which
may include exclusion or suspension of the physician or provider entity from
future participation in the Medicare and Medicaid programs and substantial
fines.
The Stark Law provides exceptions from its prohibitions for certain
types of referrals within a qualifying group medical practice, employment
relationships and certain personal services and leasing arrangements and certain
other contractual relationships. The Company has reviewed the
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<PAGE>
effects of the Stark Law and believes that it complies in all material respects
with the applicable provisions of the Stark Law, although because of the broad
and sometimes vague nature of this law and the final and proposed interpreting
regulations, there can be no assurance that an enforcement action will not be
brought against the Company or that the Company will not be found to be in
violation of the Stark Law.
False Claims Act
Several federal laws impose civil and criminal liability for knowingly
presenting or causing to be presented a false or fraudulent claim, or knowingly
making a false statement to obtain governmental approval or payment for a false
claim. Under the False Claims Act, civil damages may include a penalty of up to
three times the government's loss plus $5,000 to $10,000 per claim. Actions to
enforce the False Claims Act may be commenced by individuals on behalf of the
government (known as a qui tam suit) and such private citizens could receive up
to 30% of the recovery. The Company carefully monitors its submissions for
reimbursement on behalf of the Company and its affiliated health care providers
to assure that they are not false or fraudulent and believes that it is not in
violation of the False Claims Act, but there is no assurance that such
activities will not be challenged by governmental authorities or private parties
resulting in a false claim action.
State Laws
Many states, including some where the Company operates, have laws that
prohibit certain direct and indirect payments made by health care providers that
are designed to induce referrals. Further, some states expressly prohibit
referrals by physicians to entities in which such physicians have a financial
interest. Sanctions for violating the state statutes may include loss of
licensure for the physicians and civil and criminal penalties assessed against
both the referral source and the recipient provider. The Company continues to
review all aspects of its operations, and where appropriate has taken steps to
insure that physicians do not have investment interests in its operations.
The Company believes that it complies in all material respects with all
applicable provisions of the Anti-Kickback Statute, the Stark Law and applicable
state laws governing fraud and abuse as well as licensing and certification,
although because of the broad and sometimes vague nature of these laws and
requirements, there can be no assurance that an enforcement action will not be
brought against the Company or that the Company will not be found to be in
violation of one or more of these regulatory provisions. Further, there can be
no assurance that new laws or regulations will not be enacted, or existing laws
or regulations interpreted or applied in the future in such a way as to have a
material adverse impact on the Company.
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<PAGE>
Insurance Laws and Regulations
Certain states have enacted statutes or adopted laws and regulations
("Laws") affecting risk assumption in the health care industry, including Laws
that subject any physician or physician network engaged in risk-based
contracting to applicable insurance Laws, which may include, among other things,
Laws providing for minimum capital requirements and other safety and soundness
requirements. If these Laws were applicable to the Company, failure to comply
with them could have a material adverse effect on the Company's business,
financial condition and results of operations. However, the states in which the
Company operates provide exemptions from applicable insurance Law requirements
where partial (and in certain instances, full) risk is borne by a licensed
medical provider. In New Jersey, where the Company conducts the majority of its
operations, state law specifically permits a licensed medical provider to assume
financial risk as part of his/her provision of medical services. If these
arrangements were to become a larger part of the Company's reimbursement for
health care services, state laws currently in place in jurisdictions where the
Company conducts business generally provide significant latitude from insurance
requirements.
EMPLOYEES
As of December 31, 1998, the Company had 136 full-time employees,
including four radiologists, 33 trained diagnostic imaging technologists, one
marketing and managed care executive, nine sales representatives, and 87
administrative and clerical personnel. None of the Company's employees are
represented by labor organizations, and the Company is not aware of any activity
seeking such organization. The Company considers its relationships with its
employees to be good.
ITEM 2. PROPERTIES
The Company does not own any real property but leases space for its
corporate offices in Red Bank, New Jersey, and its 11 facilities (one of which
contains the Company's billing office). The addresses of these offices and
facilities are as follows:
Corporate Offices
- -----------------
Tri-Parkway Corporate Park
200 Schulz Drive
Red Bank, NJ 07701 (approximately 7,400 square feet)
Facilities
- ----------
Brooklyn Facility
2095 Flatbush Avenue
Brooklyn, New York 11234 (approximately 5,000 square feet)
Edgewater Facility
725 River Road, Suite 103
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<PAGE>
Edgewater, NJ 07020 (approximately 2,000 square feet)
Wayne Facility
516 Hamburg Turnpike
Wayne, NJ 07470 (approximately 700 square feet)
Philadelphia Facility
1705 Rittenhouse Square
Philadelphia, PA 19103 (approximately 4,500 square feet)
Ocean Township Facility (which contains the billing office)
733 Highway 35
Ocean Township, NJ 07712 (approximately 9,200 square feet)
New York City Facility
45 Beekman Street
New York, NY 10038 (approximately 4,000 square feet)
Bloomfield Facility
350 Bloomfield Avenue
Bloomfield, NJ 07003 (approximately 5,500 square feet)
Voorhees Facility
108 Somerdale Road
Voorhees, NJ 08043 (approximately 7,700 square feet)
Voorhees Multi-Modality Facility
600 Somerdale Road
Voorhees, NJ 08043 (approximately 2,400 square feet)
Mainland Facility
1418 New Road
Northfield, NJ 08225 (approximately 10,100 square feet)
Williamstown Facility
640 North Black Horse Pike
Williamstown, NJ 08094 (approximately 2,700 square feet)
Management believes that its offices and facilities are suitable for the
purposes for which they are used.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings which in
the opinion of its management may have a material adverse effect on its
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on December
22, 1998. At the meeting, the following directors were elected for a one year
term and until their successors are duly elected and qualified:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
NAME FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- ---- --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Shawn A. Friedkin 12,414,183 84,700 0 0 0
Manmohan A. Patel 12,301,183 197,700 0 0 0
Joseph J. Raymond 12,420,183 78,700 0 0 0
Michael S. Weiss 12,414,183 84,700 0 0 0
Elliott H. Vernon 12,418,283 80,600 0 0 0
</TABLE>
The following additional matters were voted upon at the Annual Meeting:
The ratification and approval of an option award to an executive officer
of HIS PPM Co., a wholly-owned subsidiary of the Company ("HIS PPM"), was
approved by the following vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
7,000,723 399,682 0 31,309 5,067,169
</TABLE>
The approval of an amendment to the Company's 1997 Omnibus Incentive
Plan (the "Omnibus Plan") increasing the maximum number of shares of Common
Stock that may be issued pursuant to awards to any participant under such plan
from 500,000 shares to 600,000 shares in any given fiscal year was approved by
the following vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
12,017,842 439,341 0 41,700 0
</TABLE>
The approval of certain amendments to the Company's 1996 Stock Option
Plan for Non-Employee Directors (the "Directors Plan"), among other things,
increasing the maximum number
23
<PAGE>
of shares of Common Stock that may be subject to options under such plan during
its term from 250,000 shares to 750,000 shares, was approved by the following
vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
6,996,323 402,691 0 32,700 5,067,169
</TABLE>
The ratification and approval of an option award to a director of the
Company was approved by the following vote:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- --- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
6,645,273 564,141 0 222,300 5,067,169
</TABLE>
24
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is included in The Nasdaq National Market ("HISS").
The following table sets forth the high and low sale prices for the
Common Stock for the period from January 1, 1997 through March 26, 1999 based on
transaction data as reported by The Nasdaq National Market.
High Low
---- ---
Year Ended December 31, 1997
----------------------------
First Quarter $ 2-1/16 $ 15/16
Second Quarter $ 2 $ 1
Third Quarter $ 1-7/16 $ 3/4
Fourth Quarter $ 1-15/32 $ 25/32
Year Ending December 31, 1998
-----------------------------
First Quarter $ 1-31/32 $ 31/32
Second Quarter $ 1-23/32 $ 1
Third Quarter $ 1-23/32 $ 5/8
Fourth Quarter $ 1-5/16 $ 23/32
Year Ending December 31, 1999
-----------------------------
First Quarter (through March 26, 1999) $1-3/8 $ 31/32
As of March 26, 1999, there were 73 holders of record of the Common
Stock. The Company believes that there were approximately 1,200 beneficial
holders of the Common Stock as of such date.
The Company has paid no dividends on the Common Stock since its
inception. Any future declaration of cash dividends on the Common Stock will
depend upon the Company's earnings, financial condition, capital requirements
and other relevant factors. The Company does not intend to pay cash dividends on
the Common Stock in the foreseeable future but intends to retain its earnings
for use in its business.
As previously noted, the Company issued an aggregate of 887.385 shares
of Series D Stock having an aggregate liquidation preference of $9,317,542.50
(i.e., $10,500 per share liquidation
25
<PAGE>
preference) in October 1998 in connection with the Beran Acquisition. See "Item
1. Business - The Facilities - The Beran Facilities." In addition, upon
consummation of the Beran Acquisition, certain transferees of Biltmore
Securities, Inc. ("Biltmore") were issued 750,000 shares of Common Stock under a
consulting agreement between Biltmore and the Company (see "Item 13. Certain
Relationships and Related Transactions") and a restricted stock award to the CEO
of 250,000 shares of Common Stock vested (see "Item 11. Executive
Compensation"). Moreover, in connection with the bridge financing provided by
DVI Financial Services Inc. ("DFS") with respect to the Beran Acquisition, the
Company entered into a consulting agreement with DFS and issued DFS stock
options to purchase an aggregate of 500,000 shares of Common Stock. See "Item
13. Certain Relationships and Related Transactions." Each of these issuances
were deemed to be exempt from registration under the Securities Act of 1933 in
reliance of Section 4(2) of such Act as a transaction by an issuer not involving
any public offering.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information is provided
for the Company.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998(A) 1997(B) 1996 1995 1994
------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
- ---------------
Revenues $ 16,451,057 $ 10,247,940 $ 9,787,591 $ 9,249,284 $ 11,398,794
Income/(loss) before minority
interests and income taxes $ 2,738,600 $ (331,094) $ (396,256) $ 33,227 $ (5,769,180)
Net income/(loss) available to
common shareholders $ 1,978,703 $ (804,305) $ (861,796) $ (118,430) $ (6,053,612)
Income/(loss) per common share -
basic $ 0.19 $ (0.13) $ (0.18) $ (0.03) $ (1.35)
Income/(loss) per common share -
diluted $ 0.10 $ (0.13) $ (0.18) $ (0.03) $ (1.35)
BALANCE SHEET DATA:
- -------------------
Working capital (deficit) surplus $ (2,059,665) $ 1,152,667 $ 2,943,313 $ 1,160,247 $ 658,828
Total assets $ 42,954,653 $ 13,540,635 $ 10,566,732 $ 10,006,699 $ 13,800,753
Current portion of long-term debt,
reserves for subleased equipment
and capital lease obligations $ 15,800,300 $ 1,647,148 $ 1,252,613 $ 2,287,204 $ 4,214,804
Long-term debt, reserves for
subleased equipment and capital
lease obligations less current $ 3,440,890 $ 3,101,912 $ 2,717,216 $ 3,275,445 $ 4,778,306
portion
Stockholders' equity $ 17,749,286 $ 5,412,898 $ 5,004,807 $ 3,222,876 $ 3,341,306
</TABLE>
(A) The data relating to the year ended December 31, 1998 includes the
acquisition of the Beran Entities on October 2, 1998 (effective October 1,
1998). See "Item 1. Business - The Facilities."
(B) The data relating to the year ended December 31, 1997 includes the
acquisition of the New York City Facility on November 4, 1997. See "Item 1.
Business - The Facilities."
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. STATEMENTS IN THIS ANNUAL REPORT THAT ARE NOT HISTORICAL FACTS
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). 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, 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 (THE "SEC").
For the Year Ended December 31, 1998 vs. December 31, 1997
For the year ended December 31, 1998, revenues were $16,451,057 as
compared to $10,247,940 for the year ended December 31, 1997, an increase of
approximately $6,203,000 or 61%. This increase was primarily due to (i) revenues
associated with the operation of the Beran Facilities acquired effective as of
October 1, 1998 (approximately $3,049,000), (ii) an increase in same facility
revenue (approximately $2,033,000) for facilities that were operated by the
Company for all of 1998 and 1997, (iii) revenues associated with the operation
of the New York City Facility acquired in November 1997 (approximately $805,000)
and (iv) revenues associated with its physician practice management operations
(approximately $585,000), all of which were partially offset by (x) decreased
revenues at the Brooklyn Facility (approximately $159,000) and (y) the closure
of the Secaucus Facility (approximately $151,000).
For the year ended December 31, 1998, operating expenses were
$13,712,457 as compared to $10,579,034 for the year ended December 31, 1997, an
increase of approximately $3,133,000 or 30%. This increase was primarily due to
(i) expenses incurred in connection with the operation of the Beran Facilities
acquired in October 1998 (approximately $2,070,000), (ii) increased expenses
associated with facilities that were operated by the Company for all of 1998 and
1997 (approximately $817,000) relating to an increase in the number of
procedures being performed, (iii) expenses incurred in connection with the
operation of the New York City Facility acquired in November 1997 (approximately
$610,000), (iv) expenses relating to its physician practice
28
<PAGE>
management operations (approximately $223,000), all of which were partially
offset by (x) the closure of the Secaucus Facility in May 1998 (approximately
$692,000) and (y) a decrease in non-cash compensation charges in fiscal 1998
(approximately $136,000) as compared to fiscal 1997 (approximately $399,000).
The fiscal 1998 non-cash compensation charges resulted from the grant of stock
options to (A) a director of the Company as consideration for his agreement, in
his capacity as a partner in MR Associates, to sell the Brooklyn Facility
(approximately $88,000) (see "Item 1. Business - The Facilities - Brooklyn
Facility") and (B) DFS, in its capacity as financial advisor, pursuant to a five
year consulting agreement (approximately $47,000) (see "Liquidity and Capital
Resources").
The operating results for the Company have been negatively impacted by
the Brooklyn Facility, the Philadelphia Facility and at the Secaucus Facility.
In connection with the Company's review of the viability of the Brooklyn
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 limited partners' interests in the Philadelphia Facility not currently owned
by it (i.e., the limited partners' interests) and it expects to consummate such
purchase by the end of the second quarter of fiscal 1999. See "Item 1. Business
- - The Facilities - Philadelphia Facility." However, notwithstanding the
foregoing efforts, there can be no assurance that the purchase of the limited
partners' interests in the Philadelphia Facility or the implementation of other
revenue enhancement measures, to include expanded advertising and marketing
will be successfully concluded or that the procedures generated at the Brooklyn
Facility will be sufficient to better support the operations of the Brooklyn
Facility. In May 1998, based upon losses already sustained and the expectation
of continuing losses, the Company decided to close the Secaucus 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 Secaucus Facility, including the related debt service. See
"Item 1. Business - The Facilities - Secaucus Facility."
During the year ended December 31, 1997, as a corporate general partner
the Company recorded $21,626 of losses attributable to the limited partnership
interests in the Philadelphia Facility in excess of the limited partners'
capital accounts.
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 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 the PMA Merger
Agreement) 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. See "Item 1. Business -
Introduction."
29
<PAGE>
For the Year Ended December 31, 1997 vs. December 31, 1996
For the year ended December 31, 1997, revenues were $10,247,940 as
compared to $9,787,591 for the year ended December 31, 1996, an increase of
approximately $460,000. This increase was primarily due to increased revenues at
certain of the Company's facilities, as well as the commencement, through a
joint venture, of MRI services in May 1997 at the Secaucus Facility and the
acquisition of the New York City Facility in November 1997.
For the year ended December 31, 1997, operating expenses were
$10,579,034 as compared to $10,183,847 for the year ended December 31, 1996, an
increase of approximately $395,000. This increase was primarily due to (i) the
start-up expenses incurred in establishing the Secaucus Facility (approximately
$798,000), (ii) operating costs associated with the newly-acquired New York City
Facility (approximately $107,000), (iii) increased consulting and marketing fees
(approximately $420,000) arising from various consulting agreements entered into
by the Company during fiscal 1997 with respect to an increased marketing effort
by the Company on behalf of its facilities (including the newly-acquired New
York City Facility and newly-formed Secaucus Facility) deemed to be in its
strategic interest and (iv) increased equipment operating lease expense
(approximately $192,000), all of which were partially offset by (x) a decrease
in non-cash compensation charges recorded during the year ended December 31,
1997 (approximately $399,000) as compared to December 31, 1996 (approximately
$1,445,000) and (y) a gain on the sale of one of the Company's mobile MRI units
to an unaffiliated third party (approximately $105,000). The fiscal 1997
non-cash compensation charges primarily resulted from the grant of (A) stock
options and a restricted stock award to the CEO in connection with an amendment
to his employment agreement which extended the term of his employment and
reduced his base salary (approximately $307,000) (see "Item 11. Executive
Compensation - Employment Contracts and Termination of Employment and Change in
Control Arrangements") and (B) stock options to Biltmore Securities, Inc.
("Biltmore") pursuant to a consulting agreement which vested upon the sale of
preferred stock in February 1996 (approximately $57,000) (see "Item 13. Certain
Relationships and Related Transactions").
During the year ended December 31, 1997, as a corporate general partner
the Company recorded $70,099 of losses attributable to the limited partnership
interests in the Philadelphia Facility in excess of the limited partners'
capital accounts. In addition, because the Company is the only member in the
related limited liability company obligated to fund working capital for the
Secaucus Facility, the Company recorded $153,278 of losses attributable to the
other member's interest in such facility in excess of the other member's capital
account.
The operating results for the year ended December 31, 1997 and 1996
were adversely affected by the Philadelphia Facility which incurred losses of
$175,247 and $374,969, respectively. However, the Company's expanded advertising
and marketing efforts on behalf of the Philadelphia Facility has resulted in a
significantly reduced loss for the year ended December 31, 1997 as compared to
December 31, 1996. The Company is negotiating the purchase of the interests in
the Philadelphia Facility not currently owned by it (i.e., the limited partners'
interests) and it expects to consummate such purchase by the second quarter of
fiscal 1999. See "Item 1. Business - The
30
<PAGE>
Facilities - Philadelphia Facility." However, there can be no assurance that
these negotiations will be successfully concluded. In addition, the operating
results for the year ended December 31, 1997 were adversely effected by
decreasing margins at the Brooklyn Facility resulting from competitive
pressures, as well as by the funding of the expenses associated with the
Secaucus Facility during its start-up phase.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
As of December 31, 1998, the Company had a cash balance of $1,506,123,
current assets of $18,808,408 and a working capital deficit of $2,059,665. The
working capital deficiency is a result of the short-term $14.0 million DFS
Bridge Loan. The DFS Bridge Loan was funded in October 1998 in connection with
the Beran Acquisition and provides for 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 DFS Bridge Loan is expected
to be repaid from the long term financing to be obtained in connection with the
proposed acquisition of JIHP. In the event the acquisition of JIHP is not
consummated on or prior to May 1, 1999, management believes (based on
discussions to date with several financing sources) that the DFS Bridge Loan can
be refinanced on a longer term basis. Cash flows provided by operating
activities were $1,457,563 for the year ended December 31, 1998, which consisted
of (i) depreciation and amortization of $2,029,723 primarily related to
equipment acquired in the Beran Acquisition in October 1998 and in the
acquisition of the New York City Facility in November 1997 and certain new
equipment installed in the Company's existing facilities, (ii) an increase in
the allowance for doubtful accounts receivable of $1,140,000 primarily related
to the aging of accounts receivables at certain of the Company's facilities and
(iii) minority interests in joint ventures of $479,170, all of which were
partially offset by a gain on sale of property, plant and equipment of $317,937
related to the closure of the Secaucus Facility and sale of the mobile MRI unit
used at such facility in May 1998, and the termination of the Catonsville
Facility sublease and sale of the related MRI equipment in December 1998. Other
significant components of cash flows provided by operating activities include
(x) an increase in accounts receivable of $3,703,492 due to an increase in the
number of procedures being performed at the Company's facilities, as well as
those performed at the Beran Facilities acquired October 1998, and (y) an
increase in deferred transaction and financing costs of $1,069,503 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 $768,716.
Cash flows provided by investing activities were $13,311,379, which
related to the payment of the $11.5 million cash portion of the purchase price
in the Beran Acquisition and a $2.5 million loan to the Beran Entities,
partially offset by proceeds of $655,000 from the sale of the mobile MRI unit in
May 1998 which had been utilized at the Secaucus Facility and $189,000 from the
sale of previously subleased equipment at the Catonsville Facility to the
sublessee in December 1998. The
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<PAGE>
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 provided by financing activities were $13,289,313, which
consisted primarily of borrowings of $14,000,000 and $1,376,275 under the DFS
Bridge Loan and revolving line of credit, respectively, mainly in connection
with the Beran Acquisition in October 1998, and which was partially offset by
payments on capital lease obligations of $1,908,258, payments on obligations
related to restructured operations of $49,505 and distributions to limited
partners of joint ventures of $129,199.
The Philadelphia Facility, which has been operating since November
1992, continues to operate at a loss resulting in negative cash flows. The
overall operating results of the Company were affected during the years ended
December 31, 1998, 1997 and 1996 due to the operational results of the
Philadelphia Facility which incurred losses of $54,064, $175,247 and $374,969,
respectively. In order to become profitable, this facility must attain a
certain volume of business and it is uncertain whether such business level will
ever be attained. The Company's expanded advertising and marketing efforts on
behalf of the Philadelphia Facility has resulted in a significantly reduced
loss for the years ended December 31, 1998 and 1997 as compared to December 31,
1996. The Company is negotiating the purchase of the present limited partners'
interests in such joint venture which it expects to consummate during the
second quarter of fiscal 1999. However, there can be no assurance that these
negotiations will be successfully concluded.
In December 1997, the Company agreed to guarantee a loan $1,000,000
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 December 31, 1998,
approximately $810,000 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 $2,000,000, which amount
increased to $3,000,000 in October 1998 in connection with the Beran
Acquisition, with advances limited to 75% of eligible accounts receivable, as
determined by DVIBC.
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Borrowings under the line of credit bear interest at the rate of 3% over the
prime lending rate and are repayable on May 1, 1999. 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 May 1, 1999, management believes
that the revolving line of credit can be refinanced on a longer-term basis or
the repayment due date 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 December 31, 1998 and
1997, respectively, the Company had $2,838,275 and $1,462,000, respectively, of
borrowings under this credit facility.
Prior to September 1998, the Company leased the Brooklyn Facility from
DMR. For fiscal 1997 and the nine months ended September 30, 1998, the Company
paid DMR an aggregate of approximately $407,000 and $208,000, respectively, in
lease payments for the Brooklyn Facility. The Company's lease payments to DMR
were structured to fully satisfy DMR's costs and expenses related to the
facility, including mortgage payments, taxes and other related costs. Effective
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
12% per annum and was repayable over 34 months commencing February 15, 1997. The
outstanding balance of this loan was approximately $145,000 at September 16,
1998. In September 1998, DMR sold its interest in the Brooklyn Facility to an
affiliate of DFS and used all of the proceeds of the sale to pay the mortgages
on the property. Simultaneously with, and as a condition to, such sale, such
affiliate of DFS entered into a lease arrangement with the Company for the
Brooklyn Facility providing for monthly lease payments of approximately $21,000.
As a result of such transaction, the Company has reduced its monthly lease
payments for the Brooklyn Facility by approximately $13,500 per month. See "Item
13. Certain Relationships and Related Transactions."
The Company does not expect the adoption of recently issued accounting
pronouncements to have a material effect, if any, on its financial condition or
results of operations. See Note 1 of the Notes to the Consolidated Financial
Statements of the Company and its Subsidiaries.
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
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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 have maturity dates of May 1, 1999. 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 May 1, 1999, management believes that the DFS Bridge
Loan and 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 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 second 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
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purchase and utilize in a wide area network setting upon consummation of its
acquisition of JIHP. The costs related to such purchase and 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 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries are filed on the pages listed below, as part of Part II,
Item 8.
Independent Auditors' Report F-1
Consolidated balance sheets - December 31,
1998 and 1997 F-2
Consolidated statements of operations -
For the years ended December 31, 1998,
1997 and 1996 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31,
1998, 1997 and 1996 F-4
Consolidated statements of cash flows - For the years ended
December 31, 1998, 1997 and 1996 F-5
Notes to consolidated financial statements F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The members of the Board of Directors of the Company, their respective
ages and the period during which they have served as Directors are as follows:
PERIOD DURING
NAME AGE WHICH A DIRECTOR
---- --- ----------------
Shawn A. Friedkin 34 May 1996 - Present
Manmohan A. Patel 49 December 1998 - Present
Joseph J. Raymond 63 December 1995 - Present
Michael S. Weiss 32 July 1998 - Present
Elliott H. Vernon 56 July 1991 - Present
Shawn A. Friedkin has been the President of Paramount Funding
Corporation, a Florida based factoring company specializing in commercial
receivable funding, since July 1992. From January 1990 through June 1992, Mr.
Friedkin was the Vice President of Friedkin Industries, a Florida company
engaged in the aluminum extrusion and eyeglass manufacturing businesses. Mr.
Friedkin is a graduate of Syracuse University School of Management.
Manmohan A. Patel, M.D. has been the Chairman of Jersey Integrated
HealthPractice, Inc. a privately-held management services organization ("Jersey
Integrated") which provides management services to Pavonia Medical Associates,
P.A. ("Pavonia"), since August 1995. Dr. Patel was one of the founders of
Pavonia, which is the largest independent multi-specialty medical group in New
Jersey, and currently is its President. Dr. Patel is a practicing internist
specializing in pulmonary diseases and critical care and has received board
certifications in the following five specialties: internal medicine, pulmonary
diseases, critical care, emergency medicine and geriatric medicine. Dr. Patel
received his M.D. from Mahatma Gandhi Medical College in India in 1973. He was
an intern at the M.M. Medical College in India, at West Middlesex Hospital in
Britain, at Loyola University, at the Stitch Medical School in Chicago, Illinois
and at the Catholic Medical Center of Brooklyn and Queens in New York and had
fellowships with Bellevue Hospital and New York University Medical Center. Since
1994, Dr. Patel has been a member of the Board of Trustees of the Meadowlands
Hospital Medical Center in Secaucus, New Jersey, and since 1995, Dr. Patel has
been a member of the Board of Trustees of Liberty HealthCare System, Inc. which
is a New Jersey-based teaching hospital system that is affiliated with Mt.
Sinai Health System in New York.
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<PAGE>
Joseph J. Raymond has been the Chairman, Chief Executive Officer and
President of Stratus Services Group, Inc., a staffing company, since September
1997. From July 1992 through August 1996, Mr. Raymond was the Chairman of the
Board, Chief Executive Officer and President of Transworld Home HealthCare, Inc.
("THH"), a publicly-held regional supplier of a broad range of alternate site
healthcare services and products including respiratory therapy, drug infusion
therapy, nursing and para-professional services, home medical equipment,
radiation and oncology therapy and a nationwide specialized mail order pharmacy.
Prior thereto, he was the Chairman of the Board and President of Transworld
Nursing, Inc. ("TNI"), a wholly-owned subsidiary (and predecessor) of THH, from
its inception in 1987. Mr. Raymond received an M.S. degree in management from
the New Jersey Institute of Technology ("NJIT") in 1968 and received a B.S.
degree in electrical engineering from NJIT in 1961.
Michael S. Weiss, Esq. has been a Senior Managing Director of Paramount
Capital, Inc. (a private investment banking firm) ("Paramount") and has held
various other positions with Paramount and certain of its affiliates since
November 1993. Mr. Weiss is also the Vice Chairman of Genta Incorporated and
Chairman of Procept, Inc., both of which are publicly-traded biotechnology
companies. In addition, Mr. Weiss is also a member of the Board of Directors of
AVAX Technologies, Inc., Pacific Pharmaceuticals, Inc. and Palatin Technologies,
Inc. and is the Secretary of Atlantic Pharmaceuticals, Inc., each of which is a
publicly-traded biotechnology company. Additionally, Mr. Weiss is a member of
the Board of Directors of several privately-held biotechnology companies. Prior
to joining Paramount, Mr. Weiss was an attorney with the law firm of Cravath,
Swaine & Moore. Mr. Weiss received his J.D. from Columbia University School of
Law and his B.S. in Finance from the State University of New York at Albany.
Elliott H. Vernon, Esq. has been the Chairman of the Board, President
and Chief Executive Officer of the Company since the Company's inception in July
1991. For over ten years, Mr. Vernon has also been the managing partner of MR
General Associates, a New Jersey general partnership ("MR General") which is the
general partner of DMR Associates, L.P., a Delaware limited partnership ("DMR
Associates"). See "Item 13. Certain Relationships and Related Transactions."
Since December 1995, Mr. Vernon has been a director of Pacific Pharmaceuticals,
Inc., a publicly-traded company engaged in the development and commercialization
of medical products with a primary focus on cancer treatment. Since December
1997, Mr. Vernon has been a director of Procept Inc., a publicly traded company
engaged in the development of novel drugs for the prevention of infectious
diseases, with a primary focus on the HIV disease. Mr. Vernon is also one of the
founders of TNI and was, until April 1997, a director THH. Mr. Vernon is also a
principal of HealthCare Financial Corp., LLC, a healthcare financial consulting
company engaged primarily in FDA matters. From January 1990 to December 1994,
Mr. Vernon was a director and the Executive Vice President and General Counsel
of the Wall Street firm of Aegis Holdings Corporation which offered financial
services through its investment management subsidiary and its capital markets
consulting subsidiary on an international basis. Prior to entering the
healthcare field on a full-time basis, Mr. Vernon was in private practice as a
trial attorney specializing in federal white collar criminal and federal
regulatory matters. Prior to founding his own law firm in 1973,
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<PAGE>
Mr. Vernon was commissioned as a Regular Army infantry officer in the United
States Army (1964). He is a former paratrooper and Vietnam War veteran with
service in the 82nd Airborne Division and 173rd Airborne Brigade. Upon his
return from Vietnam in 1970, Mr. Vernon served as Chief Prosecutor and Director
of Legal Services at the United States Army Communications and Electronics
Command until 1973.
Executive Officers
The names of the current executive officers of the Company and certain
of its subsidiaries, and certain information about them, are set forth below.
Name Age Position
---- --- --------
Elliott H. Vernon 56 Chairman of the Board, President and
Chief Executive Officer
Robert D. Baca 42 President and Chief Operating Officer
of HIS PPM Co.
Scott P. McGrory 34 Vice President, Controller
See above for information regarding Mr. Vernon.
Robert D. Baca, C.P.A., is the President and Chief Operating Officer of
HIS PPM Co., a Delaware corporation and wholly-owned subsidiary of the Company
formed to engage in the physician practice management business ("HIS PPM"). Mr.
Baca has been the President and Chief Operating Officer of HIS PPM since April
1998. From May 1997 to March 1998, Mr. Baca was the Senior Vice President of
Corporate Development for Medical Resources, Inc. ("Medical Resources"), a
publicly-held diagnostic imaging company. Mr. Baca was a founder of Capstone
Management, Inc. ("Capstone"), a diagnostic imaging company which was acquired
by Medical Resources in May 1997, and was, from June 1993 to May 1997, the Chief
Executive Officer and Chief Financial Officer of Capstone. Mr. Baca received a
M.S. in Taxation from Villanova Law School in 1985 and received a B.S. in
Accounting from the University of Delaware in 1978. Mr. Baca is a licensed
certified public accountant in the State of Pennsylvania.
Scott P. McGrory, C.P.A., has been the Vice President, Controller of
the Company (as well as the Assistant Secretary of the Company) since October
1996. As the Vice President, Controller of the Company, Mr. McGrory is the
Principal Financial and Accounting Officer of the Company and is responsible for
overseeing all financial reporting aspects of the Company. Mr. McGrory was the
Company's Controller from August 1995 to October 1996; the Company's Manager of
Accounting from January 1994 to August 1995; and the Company's Manager of
Budgeting from December 1992 to January 1994. From April 1988 to December 1992,
Mr. McGrory was employed as a Senior Accountant by NMR of America, Inc., a
provider of outpatient services in the field of
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<PAGE>
advanced diagnostic imaging. Mr. McGrory is a licensed certified public
accountant in the State of New Jersey.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the outstanding shares
of Common Stock, to file with the SEC initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company (collectively, "Section 16 reports") on a timely basis. Directors,
executive officers and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16 reports. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and certain written representations that no other
reports were required, during fiscal 1998, all Section 16(a) filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were complied with on a timely basis, except that (i) each of Michael S.
Weiss and Manmohan A. Patel did not timely file a Form 3 with respect to his
becoming a member of the Board of Directors, (ii) each of Joseph J. Raymond, a
director of the Company, and Scott P. McGrory, an executive officer of the
Company, did not timely file a Form 4 with respect to one transaction, and (iii)
Shawn A. Friedkin, Joseph J. Raymond, Manmohan A. Patel and Michael S. Weiss,
directors of the Company, did not timely file a Form 5 with respect to two
transactions each for Messrs. Friedkin, Raymond and Weiss and one transaction
for Mr. Patel.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid to, the Chief Executive Officer and each other executive officer of the
Company and its subsidiaries (whose total annual salary and bonus exceed
$100,000) for services rendered in all capacities to the Company and its
subsidiaries during fiscal 1998, 1997 and 1996 (the "named executive officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------
-------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING OTHER
POSITION YEAR SALARY ($) BONUS ($) ($)1 AWARD(S)($) OPTIONS (#) COMPENSATION
- -------- ---- ---------- --------- ---- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ELLIOTT H.
VERNON................ 1998 $244,272 $328,829 $19,249(2) -- -- --
(Chairman of the
Board, President 1997 $100,415 -- $29,359(2) -- 500,000 $88,076(4)
and Chief Executive
Officer) 1996 $181,923 $111,710 $28,121(2) $468,750(3) 500,000 --
ROBERT D.
BACA .................... 1998 $165,808(5) $32,588 -- -- 350,000 --
(President and Chief
Operating Officer of
HIS PPM)
</TABLE>
(1) Unless noted, the value of prerequisites and other personal benefits,
securities and other property paid to or accrued for the named executive
officers did not exceed $50,000 for each such officer, or 10% of such
officer's total reported salary and bonus, and thus are not included in
the table.
(2) Represent payments for personal life and disability insurance made by the
Company on behalf of Mr. Vernon pursuant to Mr. Vernon's employment
agreement.
(3) This restricted stock award vested on October 2, 1998 upon consummation by
the Company of the Beran Acquisition. At December 31, 1998, the restricted
stock award had a value of $281,250 and at October 2, 1998, the restricted
stock award had a value of $226,563.
(4) Represents a non-interest bearing advance made to Mr. Vernon during fiscal
1997. See "Item 13. Certain Relationships and Related Transactions."
(5) Represent compensation beginning on April 13, 1998, the commencement date
of Mr. Baca's employment with HIS PPM.
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Compensation of Directors
The Company does not presently pay non-employee directors any cash fees
in connection with their services as such; however, the Company reimburses them
for all costs and expenses incident to their participation in meetings of the
Board of Directors of the Company (the "Board") and its committees. In addition,
non-employee directors are entitled to participate in the Directors Plan and the
Omnibus Plan (other than members of the Stock Option Committee). Pursuant to the
Directors Plan, stock options exercisable to purchase an aggregate of 25,000
shares of Common Stock automatically are granted to newly-elected or appointed
non-employee directors of the Company. In addition, as approved by the
stockholders at the 1998 annual meeting of stockholders, the Directors Plan
further provides that non-employee directors are entitled to receive stock
options to purchase 5,000 shares of Common Stock (the "Fee Options") for a Plan
Year (as defined in the plan) in the event no annual cash director's fees are
paid by the Company for such Plan Year and may also elect to receive the Fee
Options in lieu of any cash director's fee otherwise payable by the Company to
such director for such Plan Year. The Company has determined that no cash
director's fees will be paid for the 1999 Plan Year, and, therefore, Fee Options
have been issued to each of the current non-employee directors.
The purchase price of the shares of Common Stock subject to stock
options issued under the Directors Plan is equal to the fair market value of
such shares on the date of the grant, as determined in accordance with the plan.
Stock options awarded under the Directors Plan vest in increments of 40% after
the sixth month, 80% after the eighteenth month and 100% after the thirtieth
month anniversary of the date of grant. Upon termination of a non-employee
director's service on the Board, any stock options vested as of the date of
termination may be exercised until the first anniversary of such date (unless
such options expire earlier in accordance with their terms); provided that if
such termination is a result of such director's removal from the Board other
than due to his death or disability, all stock options will terminate
immediately.
At the 1998 annual meeting of stockholders, the stockholders also
approved an amendment to the Directors Plan providing for an additional
automatic grant of stock options to purchase 25,000 shares of Common Stock in
accordance with the terms and provisions of the Plan to the then non-employee
directors of the Company (i.e., Messrs. Friedkin, Raymond and Weiss).
No remuneration is paid to executive officers of the Company for
services rendered in their capacities as directors of the Company.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
In October 1991, the Company entered into a five year employment
agreement with Elliott H. Vernon, pursuant to which Mr. Vernon agreed to serve
as the Chairman of the Board, President and Chief Executive Officer of the
Company at an annual base salary of $200,000. The employment agreement provided
that if a "constructive termination of employment" would occur, Mr. Vernon would
be entitled to a continuation of full salary and bonus compensation for a period
equal to the
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<PAGE>
remainder of the term. "Constructive termination of employment" was defined in
the employment agreement to include a material change in Mr. Vernon's
responsibilities, removal of Mr. Vernon from his position as the Company's
Chairman of the Board, President and Chief Executive Officer (other then for
"Cause," as defined in the employment agreement) or a "Change in Control." A
"Change in Control" was defined to include a change in the majority of the Board
which was not approved by the incumbent directors or an accumulation by any
person or group, other than Mr. Vernon, of in excess of 30% of the outstanding
voting securities of the Company. The employment agreement further provided that
a constructive termination of employment would not include (i) any sale of the
business of the Company, whether through merger, sale of stock or sale of
assets, which is approved by the vote of two-thirds of the full Board or (ii) a
change in Mr. Vernon's title and/or the person or persons to whom Mr. Vernon
reports resulting from a Change of Control approved by the affirmative vote of
two-thirds of the full Board, so long as it does not result in any other event
constituting a constructive termination of employment.
Mr. Vernon's employment agreement provided for annual profit sharing
with other executive level employees of a bonus pool consisting of 15% of the
Company's consolidated income before taxes, determined in accordance with
generally accepted accounting principles (the "Bonus Pool"). During the first
year of the term, Mr. Vernon was entitled to not less than two-thirds of the
first $300,000 of the Bonus Pool and one-third of the next $300,000 of the Bonus
Pool, and, for the remainder of the term, he was entitled to not less than 50%
of the Bonus Pool. Mr. Vernon was entitled to monthly bonus payments, based upon
an estimate of his full years' entitlement, subject to adjustment at the end of
each fiscal quarter and at the end of each fiscal year. The entitlement of Mr.
Vernon and the other officers of the Company to the remainder of the Bonus Pool
was made by Mr. Vernon as the Chairman of the Board, President and Chief
Executive Officer of the Company, subject to any applicable employment
agreements.
As of February 1, 1996, the Company amended its then current employment
agreement with Mr. Vernon. Pursuant to such amendment, the employment
agreement's expiration date of October 22, 1996 was extended to October 22, 1997
and during such one year extension Mr. Vernon's annual base compensation was
reduced from $200,000 to $100,000. In addition, upon execution of such
amendment, options that Mr. Vernon held as of such date exercisable to purchase
an aggregate of 270,000 shares of Common Stock under the Company's 1991 Stock
Option Plan (the "1991 Plan") (at exercise prices ranging from $1.50 to $5.00
per share) were terminated and the Company granted him options exercisable to
purchase an aggregate of 500,000 shares of Common Stock at a cash exercise price
of $0.75 per share (the "Vernon New Options"). Furthermore, as additional
incentive compensation, upon execution of such amendment, Mr. Vernon received
from the Company a restricted stock award of 250,000 shares of Common Stock. The
restrictions thereon lapsed upon consummation by the Company of the Beran
Acquisition on October 2, 1998. Mr. Vernon is entitled to certain demand and
"piggyback" registration rights with respect to such 250,000 shares and the
500,000 shares of Common Stock issuable upon exercise of the Vernon New Options.
At any time commencing April 16, 1996 and ending April 16, 2000, Mr. Vernon has
the right to demand that the Company prepare and file, and use its best efforts
to cause to become effective, a registration statement under the Act to permit
the sale of such shares. The Company is be obligated to file one
43
<PAGE>
such registration statement for which all expenses (other than fees of counsel
for such holders and underwriting discounts) will be payable by the Company.
Effective in November 1997, the Company entered into a new three year
employment agreement with Mr. Vernon. Pursuant to such new employment agreement,
Mr. Vernon has agreed to continue to serve as the Chairman of the Board,
President and Chief Executive Officer of the Company at an annual base of
$250,000, subject to annual increases equal to the greater of (a) 10% or (b) the
same percentage as the increase during the immediately preceding calendar year
in the United States Department of Labor, Bureau of Labor Statistics, Consumer
Price Index for All Urban Consumers (1962-1984=100) (the "CPI") or (c) such
greater amount as may be determined by the Board. The employment agreement
provides that, upon the consummation by the Company of the proposed acquisition
of JIHP, Mr. Vernon will receive (i) a cash bonus of $250,000 and (ii) stock
options to purchase 250,000 shares of Common Stock at an exercise price equal to
the average of the fair market value (as defined in the Omnibus Plan) of the
Common Stock for the ten consecutive trading days immediately preceding the
closing date of such acquisition (which stock options will vest in 25%
increments over four years from the date of grant). The employment agreement is
subject to successive one year renewal periods. The employment agreement also
provides that if Mr. Vernon resigns for "Good Reason" (as defined in the
employment agreement), Mr. Vernon will be entitled to receive a payment of 2.99
times his highest annual salary and bonus pursuant to the employment agreement.
In the event Mr. Vernon's employment is terminated for "Disability" (as defined
in the employment agreement), Mr. Vernon will continue to be paid his base
salary for a period of six months after such date (which amount will be reduced
by any disability payments received by him). Mr. Vernon's employment agreement
also provides that in the event his employment is terminated for "Cause" or
because of his death, Mr. Vernon or his designated beneficiaries, as the case
may be, shall only be entitled to be paid his base salary through the month in
which such termination occurred.
Mr. Vernon's new employment agreement also provides for annual profit
sharing with other executive level employees of a bonus pool consisting of 15%
of the Company's consolidated income before taxes. Mr. Vernon is entitled to not
less than 50% of such bonus pool, and the Board or a duly constituted committee
thereof may allocate additional amounts of the bonus pool to Mr. Vernon. It is
expected that the entitlement of the other officers of the Company to the
remainder of such bonus pool (if any) will be made by Mr. Vernon in his capacity
as the Chairman of the Board, President and Chief Executive Officer of the
Company, subject to the contractual rights of other persons entitled to
participate in such bonus pool, and to the concurrence of the Board or a duly
constituted committee thereof. In addition, the employment agreement provides
for certain insurance and automobile benefits for Mr. Vernon and his
participation in the Company's other benefit plans. The employment agreement
provides that Mr. Vernon will be entitled to reimbursement of up to $10,000 per
annum for medical expenses not covered by insurance for himself and his
immediate family. In connection with the Board's approval in November 1997 of
the material terms of this new employment agreement, Mr. Vernon was granted
stock options to purchase 471,200 shares of Common Stock under the 1991 Plan and
28,800 shares of Common Stock under the Omnibus Plan at an exercise price of
$1.0625 per share. Such options vest in 25%
44
<PAGE>
increments upon the Common Stock attaining, for a period of 20 consecutive
trading days, a fair market value (as defined in the applicable plan) of $2.50,
$5.00, $7.50 and $10.00, respectively. Notwithstanding the foregoing, each such
option shall become fully vested upon the earlier to occur of (x) the fifth
anniversary of the grant date of such option and (y) a "Change in Control" (as
defined in the Omnibus Plan).
As of April 13, 1998, HIS PPM entered into a three year employment
agreement with Robert D. Baca, pursuant to which Mr. Baca agreed to serve as its
President and Chief Operating Officer at an annual base salary of $225,000
(subject to annual increases by the same percentage as the increase during the
immediately preceding calendar year in the CPI or such greater amount as may be
determined by the Board). The employment agreement is subject to successive one
year renewal periods and provides for Mr. Baca's participation in the employee
benefit programs and plans of HIS PPM as well as a monthly automobile allowance.
As incentive compensation, in connection with the execution of the employment
agreement, Mr. Baca received (i) a stock option under the Omnibus Plan to
purchase 200,000 shares of Common Stock at an exercise price of $1.3125 per
share (which option vested 50% on the date of grant and the remaining 100,000
shares will vest in increments of one-third upon the Common Stock attaining,
during the Term (as defined in the employment agreement), an average Fair Market
Value (as defined in the Omnibus Plan) for a period of 20 consecutive trading
days, and a Fair Market Value on the last day of such 20 day period, of $5.00,
$8.00 and $12.00 per share, respectively; provided, however, that in any event
the remaining 100,000 shares shall vest in increments of one-third on each
subsequent anniversary of the grant date of the option, and the option will
become fully vested immediately upon a Change in Control (as defined in the
Omnibus Plan)) and (ii) subject to ratification and approval of the Company's
stockholders, a stock option, not issued under the Omnibus Plan (since at the
time of grant there were not enough shares available for issuance under the
Omnibus Plan to allow for such issuance thereunder) but which shall,
nonetheless, be subject to the terms and conditions of the Omnibus Plan, to
purchase 150,000 shares of Common Stock at an exercise price of $7.50 per share
(with respect to 50,000 of the shares subject to the options), $10.00 per share
(with respect to 50,000 of the shares subject to the option) and $12.50 per
share (with respect to 50,000 of the shares subject to the option) (which option
will vest upon the attainment of any two of the three following objectives: (a)
the Company achieving gross revenues of $100.0 million in any fiscal year during
the Term, (b) the Company achieving net income of $12.0 million in any fiscal
year during the Term or (3) the Common Stock attaining, during the Term, an
average Fair Market Value (as defined in the option) for a period of 20
consecutive trading days, and a Fair Market Value on the last day of such 20 day
period, of $20.00 per share; provided, however, that in any event the option
will vest on the third anniversary of the grant date of the option, and the
option will become fully vested immediately upon a Change in Control of HIS PPM
(as defined in the option)). Stockholder ratification and approval of such stock
option was obtained at the 1998 annual meeting of stockholders. See "-- Option
Grants in Fiscal 1998."
The employment agreement provides that if Mr. Baca resigns for "Good
Reason" (as defined in the employment agreement) or if HIS PPM terminates his
employment other than as provided in the employment agreement, Mr. Baca will be
entitled to receive his full base salary through the date
45
<PAGE>
of termination, as well as all accrued incentive compensation through the date
of termination, plus an amount (payable over a period of months equal to the
lesser of the number of months remaining in the Term and 18) equal to the
product of (a) the sum of (i) the base salary in effect as of the date of
termination and (ii) the average of the bonus compensation paid or payable to
Mr. Baca with respect to the three years preceding the year in which the date of
termination occurs (or such lesser period as he may have been employed) and (b)
the lesser of (i) the number of months remaining in the Term divided by 12 and
(ii) one and one-half (the "Severance Amount"). In the event that, within one
year after the occurrence of a Change of Control (as defined in the employment
agreement), HIS PPM terminates Mr. Baca's employment other than as provided in
the employment agreement or Mr. Baca resigns for "Good Reason," Mr. Baca will be
entitled to receive his full base salary through the date of termination, as
well as all accrued incentive compensation through the date of termination, plus
the present value (as defined in the employment agreement) of the Severance
Amount on or before the tenth day following the date of termination.
The employment agreement further provides that in the event HIS PPM
terminates Mr. Baca's employment because of his death, Mr. Baca (or his
designated beneficiary, estate or other legal representative, as applicable,
(the "Estate")) will be entitled to be paid his base salary through the month in
which such termination occurred, as well as all unpaid and accrued incentive
compensation through the date of termination, and the Estate shall be entitled
to continue to participate (to the extent permissible under the terms and
provisions of such programs and plans) in HIS PPM's benefit programs and plans
until the end of the Term on the same terms and conditions as Mr. Baca
participated immediately prior to the date of termination. If Mr. Baca's
employment is terminated for Disability (as defined in the employment
agreement), Mr. Baca will continue to be paid his base salary for a period of
six months after such date (which amount will be reduced by any disability
benefits received by him from disability policies paid for by HIS PPM).
Upon termination of Mr. Baca's employment for Cause (as defined in the
employment agreement) or in the event Mr. Baca's employment is terminated
because of a court order restricting his employment by HIS PPM, Mr. Baca only
will be entitled to be paid his base salary through the date the Notice of
Termination (as defined in the employment agreement) is given, as well as all
accrued and unpaid incentive compensation through the date the Notice of
Termination is given.
Option Grants in Fiscal 1998
The following table sets forth each grant of stock options made by the
Company during fiscal 1998 to each of the named executive officers:
46
<PAGE>
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE PRICE OPTION TERM 3
NAME OPTIONS EMPLOYEE IN ($/SHARE) EXPIRATION DATE -----------------------------
- ---- GRANTED($) FISCAL YEAR RANGE RANGE 5%($) 10%($)
---------- ----------- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert D. Baca 200,000(1) 47.9% $1.3125 Apr. 2008 $165,085 $418,357
150,000(2) 35.9% (3) Dec. 2008 $ -0- $ -0-
</TABLE>
- ---------
(1) This option vested 50% (i.e., 100,000 shares) on the initial date of grant
and the remaining 100,000 shares will vest in increments of one-third
(i.e., 33,333 shares) upon the Common Stock attaining, during the Term (as
defined in Mr. Baca's employment agreement with HIS PPM), an average Fair
Market Value (as defined in the Omnibus Plan) for a period of 20
consecutive trading days, and a Fair Market Value on the last day of such
20 day period, of $5.00, $8.00 and $12.00 per share, respectively;
provided, however, that in any event the remaining 100,000 shares shall
vest in increments of one-third (i.e., 33,333 shares) on each subsequent
anniversary of the grant date of the option, and the option will become
fully vested immediately upon a Change in Control (as defined in the
Omnibus Plan).
(2) The exercise price of this option is as follows: $7.50 per share (with
respect to 50,000 of the shares subject to the option), $10.00 per share
(with respect to 50,000 of the shares subject to the option) and $12.50
per share (with respect to 50,000 of the shares subject to the option).
This option will vest upon the attainment of any two of the three
following objectives: (a) the Company achieving gross revenues of $100.0
million in any fiscal year during the Term, (b) the Company achieving net
income of $12.0 million in any fiscal year during the Term or (c) the
Common Stock attaining, during the Term, an average Fair Market Value (as
defined in the option) for a period of 20 consecutive trading days, and a
Fair Market Value on the last day of such 20 day period, of $20.00 per
share; provided, however, that in any event the option will vest on the
third anniversary of the grant date of the option and the option will
become fully vested immediately upon a Change in Control of HIS PPM (as
defined in the option).
(3) The potential realizable values represent future opportunity and have not
been reduced to present value in 1998 dollars. The dollar amounts included
in these columns are the result of calculations at assumed rates set by
the SEC for illustration purposes, and these rates are not intended to be
a forecast of the Common Stock price and are not necessarily indicative of
the values that may be realized by the named executive officer.
Aggregated Option Exercises in Fiscal 1998 and 1998 Fiscal Year End Option
Values
The following table summarizes for each of the named executive officers
the total number of unexercised stock options held at December 31, 1998 and the
aggregate dollar value of in-the-money, unexercised options held at December 31,
1998. No options were exercised by such persons during fiscal 1998. The value of
unexercised, in-the-money options at fiscal year-end is the difference between
its exercise or base price and the fair market value (i.e., the closing sale
price on such date) of the underlying Common Stock on December 31, 1998 (the
last trading day in fiscal 1998), which was $1.1250 per share. These values,
unlike the amounts set forth in the column headed "Value Realized," have not
been, and may never be, realized. The stock options have not been, and may never
be, exercised; and actual gains, if any, on exercise will depend on
47
<PAGE>
the value of the Common Stock on the date of exercise. There can be no assurance
that these values will be realized.
The Company does not have any stock appreciation rights ("SARs")
outstanding.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
--------------- ---------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Elliott H.
Vernon -0- N/A 500,000/500,000 $187,500/$31,250
Robert D.
Baca -0- N/A 100,000/250,000 $0/$0
</TABLE>
48
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock Ownership
The table below sets forth the beneficial ownership of the shares of
Common Stock as of March 26, 1999 of (i) each person known by the Company to
beneficially own 5% or more of the shares of Common Stock, (ii) each of the
Company's directors, (iii) each of the Company's executive officers named in the
Summary Compensation Table and (iv) all of the Company's directors and executive
officers as a group. An asterisk indicates beneficial ownership of less than 1%
of the shares of Common Stock.
AS OF MARCH 26, 1999
--------------------
Number Percent
of Shares (1) of Class
------------- --------
Beran Entities (2) 2,094,768 15.57%
c/o Phyllis Beran
10 Grove Street
Cherry Hill, NJ 08002
Elliott H. Vernon (3) 1,330,500 11.22%
c/o Healthcare Imaging Services, Inc.
200 Schulz Drive
Red Bank, New Jersey 07701
George Braff, M.D. 1,000,000 8.81%
43 West 13th Street
New York, New York 10011
Elliot Loewenstern (4) 868,000 7.39%
6700 North Andrews Avenue
Suite 401
Fort Lauderdale, FL 33309
Ulises C. Sabato, M.D. (5) 732,365 6.42%
106 Grand Avenue
Englewood, NJ 07631
Shawn A. Friedkin (6) 25,000 *
Manmohan A. Patel, M.D.(7) 300,000 *
49
<PAGE>
Joseph J. Raymond (6)(8) 245,000 *
Michael S. Weiss (6) 10,000 *
Robert D. Baca (9) 183,333 *
All directors and 2,131,683 17.42%
executive officers
as a group (7 persons)
(3)(6)(7)(8)(9)(10)
- --------------
(1) In no case was voting and investment power shared with others, other than
as expressly set forth herein. The information set forth in this table
regarding a person's/entity's beneficial ownership has been derived from
information provided by such person/entity (including, in some instances,
from information set forth in a Schedule 13D filed with the SEC).
(2) Such shares represent beneficial ownership of shares of Common Stock
issuable upon conversion of all outstanding shares of Series D Stock held
by the liquidating trusts of the Beran Entities. See "-Series D Stock
Ownership" for additional information regarding these shares as well as a
listing of each entity's individual holdings. Samuel J. Beran, M.D. and
Phyllis Beran are the co-trustees of the liquidating trusts and may be
deemed to be the beneficial owners of the shares owned by the trusts. The
address of Dr. Beran is Department of Plastic Surgery, 5323 Harry Hines
Boulevard, Dallas, TX 75235-9132 and the address of Mrs. Beran is 10 Grove
Street, Cherry Hill, NJ 08002.
(3) Includes beneficial ownership of an aggregate of 500,000 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options. Does not include an aggregate of 500,000 shares of Common Stock
issuable upon the exercise of certain stock options which are not
exercisable within 60 days of March 26, 1999. See "Item 11. Executive
Compensation -- Employment Contracts and Termination of Employment and
Change in Control Arrangements."
(4) Includes beneficial ownership of an aggregate of (i) 184,000 shares of
Common Stock owned by the Stephanie Loewenstern Irrevocable Trust, (ii)
184,000 shares of Common Stock owned by the Brett Loewenstern Irrevocable
Trust, (iii) 125,000 shares of Common Stock owned by the Victoria
Loewenstern Irrevocable Trust, (iv) 125,000 shares of Common Stock
issuable upon the exercise of certain currently exercisable stock options
owned by the Stephanie Loewenstern Irrevocable Trust, (v) 125,000 shares
of Common Stock issuable upon the exercise of certain currently
exercisable stock options held by the Brett Loewenstern Irrevocable Trust,
and (vi) 125,000 shares of Common Stock issuable upon the exercise of
certain currently exercisable stock options held by the Victoria
Loewenstern Irrevocable Trust. Mr. Loewenstern is the trustee of each of
the aforementioned trusts.
(5) Includes beneficial ownership of an aggregate 50,000 shares of Common
Stock issuable upon the exercise of certain currently exercisable stock
options. See "Item 13. Certain Relationships and Related Transactions."
(6) Such shares represent shares of Common Stock issuable upon exercise of
certain currently exercisable stock options granted pursuant to the
Directors Plan.
50
<PAGE>
(7) Does not include an aggregate of 300,000 shares of Common Stock issuable
upon the exercise of certain stock options which are not exercisable
within 60 days of March 26, 1999. See "Item 13. Certain Relationships and
Related Transactions."
(8) Includes an aggregate of 150,000 shares of Common Stock issuable upon the
exercise of certain currently exercisable stock options. See "Item 13.
Certain Relationships and Related Transactions."
(9) Includes an aggregate of 133,333 shares of Common Stock issuable upon the
exercise of certain currently exercisable stock options. Does not include
an aggregate of 216,667 shares of Common Stock issuable upon the exercise
of stock options which are not exercisable within 60 days of March 26,
1999. See "Item 11. Executive Compensation -- Employment Contracts and
Termination of Employment and Change in Control Arrangements."
(10) Includes an aggregate of 875,183 shares of Common Stock issuable upon the
exercise of stock options exercisable within 60 days of March 26, 1999.
See footnotes (3), (6) and (8) above. Does not include an aggregate of
1,155,417 shares of Common Stock issuable upon the exercise of stock
options which are not exercisable within 60 days of March 26, 1999. See
footnotes (3) and (7) above.
Series D Stock Ownership
The table below sets forth the beneficial ownership of the outstanding
shares of Series D Stock (and the beneficial ownership of Common Stock issuable
upon conversion of the Series D Stock) as of March 26, 1999. None of the
Company's directors or executive officers own any shares of Series D Stock. An
asterisk indicates beneficial ownership of less than 1% of the shares.
An aggregate of 871.743 shares of Series D Stock having an aggregate
liquidation preference of $9,153,301.50 (i.e., $10,500 per share liquidation
preference) were issued by the Company (the "Beran Issuance") to the Beran
Entities in connection with the Beran Acquisition. The Beran Entities are in the
process of being dissolved and liquidating their assets, and the shares of
Series D Stock are currently held by their respective liquidating trusts.
The holders of the Series D Stock are entitled to convert the Series D
Stock into that number of shares of Common Stock equal to the quotient obtained
by dividing (i) the aggregate liquidation preference of the Series D Stock being
converted by (ii) $1.049 (subject to adjustment in certain circumstances) (i.e.,
approximately 8,723,921 shares of Common Stock in the event of the conversion of
all outstanding shares of Series D Stock); provided that until the Company
obtains stockholder approval of the Beran Issuance (as required by the rules of
the Nasdaq National Market, the exchange upon which the Company's securities are
included), the holders of the Series D Stock only will be able to convert such
shares into Common Stock representing in the aggregate 19.9% of the outstanding
Common Stock as of the date of issuance of the Series D Stock (i.e.,
approximately 2,094,768 shares). The holders of the Series D Stock are 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 Company stockholders; provided that
until the Company obtains stockholder approval of the Beran Issuance (as
required by the rules of the Nasdaq National Market, the exchange upon which the
Company's securities are included), the aggregate voting
51
<PAGE>
rights of the holders of the Series D Stock shall not exceed 19.9% of the
outstanding Common Stock as of the date of issuance of the Series D Stock (i.e.,
approximately 2,094,768 shares). Due to timing constraints, stockholder approval
of the Beran Issuance was not solicited prior to the consummation of the Beran
Acquisition and such issuance of stock in October 1998. The Company expects to
solicit stockholder approval of the Beran Issuance during the second quarter of
fiscal 1999.
Upon certain events (as described more fully in the certificate of
designations, preferences and rights of the Series D Stock), including the
Company's failure to redeem the Series D Stock prior to March 1, 1999, the
holders of the Series D Stock have the right to cause the Company to call a
special meeting of stockholders for the purpose of electing directors. Upon
stockholder ratification and approval of the Beran Issuance, assuming the
holders of the Series D Stock were to act collectively, such holders would be in
a position to influence the election of the Company's directors and other
matters requiring stockholder approval. Dr. Samuel J. Beran and his mother,
Phyllis Beran, are currently the co-trustees of each of the holders of the
Series D Stock. The information set forth in the following table regarding a
person's/entity's beneficial ownership has been derived from a Schedule 13D
filed by such person/entity with the SEC.
52
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 26, 1999
-------------------------------------------
Number of Percent Number of Percent
Shares of of Shares of of
Series D Stock Class Common Stock (1) Class (1)
-------------- ----- ---------------- ---------
<S> <C> <C> <C> <C>
Beran/Bloomfield IV 61.022 7% 146,633.76 1%
Shareholders Trust (2)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/Echelon I 453.306 52% 1,089,279.36 9%
Shareholders Trust (3)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/INB V 26.153 3% 62,843.04 *
Shareholders Trust (4)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/Mainland II 95.891 11% 230,424.48 2%
Shareholders Trust (5)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
Beran/Management III 235.371 27% 565,587.36 4%
Shareholders Trust
Associates, L.P. (6)
c/o Phyllis Beran
1751 Rolling Lane
Cherry Hill, New Jersey 08003
</TABLE>
- --------------
(1) Does not take into account stockholder approval of the Beran Issuance
which will increase the number of shares of Common Stock issuable upon
conversion of the Series D Stock and the voting rights thereof. Percent of
Class calculated based upon 11,356,974 shares of Common Stock outstanding
as of March 26, 1999 and 2,094,768 shares of Common Stock issuable upon
conversion of all outstanding shares of Series D Stock (assuming no
stockholder approval of the Beran Issuance).
(2) Includes 18 shares of Series D Stock pledged to the Company as collateral
to secure repayment of a $175,000 promissory note issued by Bloomfield
Imaging Associates, P.A. to the Company and 1.145 shares of Series D Stock
held in escrow in respect of certain post-closing adjustments in
connection with the Beran Acquisition. The holder currently has the right
to vote such shares. Samuel J. Beran, M.D. and Phyllis Beran, the
co-trustees of the holder, may be deemed to be the beneficial owners of
the shares owned by the holder.
53
<PAGE>
(3) Includes 133.7 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $1.3 million promissory note issued by
Echelon MRI, P.C. to the Company and 8.508 shares of Series D Stock held
in escrow in respect of certain post-closing adjustments in connection
with the Beran Acquisition. The holder currently has the right to vote
such shares. Samuel J. Beran, M.D. and Phyllis Beran, the co-trustees of
the holder, may be deemed to be the beneficial owners of the shares owned
by the holder.
(4) Includes 7.7 shares of Series D Stock pledged to the Company as collateral
to secure repayment of a $75,000 promissory note issued by Irving N.
Beran, M.D., P.A. to the Company and 0.491 shares of Series D Stock held
in escrow in respect of certain post-closing adjustments in connection
with the Beran Acquisition. The holder currently has the right to vote
such shares. Samuel J. Beran, M.D. and Phyllis Beran, the co-trustees of
the holder, may be deemed to be the beneficial owners of the shares owned
by the holder.
(5) Includes 28.3 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $275,000 promissory note issued by
Mainland Imaging Center, P.C. to the Company and 1.8 shares of Series D
Stock held in escrow in respect of certain post-closing adjustments in
connection with the Beran Acquisition. The holder currently has the right
to vote such shares. Samuel J. Beran, M.D. and Phyllis Beran, the
co-trustees of the holder, may be deemed to be the beneficial owners of
the shares owned by the holder.
(6) Includes 69.4 shares of Series D Stock pledged to the Company as
collateral to secure repayment of a $675,000 promissory note issued by
North Jersey Imaging Management Associates, L.P. to the Company and 4.418
shares of Series D Stock hold in escrow in respect of certain post-closing
adjustments in connection with the Beran Acquisition. The holder currently
has the right to vote such shares. Samuel J. Beran, M.D. and Phyllis
Beran, the co-trustees of the holder, may be deemed to be the beneficial
owners of the shares owned by the holder.
54
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998 and 1997, Elliott H. Vernon (the Company's
Chairman of the Board, President and Chief Executive Officer) (the "CEO") owed
the Company $264,125 in connection with certain non-interest bearing advances
under the Company's bonus plan. In accordance with this bonus plan and Mr.
Vernon's employment agreement with the Company, Mr. Vernon is entitled to
monthly bonus payments based upon an estimate of his full years' bonus
entitlement, subject to adjustment. These advances represent such payments which
were determined not to have been earned by Mr. Vernon under the terms of the
bonus plan and are repayable to the Company.
The Company entered into an arrangement, effective September 1, 1994
until July 1996, pursuant to which it operated solely as a sublessor of its four
mobile MRI units rather than as an operator of such equipment. Mark R. Vernon,
the brother of the CEO and an officer of the Company since April 1997, is the
President and a significant stockholder of such sublessee of the Company's
mobile MRI equipment. The other stockholders of the sublessee include certain
former customers of the Company. The sublease provided for monthly payments to
the Company, which commenced September 1, 1994, in the amount of $50,000 per
month for the first three months and $115,000 per month for the next 45 months.
These monthly payments included maintenance and insurance of approximately
$44,000 per month paid directly by the Company. The total monthly sublease
payments due to the Company were collateralized by the accounts receivable due
to the sublessee by the sublessee's mobile MRI customers. Effective May 1, 1995,
the sublease agreement was amended to provide for monthly payments to the
Company in the amount of $76,373 per month for the next 40 months excluding
maintenance of $38,627 per month originally paid directly by the Company since
the sublessee entered into a maintenance agreement with an unrelated third party
and began paying the equipment maintenance directly for the subleased mobile MRI
units. At December 31, 1994, the sublessee was current with its monthly payment
obligations. However, for fiscal 1995, the Company was entitled to receive from
the sublessee approximately $1,047,000 in rental income of which it received
approximately $685,000 resulting in past due amounts of approximately $362,000.
The Company, due to the sublessee's failure to remain current with its 1995
monthly payment obligations, notified the sublessee that it was in default of
the sublease agreement. As a result, after assessing the sublease business
arrangement, the Company sold one of its mobile MRI units for $625,000 in
December 1995, which in turn reduced the sublessee's monthly payment obligation
to the Company from $76,373 to $52,582 a month for the remaining 33 months of
the sublease. As a result of the sale of the mobile MRI unit, the Company
incurred a loss of approximately $31,000 representing the difference between the
remaining sublease income attributable to such mobile MRI unit and the sale
proceeds received. In February 1996, the Company terminated the master agreement
with the sublessee and repossessed the remaining three mobile MRI units from the
sublessee as a result of the failure of the sublessee and its customers to
satisfy their obligations thereunder to the Company. At such time, the sublessee
owed the Company approximately $456,000. In an attempt to satisfy the past due
amounts owed to the Company, the sublessee and its customers provided the
Company with cash (aggregating approximately $75,000) and additional patient
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receivable claims (aggregating approximately $504,000) to partially offset the
amounts they owed to the Company. The additional patient receivable claims were
to supplement the amounts previously submitted to the Company to satisfy prior
past due indebtedness from the sublessee and its customers. The Company soon
after returned the three mobile MRI units to the sublessee. Effective July 27,
1996, the Company again repossessed the three mobile MRI units due to the
sublessee's continuing failure to meet its obligations to the Company. At such
time, the sublessee owed the Company approximately $532,000. In August 1996, the
Company entered into a lease purchase agreement with respect to the sale of one
of the Company's mobile MRI units. The lease purchase agreement provided for a
$20,000 down payment upon execution of the agreement, 11 monthly installments of
$5,000 each which commenced October 1, 1996 and a final payment of $35,000 due
in September 1997. Such amounts have been paid. The Company has entered into an
agreement with certain other creditors of the sublessee in respect of the
collection of the sublessee's receivables. As of December 31, 1998, the amount
of the sublessee's past due indebtedness was approximately $257,000 (which
amount has been fully reserved for by the Company in its financial statements).
See "Item 1. Business - Mobile MRI Division."
As of January 30, 1996, the Company entered into a one year consulting
agreement (the "Consulting Agreement") with Biltmore Securities, Inc.
("Biltmore"). In January 1997, the Company extended the term of the Consulting
Agreement for an additional year, and in November 1997, the Company further
extended the term of the Consulting Agreement for an additional year, through
January 1999. 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 seek to find business
partners suitable for the Company and assist in the structuring, negotiating and
financing of such transactions. During fiscal 1996, Biltmore was issued options
(the "Biltmore Options") exercisable to purchase 750,000 shares of Common Stock
at a cash exercise price of $0.75 per share under the Consulting Agreement and
during fiscal 1998, upon consummation of the Beran Acquisition, certain
transferees of Biltmore were issued 750,000 shares (the Biltmore Fee Shares") of
Common Stock under the Consulting Agreement. The holders of the Biltmore Options
and the Biltmore Fee Shares are entitled to certain demand and "piggyback"
registration rights with respect to the shares of Common Stock issuable upon
exercise of the Biltmore Options and the Biltmore Fee Shares. Furthermore, in
consideration of Biltmore's placement agent services with respect to the sale of
the Company's Series C Convertible Preferred Stock in February 1996, the Company
issued Biltmore 60,000 shares of Series C Convertible Preferred Stock at such
time.
During fiscal 1998, Dr. George Braff, a director of the Company from
December 1995 until April 1997, the Company's Medical Director since October
1997 and the supervising radiologist at three of the Company's MRI facilities,
was the majority shareholder and officer of three of the Company's Medical
Licensees: NYC MRI, Monmouth and Kings Medical. For fiscal 1998, NYC MRI,
Monmouth and Kings Medical paid the Company approximately $753,290, $3,869,117
and $1,306,254, respectively, in fees for services previously rendered. In
addition, revenues generated to the Company by NYC MRI, Monmouth and Kings
Medical accounted for 6%, 27%, and 6%, respectively, of the Company's total
revenues in fiscal 1998. For fiscal 1998,
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NYC MRI, Monmouth and Kings Medical paid Dr. Braff approximately $53,865,
$442,026 and $119,150, respectively, in fees for professional services rendered
by him on their behalf. Such entities have continued to be Medical Licensees of
the Company in fiscal 1999. Prior to October 1997, Dr. Braff was also a majority
shareholder and officer of another of the Company's Medical Licensees, Edgewater
Diagnostic Imaging, P.A., which paid the Company approximately $1,400,000 in
fees during fiscal 1997 and generated revenues to the Company in fiscal 1997
representing 18% of the Company's total revenues for such fiscal year.
On November 4, 1997, the Company acquired substantially all of the
assets of NYC MRI which operated the New York City Facility. The consideration
for the acquisition was (i) the assumption of certain obligations and
liabilities of NYC MRI, including payments to be made under a certain capital
lease of up to approximately $300,000, (ii) cash in the amount of $900,000,
(iii) the issuance of 1.0 million shares of Common Stock, and (iv) the issuance
of a $300,000 promissory note that was due and paid on December 31, 1997. The
Company also assumed certain contractual obligations of NYC MRI on a
going-forward basis under the contracts assigned to the Company in the
acquisition (including operating leases and equipment maintenance agreements).
In connection with the acquisition, the Company also entered into a consulting
services agreement with NYC MRI, which, among other things, provides that Dr.
Braff will continue to provide all medical services at the New York City
Facility.
Prior to September 1998, the Company leased the Brooklyn Facility from
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 Elliott H. Vernon, the Company's Chairman of
the Board, President and Chief Executive Officer, and Joseph J. Raymond, another
director of the Company. For fiscal 1997 and the nine months ended September 30,
1998, the Company paid DMR an aggregate of approximately $407,000 and $208,000,
respectively, in lease payments for the Brooklyn Facility. The Company's lease
payments to DMR were structured to fully satisfy DMR's costs and expenses
related to the facility, including mortgage payments, taxes and other related
costs. However, Messrs. Vernon and Raymond were still required to pay taxes in
respect of these lease payments even though they did not recognize any profit
from such arrangement and participated in such arrangement as an accommodation
to the Company without any reimbursement therefor. Effective 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 12% per annum and was
repayable over 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 the Brooklyn Facility to an
affiliate of DFS, which, in turn, has entered into a lease arrangement (the "DFS
Lease") with the Company in respect of this facility. All of the proceeds from
such sale were used to repay the outstanding balance of the DFS Loan which was
$145,174.43. In consideration for Mr. Raymond's agreement to such sale (as well
as in appreciation of his participation in the original lease transaction), the
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Company granted Mr. Raymond (subject to stockholder ratification and approval) a
ten year stock option to purchase 150,000 shares of Common Stock at an exercise
price per share equal to $1.00 (the closing sales price of the Common Stock on
The Nasdaq National Market on December 22, 1998, the date of stockholder
ratification and approval of such stock option grant), which option is 100%
exercisable. In addition, the Company has agreed that, to the extent the Company
exercises its purchase option under the DFS Lease 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 addition to the DFS Lease, the Company has numerous other financing
arrangements with DFS and its affiliates relating to equipment financing, as
well as the DFS Bridge Loan provided in connection with the Beran Acquisition
and the Company's $3.0 million secured revolving line of credit provided by
another affiliate of DFS. DFS was a significant stockholder of the Company from
its inception until April 1996 and is a leading provider of medical equipment
financing. In October 1998, in connection with the DFS Bridge Loan the Company
entered into a five-year financial advisory and consulting services agreement
with DFS. In accordance with the terms of such agreement, the Company granted
DFS stock options immediately exercisable for a five-year period (subject to
certain prescribed restrictions) to purchase an aggregate of 500,000 shares of
Common Stock at an exercise price of $0.90625 per share (with respect to 50,000
of the shares subject to the options), $1.03125 per share (with respect to
400,000 of the shares subject to the options), $1.28125 per share (with respect
to 20,000 of the shares subject to the options), $1.25 per share (with respect
to 10,000 of the shares subject to the options) and $1.46875 (with respect to
20,000 shares subject to the options). The Company is also a guarantor of the
JIHP Loan (as hereinafter defined). All of the Company's arrangements with DFS
and its affiliates are on an arms'-length basis.
In May 1997, the Company entered into a consulting agreement with Munr
Kazmir, M.D., a former director of the Company, for a one year term commencing
June 1, 1997. In January 1998, such agreement was terminated and a new
consulting agreement for a one year term commenced effective as of January 1,
1998. Pursuant to such agreement, Dr. Kazmir agreed to provide such consultation
and advice as the Company may reasonably request, including advice in respect of
new developments in the diagnostic imaging market and the Company's
relationships with current and potential referral sources, and assistance in the
development of Company newsletters and the preparation and arrangement of
seminars, luncheons and other training and education vehicles for current and
potential referral sources. Dr. Kazmir also provided assistance to the Company
in the expansion of its business into physician practice management. Dr. Kazmir
was entitled to an annual consulting fee of $72,000 under such consulting
agreement. The consulting agreement was terminated in October 1998. During
fiscal 1997 and 1998, Dr. Kazmir was paid an aggregate of $35,000 and $54,000,
respectively, in consulting fees under the consulting agreement.
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In October 1996, the Company entered into a consulting agreement with
Ulises C. Sabato, M.D., a significant stockholder of the Company, for a one year
term which commenced on October 15, 1996. Pursuant to such agreement, Dr. Sabato
agreed to provide such consultation and advice as the Company may reasonable
request, including advice in respect of new developments in the diagnostic
imaging market and the Company's relationships with current and potential
referral sources, and assistance in the development of Company newsletters and
the preparation and arrangement of seminars, luncheons and other training and
education vehicles for current and potential referral sources. Dr. Sabato also
provided assistance to the Company in the expansion of its business into
physician practice management. Pursuant to such agreement, Dr. Sabato was
entitled to an annual consulting fee of $48,000. In addition, upon execution of
such agreement, the Company granted Dr. Sabato, stock options exercisable to
purchase an aggregate of 50,000 shares of Common Stock over a five year period
at an exercise price of $1.0625 per share. The options vested quarterly in equal
installments over the term of the one year consulting agreement. In December
1997, the term of the consulting agreement was extended until October 16, 1998
at which time it expired. During fiscal 1997 and 1998, Dr. Sabato was paid an
aggregate of $44,000 and $48,000, respectively, in consulting fees under the
consulting agreement. Dr. Sabato also was a limited partner in Edgewater Imaging
Associates, L.P., which leased real estate and equipment to the Company in
respect of its fixed-site MRI facility in Edgewater, New Jersey. The Edgewater
Imaging Associates, L.P. was dissolved as of January 1, 1998.
In February 1998, the Company entered into a consulting agreement with
Dr. Manmohan A. Patel, a director of the Company since December 1998, for a one
year term commencing February 27, 1998. Such agreement, upon expiration of its
initial one year term, was extended for an additional six month period. Pursuant
to such agreement, Dr. Patel will provide such consultation and advice as the
Company may reasonably request, including advice in respect of the Company's
development of its physician management operations. Such agreement shall be
terminated upon the earlier to occur of (i) the negotiation and execution of an
employment agreement between the Company and Dr. Patel on terms and conditions
satisfactory to the parties thereto (the "Patel Employment Agreement"), or (ii)
the expiration or termination of such agreement pursuant to the terms thereof.
Pursuant to such agreement, and in contemplation of the services to be rendered
pursuant to the Patel Employment Agreement, the Company granted Dr. Patel stock
options exercisable to purchase an aggregate of 300,000 shares of Common Stock
under the terms and conditions of the Omnibus Plan. Such stock options are
exercisable at $1.71875 per share, the closing sales price of the Common Stock
on The Nasdaq National Market on the date of grant, and vest in increments of
25% (i.e., 75,000 shares) upon the Common Stock attaining , for a period of 20
consecutive trading days, a fair market value (as defined in the Omnibus Plan)
of $2.50, $5.00, $7.50 and $10.00, respectively. Notwithstanding the foregoing,
such stock options shall become fully vested upon the earlier to occur of (x)
the fifth anniversary of the grant date of the stock options and (y) a "Change
in Control" as defined in the Omnibus Plan: provided however, that in no event
shall any shares be purchasable under such stock options unless and until Dr.
Patel has become a full-time employee of the Company.
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In January 1998, the Company and PMA and its physician stockholders
(including Dr. Patel, a director of the Company who owns an aggregate of 11,500
shares of PMA's common stock, representing 20.44% of such outstanding common
stock) signed a non-binding letter of intent with respect to the Company's
acquisition of all of the capital stock of JIHP held by PMA. The terms of this
acquisition were a result of arm's-length negotiations among the parties. A
merger agreement between the Company and PMA was executed effective January 29,
1999 (subject to the approval of the physician stockholders of PMA). Such letter
(as well as the merger agreement) states that the Company intends to appoint Dr.
Patel to the Board upon consummation of such acquisition. Notwithstanding the
foregoing, the election of Dr. Patel as a director was not made in connection
with such provision. See "Item l. Business - Introduction."
In December 1997, the Company agreed to guarantee a loan of $1.0
million from DFS to JIHP (the "JIHP Loan"). This loan was funded by DFS to JIHP
on January 8, 1998 and the loan bears interest at 12% per annum and is repayable
over 48 months commencing in February 1998 at $26,330 per month. At December 31,
1998, approximately $810,000 of the loan was outstanding. PMA and each physician
stockholders 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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are filed on the pages below, as part of Part II, Item 8 of this
report:
Independent Auditors' Report F-1
Consolidated balance sheets - December 31,
1998 and 1997 F-2
Consolidated statements of operations -
For the years ended December 31, 1998,
1997 and 1996 F-3
Consolidated statements of stockholders'
equity - For the years ended December 31, 1998,
1997 and 1996 F-4
Consolidated statements of cash flows - For the
years ended December 31, 1998, 1997 and 1996 F-5
Notes to consolidated financial statements F-7
2. FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts -
For the years ended December 31, 1998, 1997 and 1996 F-27
3. EXHIBITS
2.1 Agreement and Plan of Merger, dated as of January 29, 1999, among
HealthCare Imaging Services, Inc., HIS PPM Co., Jersey Integrated
HealthPractice, Inc., Pavonia Medical Associates, P.A. and the
physician stockholders of Pavonia Medical Associates, P.A.
3.1 Certificate of Incorporation of HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1
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Registration No.33-42091 filed with the Securities and Exchange
Commission on August 13, 1991)
3.2 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995)
3.3 By-Laws of HealthCare Imaging Services, Inc. (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-1
Registration No. 33-42091 filed with the Securities and Exchange
Commission on August 13, 1991)
3.4 Certificate of Amendment of the Certificate of Incorporation of
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
3.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996)
3.5 Certificate of Designations, Preferences and Rights of Series D
Cumulative Accelerating Redeemable Preferred Stock of HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 16, 1998)
10.1 Master Equipment Lease dated March 29, 1991 by and between DVI
Financial Services Inc. and HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on August 13, 1991)
10.2 [INTENTIONALLY OMITTED]
10.3 [INTENTIONALLY OMITTED]
10.4 Consulting Services and License Agreement between New York MR
Associates and Kings Medical Diagnostic Imaging, P.C. dated January 27,
1986 (Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on August 13, 1991)
10.5 Addendum to Consulting Services and License Agreement dated June 15,
1990 between New York MR Associates and Kings Medical Diagnostic
Imaging, P.C. (Incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange Commission on August 13, 1991)
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10.6 [INTENTIONALLY OMITTED]
10.7 Assignment and Consent Agreement dated as of July 24, 1991 by and among
Kings Medical Diagnostic Imaging, P.C., Kings Plaza Radiology
Associates (Incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091 filed with
the Securities and Exchange Commission on August 13, 1991)
10.8 Lease between New York MR Associates and Kings Medical Diagnostic
Imaging, P.C. as of January 27, 1986 for Brooklyn property
(Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 Registration No.33-42091 filed with
the Securities and Exchange Commission on August 13, 1991)
10.9 Assignment and Assumption of Lease dated October 22, 1991 between Kings
Medical Diagnostic Imaging, P.C. and HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 Registration No. 33-42901 filed with
the Securities and Exchange Commission on November 6, 1991)
10.10 [INTENTIONALLY OMITTED]
10.11 [INTENTIONALLY OMITTED]
10.12 [INTENTIONALLY OMITTED]
10.13 [INTENTIONALLY OMITTED]
10.14 [INTENTIONALLY OMITTED]
10.15 Employment Agreement dated October 22, 1991 between Elliott Vernon and
HealthCare Imaging Services, Inc. (Incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1 Registration
No. 33-42091 filed with the Securities and Exchange Commission on
November 6, 1991)*
10.16 [INTENTIONALLY OMITTED]
10.17 [INTENTIONALLY OMITTED]
10.18 [INTENTIONALLY OMITTED]
10.19 HealthCare Imaging Services, Inc. 1991 Stock Option Plan (Incorporated
by reference to Exhibit 10.19 to the Company's Registration Statement
on Form S-1 Registration No. 33-42091 filed with the Securities and
Exchange Commission on November 6, 1991)*
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10.20 HealthCare Imaging Services, Inc. 1991 Stock Option Plan for
Non-Employee Directors (Incorporated by Reference to Exhibit 10.20 to
the Company's 1991 Annual Report on Form 10-K)*
10.21 [INTENTIONALLY OMITTED]
10.22 [INTENTIONALLY OMITTED]
10.23 [INTENTIONALLY OMITTED]
10.24 [INTENTIONALLY OMITTED]
10.25 [INTENTIONALLY OMITTED]
10.26 [INTENTIONALLY OMITTED]
10.27 [INTENTIONALLY OMITTED]
10.28 Master Equipment Lease (No. 91-11-0534) dated December 31, 1991 by and
between DVI Financial Services Inc. and HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992)
10.29 Master Equipment Lease (No. 91-11-0535) dated December 31, 1991 by and
between DVI Financial Services Inc. and HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992)
10.30 Master Mobile Lease Agreement dated September 1, 1994 between Universal
Diagnostic Corp., Medibest Imaging Corp., Ocean Diagnostic Radiology,
P.C., Eagle Diagnostic Imaging Corp., Junction Diagnostic Imaging
Corp., HealthCare Imaging Services, Inc. and Omni Medical Imaging, Inc.
(Together with certain Exhibits thereto) (Incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994)
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10.31 Master Lease Agreement dated March 14, 1995 between HealthCare Imaging
Services, Inc. and Maiden Choice MRI, L.L.C. (Together with certain
Exhibits thereto) (Incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994)
10.32 Restructuring Agreement, dated as of July 1, 1994, among Edgewater
Imaging Associates, L.P., HealthCare Imaging Services of Edgewater,
Inc., and the certain individuals signatory thereto (Incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 12, 1994)
10.33 Master Equipment Lease dated September 26, 1995 by and between DVI
Financial Services Inc. and HealthCare Imaging Services, Inc. (Together
with certain Schedules thereto) (Incorporated by reference to Exhibit
10.33 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995)
10.34 [INTENTIONALLY OMITTED]
10.35 Consulting Agreement dated as of January 30, 1996 by and between
Biltmore Securities, Inc. and HealthCare Imaging Services, Inc.
(Together with certain Exhibits thereto) (Incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995)
10.36 Form of Subscription Agreement for the Purchase of Series C Convertible
Preferred Stock of HealthCare Imaging Services, Inc. (Incorporated by
reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995)
10.37 Amendment No. 1 dated as of February 1, 1996 to Employment Agreement by
and between Elliott H. Vernon and HealthCare Imaging Services, Inc.
(Together with a Stock Option Agreement, Restricted Stock Award
Agreement and Registration Rights Agreement, each dated as of February
1, 1996 and by and between Mr. Vernon and HealthCare Imaging Services,
Inc., which are exhibits thereto) (Incorporated by reference to Exhibit
10.37 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995)*
10.38 Amendment No. 2 to HealthCare Imaging Services, Inc. 1991 Stock Option
Plan (Incorporated by reference to Exhibit 10.38 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)*
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10.39 HealthCare Imaging Services, Inc. 1996 Stock Option Plan for
Non-Employee Directors (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 Registration No. 333-8699
filed with the Securities and Exchange Commission on July 24, 1996)*
10.40 Agreement, dated as of January 30, 1997, between HealthCare Imaging
Services, Inc. and Biltmore Securities, Inc. (Incorporated by reference
to Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997)
10.41 Agreement, dated as of January 30, 1997, between HealthCare Imaging
Services, Inc. and Elliott H. Vernon (Incorporated by reference to
Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997)*
10.42 Amendment No. 2 to Employment Agreement between HealthCare Imaging
Services, Inc. and Elliott H. Vernon (Incorporated by reference to
Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997)*
10.43 Amendment No. 3 to HealthCare Imaging Services, Inc. 1991 Stock Option
Plan (Incorporated by reference to Exhibit 10.43 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)*
10.44 Form of Excess Capacity Agreement (Incorporated by reference to Exhibit
10.44 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997)
10.45 Loan and Security Agreement, dated as of December 26, 1996, between
HealthCare Imaging Services, Inc., Edgewater Imaging Associates, L.P.,
Wayne Imaging Associates, L.P., Rittenhouse Square Imaging Associates,
L.P. and DVI Business Credit Corporation (Incorporated by reference to
Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)
10.46 Asset Purchase Agreement, dated as of November 4, 1997 between
HealthCare Imaging Services, Inc. and M.R. Radiology Imaging of Lower
Manhattan, P.C. (Incorporated by Reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 19, 1997)
10.47 Promissory Note of HealthCare Imaging Services, Inc. to M.R. Radiology
Imaging of Lower Manhattan, P.C. (Incorporated by Reference to Exhibit
2.2 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 19, 1997)
10.48 Amendment No. 1 to HealthCare Imaging Services, Inc. 1996 Stock Option
Plan for Non-Employee Directors (Incorporated by reference to
Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997)*
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10.49 Agreement, dated as of November 3, 1997, between HealthCare Imaging
Services, Inc. and Biltmore Securities, Inc. (Incorporated by reference
to Exhibit 10.49 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
10.50 Agreement, dated as of November 3, 1997, between HealthCare Imaging
Services, Inc. and Elliott H. Vernon (Incorporated by reference to
Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997)*
10.51 HealthCare Imaging Services, Inc. 1997 Omnibus Incentive Plan
(Incorporated by reference to Exhibit 10.51 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)*
10.52 HealthCare Imaging Services, Inc. 1997 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.52 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)*
10.53 Stock Purchase Agreement, dated as of February 25, 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 (Incorporated by
reference to Exhibit 10.53 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997)
10.54 Employment Agreement dated April 13, 1998 between Robert D. Baca and
HIS PPM Co. (Incorporated by reference to Exhibit 10.54 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998)*
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 (Incorporated by
reference to Exhibit 10.55 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998)
10.56 Consulting Agreement, dated as of February 27, 1998, by and between
Manmohan A. Patel, M.D. and HealthCare Imaging Services, Inc.*
10.57 Asset Purchase Agreement, dated as of September 16, 1998, among
HealthCare Imaging Services, Inc., Echelon MRI, P.C., Mainland Imaging
Center, P.C., North Jersey Imaging Management Associates, L.P.,
Bloomfield Imaging Associates, P.A., Irving N. Beran, M.D., P.A., the
Estate of Irving N. Beran, Deceased, Mrs. Phyllis Beran and Sam Beran,
67
<PAGE>
M.D. (Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
October 16, 1998)
10.58 Amendment No. 1 to the HealthCare Imaging Services, Inc. 1997 Omnibus
Incentive Plan*
10.59 Amended and Restated HealthCare Imaging Services, Inc. 1996 Stock
Option Plan for Non-Employee Directors*
10.60 Option Agreement, dated as of April 13, 1998, between Robert D. Baca
and HealthCare Imaging Services, Inc.*
10.61 Option Agreement, dated as of October 1, 1998, between Joseph J.
Raymond and HealthCare Imaging Services, Inc.
10.62 Agreement, dated as of October 1, 1998 between Joseph J. Raymond and
HealthCare Imaging Services, Inc.
10.63 Employment Agreement, dated as of October 1, 1998, between Elliott H.
Vernon and HealthCare Imaging Services, Inc.*
10.64 Consulting Services Agreement, dated as of November 4, 1997, by and
between HealthCare Imaging Services, Inc. and M.R. Radiology Imaging of
Lower Manhattan, P.C.
10.65 Consulting Agreement, dated as of December 31, 1997, between Dr. Ulises
C. Sabato and HealthCare Imaging Services, Inc.
10.66 Consulting Agreement, dated as of January 28, 1998, between Dr. Munr
Kazmir and HealthCare Imaging Services, Inc.*
10.67 Financial and Consulting Services Agreement dated as of October 1, 1998
by and between HealthCare Imaging Services, Inc. and DVI Financial
Services Inc.
10.68 DVI Bridge Loan and Security Agreement No. 1969 executed September 30,
1998, to become effective as of October 1, 1998, by and between DVI
Financial Services, Inc. and HealthCare Imaging Services, Inc.
10.69 Loan Modification Agreement dated December 31, 1998, by and between
HealthCare Imaging Services, Inc. and DVI Financial Services Inc.
68
<PAGE>
10.70 Amendment No. 1 to Loan and Security Agreement between HealthCare
Imaging Services, Inc., Edgewater Imaging Associates, L.P., Wayne
Imaging Associates, L.P., Rittenhouse Square Imaging Associates, L.P.
and DVI Business Credit Corporation
10.71 Amendment No. 2 to Loan and Security Agreement between HealthCare
Imaging Services, Inc., Edgewater Imaging Associates, L.P., Wayne
Imaging Associates, L.P., Rittenhouse Square Imaging Associates, L.P.
and DVI Business Credit Corporation
10.72 Amendment No. 3 to Loan and Security Agreement between HealthCare
Imaging Services, Inc., Edgewater Imaging Associates, L.P., Wayne
Imaging Associates, L.P., Rittenhouse Square Imaging Associates, L.P.,
Meadowlands MRI, LLC and DVI Business Credit Corporation
22.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors, Deloitte & Touche LLP
27 Financial Data Schedule
- --------------------------------------------------------------------------------
* Such exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(c) of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
(b) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission during the fourth quarter of fiscal
1998:
(i) Current Report on Form 8-K (the "Beran 8-K") filed with the
Securities and Exchange Commission on October 16, 1998 regarding
the acquisition on October 2, 1998 (effective October 1, 1998) by
a wholly-owned subsidiary of the Company of five multi-modality
diagnostic imaging centers located in Voorhees (two centers),
Bloomfield, Northfield and Williamstown, New Jersey. The
following financial statements were filed with such report:
Audited Combined Financial Statements of the Beran Entities
for the years ended December 31, 1997 and 1996
Unaudited Combined Financial Statements of the Beran Entities
for the six months ended June 30, 1998
69
<PAGE>
(ii) Amendment No. 1 to the Beran 8-K filed with the Securities and
Exchange Commission on November 11, 1998 including the following
pro forma financial information:
Pro Forma Consolidated Condensed Balance Sheets as of June
30, 1998
Pro Forma Consolidated Condensed Statements of Operations as
of June 30, 1998
Pro Forma Consolidated Condensed Statements of Operations for
the year ended December 31, 1997
Notes to Pro Forma Consolidated Condensed Financial
Statements
(iii) Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 7, 1998 including the following financial
statements:
Unaudited Consolidated Balance Sheet of HealthCare Imaging
Services, Inc. as of October 31, 1998
Unaudited Consolidated Statements of Income of HealthCare
Imaging Services, Inc for the one month and ten month periods
ended October 31, 1998.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTHCARE IMAGING SERVICES, INC.
Dated: March 30, 1999 By: /s/ Elliott H. Vernon
--------------------------
Elliott H. Vernon
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Name Title Date
- ---- ----- ----
/s/ Elliott H. Vernon Chairman of the March 30, 1999
- ------------------------ Board, President and
Elliott H. Vernon Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/ Scott P. McGrory Vice President, March 30, 1999
- ------------------------ Controller
Scott P. McGrory (Principal
Financial and
Accounting Officer)
/s/ Shawn A. Friedkin Director March 30, 1999
- ------------------------
Shawn A. Friedkin
/s/ Manmohan A. Patel Director March 30, 1999
- ------------------------
Manmohan A. Patel
/s/ Joseph J. Raymond Director March 30, 1999
- ------------------------
Joseph J. Raymond
71
<PAGE>
/s/ Michael S. Weiss Director March 30, 1999
- ------------------------
Michael S. Weiss
72
<PAGE>
HEALTHCARE IMAGING SERVICES, INC.
---------
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
---------
INDEX TO EXHIBITS
Number Page
- ------ ----
2.1 Agreement and Plan of Merger, dated as of January 29, 1999,
among HealthCare Imaging Services, Inc., HIS PPM Co., Jersey
Integrated HealthPractice, Inc., Pavonia Medical Associates,
P.A. and the physician stockholders of Pavonia Medical
Associates, P.A.
3.1 Certificate of Incorporation of HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 Registration No.33-42091
filed with the Securities and Exchange Commission on August 13,
1991)
3.2 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995)
3.3 By-Laws of HealthCare Imaging Services, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on August 13, 1991)
3.4 Certificate of Amendment of the Certificate of Incorporation of
HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996)
3.5 Certificate of Designations, Preferences and Rights of Series D
Cumulative Accelerating Redeemable Preferred Stock of
HealthCare Imaging Services, Inc. (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on October 16,
1998)
10.1 Master Equipment Lease dated March 29, 1991 by and between DVI
Financial Services Inc. and HealthCare Imaging Services, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company's
73
<PAGE>
Registration Statement on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange Commission on August 13,
1991)
10.2 [INTENTIONALLY OMITTED]
10.3 [INTENTIONALLY OMITTED]
10.4 Consulting Services and License Agreement between New York MR
Associates and Kings Medical Diagnostic Imaging, P.C. dated
January 27, 1986 (Incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on Form S-1 Registration
No. 33-42091 filed with the Securities and Exchange Commission
on August 13, 1991)
10.5 Addendum to Consulting Services and License Agreement dated
June 15, 1990 between New York MR Associates and Kings Medical
Diagnostic Imaging, P.C. (Incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1
Registration No. 33-42091 filed with the Securities and
Exchange Commission on August 13, 1991)
10.6 [INTENTIONALLY OMITTED]
10.7 Assignment and Consent Agreement dated as of July 24, 1991 by
and among Kings Medical Diagnostic Imaging, P.C., Kings Plaza
Radiology Associates (Incorporated by reference to Exhibit 10.7
to the Company's Registration Statement on Form S-1
Registration No. 33-42091 filed with the Securities and
Exchange Commission on August 13, 1991)
10.8 Lease between New York MR Associates and Kings Medical
Diagnostic Imaging, P.C. as of January 27, 1986 for Brooklyn
property (Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 Registration
No.33-42091 filed with the Securities and Exchange Commission
on August 13, 1991)
10.9 Assignment and Assumption of Lease dated October 22, 1991
between Kings Medical Diagnostic Imaging, P.C. and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-1
Registration No. 33-42901 filed with the Securities and
Exchange Commission on November 6, 1991)
10.10 [INTENTIONALLY OMITTED]
74
<PAGE>
10.11 [INTENTIONALLY OMITTED]
10.12 [INTENTIONALLY OMITTED]
10.13 [INTENTIONALLY OMITTED]
10.14 [INTENTIONALLY OMITTED]
10.15 Employment Agreement dated October 22, 1991 between Elliott
Vernon and HealthCare Imaging Services, Inc. (Incorporated by
reference to Exhibit 10.15 to the Company's Registration
Statement on Form S-1 Registration No. 33-42091 filed with the
Securities and Exchange Commission on November 6, 1991)*
10.16 [INTENTIONALLY OMITTED]
10.17 [INTENTIONALLY OMITTED]
10.18 [INTENTIONALLY OMITTED]
10.19 HealthCare Imaging Services, Inc. 1991 Stock Option Plan
(Incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 Registration No. 33-42091
filed with the Securities and Exchange Commission on
November 6, 1991)*
10.20 HealthCare Imaging Services, Inc. 1991 Stock Option Plan for
Non-Employee Directors (Incorporated by Reference to Exhibit
10.20 to the Company's 1991 Annual Report on Form 10-K)*
10.21 [INTENTIONALLY OMITTED]
10.22 [INTENTIONALLY OMITTED]
10.23 [INTENTIONALLY OMITTED]
10.24 [INTENTIONALLY OMITTED]
10.25 [INTENTIONALLY OMITTED]
10.26 [INTENTIONALLY OMITTED]
10.27 [INTENTIONALLY OMITTED]
75
<PAGE>
10.28 Master Equipment Lease (No. 91-11-0534) dated December 31, 1991
by and between DVI Financial Services Inc. and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit
10.28 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992)
10.29 Master Equipment Lease (No. 91-11-0535) dated December 31, 1991
by and between DVI Financial Services Inc. and HealthCare
Imaging Services, Inc. (Incorporated by reference to Exhibit
10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992)
10.30 Master Mobile Lease Agreement dated September 1, 1994 between
Universal Diagnostic Corp., Medibest Imaging Corp., Ocean
Diagnostic Radiology, P.C., Eagle Diagnostic Imaging Corp.,
Junction Diagnostic Imaging Corp., HealthCare Imaging Services,
Inc. and Omni Medical Imaging, Inc. (Together with certain
Exhibits thereto) (Incorporated by reference to Exhibit 10.30
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994)
10.31 Master Lease Agreement dated March 14, 1995 between HealthCare
Imaging Services, Inc. and Maiden Choice MRI, L.L.C. (Together
with certain Exhibits thereto) (Incorporated by reference to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994)
10.32 Restructuring Agreement, dated as of July 1, 1994, among
Edgewater Imaging Associates, L.P., HealthCare Imaging Services
of Edgewater, Inc., and the certain individuals signatory
thereto (Incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on August 12, 1994)
10.33 Master Equipment Lease dated September 26, 1995 by and between
DVI Financial Services Inc. and HealthCare Imaging Services,
Inc. (Together with certain Schedules thereto) (Incorporated by
reference to Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995)
10.34 [INTENTIONALLY OMITTED]
10.35 Consulting Agreement dated as of January 30, 1996 by and
between Biltmore Securities, Inc. and HealthCare Imaging
Services, Inc.
76
<PAGE>
(Together with certain Exhibits thereto) (Incorporated by
reference to Exhibit 10.35 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995)
10.36 Form of Subscription Agreement for the Purchase of Series C
Convertible Preferred Stock of HealthCare Imaging Services,
Inc. (Incorporated by reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995)
10.37 Amendment No. 1 dated as of February 1, 1996 to Employment
Agreement by and between Elliott H. Vernon and HealthCare
Imaging Services, Inc. (Together with a Stock Option Agreement,
Restricted Stock Award Agreement and Registration Rights
Agreement, each dated as of February 1, 1996 and by and between
Mr. Vernon and HealthCare Imaging Services, Inc., which are
exhibits thereto) (Incorporated by reference to Exhibit 10.37
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995)*
10.38 Amendment No. 2 to HealthCare Imaging Services, Inc. 1991 Stock
Option Plan (Incorporated by reference to Exhibit 10.38 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996)*
10.39 HealthCare Imaging Services, Inc. 1996 Stock Option Plan for
Non-Employee Directors (Incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8
Registration No. 333-8699 filed with the Securities and
Exchange Commission on July 24, 1996)*
10.40 Agreement, dated as of January 30, 1997, between HealthCare
Imaging Services, Inc. and Biltmore Securities, Inc.
(Incorporated by reference to Exhibit 10.40 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997)
10.41 Agreement, dated as of January 30, 1997, between HealthCare
Imaging Services, Inc. and Elliott H. Vernon (Incorporated by
reference to Exhibit 10.41 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997)*
10.42 Amendment No. 2 to Employment Agreement between HealthCare
Imaging Services, Inc. and Elliott H. Vernon (Incorporated by
reference to Exhibit 10.42 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997)*
77
<PAGE>
10.43 Amendment No. 3 to HealthCare Imaging Services, Inc. 1991 Stock
Option Plan (Incorporated by reference to Exhibit 10.43 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997)*
10.44 Form of Excess Capacity Agreement (Incorporated by reference to
Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997)
10.45 Loan and Security Agreement, dated as of December 26, 1996,
between HealthCare Imaging Services, Inc., Edgewater Imaging
Associates, L.P., Wayne Imaging Associates, L.P., Rittenhouse
Square Imaging Associates, L.P. and DVI Business Credit
Corporation (Incorporated by reference to Exhibit 10.45 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997)
10.46 Asset Purchase Agreement, dated as of November 4, 1997 between
HealthCare Imaging Services, Inc. and M.R. Radiology Imaging of
Lower Manhattan, P.C. (Incorporated by Reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 19, 1997)
10.47 Promissory Note of HealthCare Imaging Services, Inc. to M.R.
Radiology Imaging of Lower Manhattan, P.C. (Incorporated by
Reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
November 19, 1997)
10.48 Amendment No. 1 to HealthCare Imaging Services, Inc. 1996 Stock
Option Plan for Non-Employee Directors (Incoporated by reference
to Exhibit 10.48 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997)*
10.49 Agreement, dated as of November 3, 1997, between HealthCare
Imaging Services, Inc. and Biltmore Securities, Inc.
(Incorporated by reference to Exhibit 10.49 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997)
10.50 Agreement, dated as of November 3, 1997, between HealthCare
Imaging Services, Inc. and Elliott H. Vernon (Incorporated by
reference to Exhibit 10.50 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)*
78
<PAGE>
10.51 HealthCare Imaging Services, Inc. 1997 Omnibus Incentive Plan
(Incorporated by reference to Exhibit 10.51 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997)*
10.52 HealthCare Imaging Services, Inc. 1997 Employee Stock Purchase
Plan (Incorporated by reference to Exhibit 10.52 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997)*
10.53 Stock Purchase Agreement, dated as of February 25, 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 (Incorporated by reference to Exhibit 10.53 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.54 Employment Agreement dated April 13, 1998 between Robert D.
Baca and HIS PPM Co. (Incorporated by reference to Exhibit
10.54 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998)*
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 (Incorporated by reference to Exhibit 10.55 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998)
10.56 Consulting Agreement, dated as of February 27, 1998, by and
between Manmohan A. Patel, M.D. and HealthCare Imaging
Services, Inc.*
10.57 Asset Purchase Agreement, dated as of September 16, 1998, among
HealthCare Imaging Services, Inc., Echelon MRI, P.C., Mainland
Imaging Center, P.C., North Jersey Imaging Management
Associates, L.P., Bloomfield Imaging Associates, P.A., Irving
N. Beran, M.D., P.A., the Estate of Irving N. Beran, Deceased,
Mrs. Phyllis Beran and Sam Beran, M.D. (Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
October 16, 1998)
79
<PAGE>
10.58 Amendment No. 1 to the HealthCare Imaging Services, Inc. 1997
Omnibus Incentive Plan*
10.59 Amended and Restated HealthCare Imaging Services, Inc. 1996
Stock Option Plan for Non-Employee Directors*
10.60 Option Agreement, dated as of April 13, 1998, between Robert D.
Baca and HealthCare Imaging Services, Inc.*
10.61 Option Agreement, dated as of October 1, 1998, between Joseph
J. Raymond and HealthCare Imaging Services, Inc.
10.62 Agreement, dated as of October 1, 1998 between Joseph J.
Raymond and HealthCare Imaging Services, Inc.
10.63 Employment Agreement, dated as of October 1, 1998, between
Elliott H. Vernon and HealthCare Imaging Services, Inc.*
10.64 Consulting Services Agreement, dated as of November 4, 1997, by
and between HealthCare Imaging Services, Inc. and M.R.
Radiology Imaging of Lower Manhattan, P.C.
10.65 Consulting Agreement, dated as of December 31, 1997, between
Dr. Ulises C. Sabato and HealthCare Imaging Services, Inc.
10.66 Consulting Agreement, dated as of January 28, 1998, between Dr.
Munr Kazmir and HealthCare Imaging Services, Inc.*
10.67 Financial and Consulting Services Agreement dated as of October
1, 1998 by and between HealthCare Imaging Services, Inc. and
DVI Financial Services Inc.
10.68 DVI Bridge Loan and Security Agreement No. 1969 executed
September 30, 1998, to become effective as of October 1, 1998,
by and between DVI Financial Services, Inc. and HealthCare
Imaging Services, Inc.
10.69 Loan Modification Agreement dated December 31, 1998, by and
between HealthCare Imaging Services, Inc. and DVI Financial
Services Inc.
10.70 Amendment No. 1 to Loan and Security Agreement between
HealthCare Imaging Services, Inc., Edgewater Imaging
Associates,
80
<PAGE>
L.P., Wayne Imaging Associates, L.P., Rittenhouse Square
Imaging Associates, L.P. and DVI Business Credit Corporation
10.71 Amendment No. 2 to Loan and Security Agreement between
HealthCare Imaging Services, Inc., Edgewater Imaging
Associates, L.P., Wayne Imaging Associates, L.P., Rittenhouse
Square Imaging Associates, L.P. and DVI Business Credit
Corporation
10.72 Amendment No. 3 to Loan and Security Agreement between
HealthCare Imaging Services, Inc., Edgewater Imaging
Associates, L.P., Wayne Imaging Associates, L.P., Rittenhouse
Square Imaging Associates, L.P., Meadowlands MRI, LLC and DVI
Business Credit Corporation
22.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors, Deloitte & Touche LLP
27 Financial Data Schedule
- --------------------------------------------------------------------------------
* Such exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(c) of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
81
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
HealthCare Imaging Services, Inc.
Red Bank, New Jersey
We have audited the accompanying consolidated balance sheets of HealthCare
Imaging Services, Inc. and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
Item 14 to the Company's Annual Report on Form 10-K for the year ended December
31, 1998. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
New York, New York
March 2, 1999
F-1
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,506,123 $ 70,626
Accounts receivable - net of allowances for doubtful accounts of $6,180,000 and
$4,977,000 in 1998 and 1997, respectively 9,869,696 5,375,351
Accounts receivable acquired in the Beran Acquisition 4,653,831 --
Loan receivable 2,550,000 --
Prepaid expenses and other 228,758 186,082
------------ ------------
Total current assets 18,808,408 5,632,059
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 9,578,807 5,518,772
DEFERRED TAX ASSET -NET 48,325 --
OTHER ASSETS:
Due from officer 264,125 264,125
Deferred transaction and financing costs 1,215,364 232,810
Other 180,786 197,815
Goodwill - net of accumulated amortization of $317,939 and $78,011 in 1998 and
1997, respectively 12,858,838 1,695,054
------------ ------------
Total other assets 14,519,113 2,389,804
------------ ------------
TOTAL ASSETS $ 42,954,653 $ 13,540,635
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under revolving line of credit $ 2,838,275 $ 1,462,000
Accounts payable and accrued expenses 2,122,916 1,354,200
Current portion of capital lease obligations 1,505,510 1,647,148
Bridge financing 14,000,000 --
Reserve for subleased equipment 294,790 321,465
Income taxes payable 106,582 16,044
------------ ------------
Total current liabilities 20,868,073 4,800,857
------------ ------------
NONCURRENT LIABILITIES:
Capital lease obligations 3,440,890 2,780,447
------------ ------------
MINORITY INTERESTS 896,404 546,433
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 1,000,000 shares authorized: Series C
convertible preferred stock, none and 185,000 shares outstanding at
December 31, 1998 and 1997, respectively (Each convertible into seven shares -- 18,500
of common stock)
Series D 8% cumulative accelerating redeemable preferred stock, 871.743
and no shares outstanding at December 31, 1998 and 1997,
respectively ($10,500 per
share liquidation preference) 87 --
Common stock, $.01 par value: 50,000,000 shares authorized: 11,356,974
and 9,286,974 shares outstanding at December 31, 1998 and 1997, respectively 113,570 92,870
Additional paid-in capital 23,050,076 12,694,678
Accumulated deficit (5,414,447) (7,393,150)
------------ ------------
Total stockholders' equity 17,749,286 5,412,898
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,954,653 $ 13,540,635
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES: $ 16,451,057 $ 10,247,940 $ 9,787,591
OPERATING EXPENSES:
Salaries 4,547,363 2,819,601 2,838,739
Operating expenses 4,587,734 4,294,407 3,842,573
Provision/(recovery) of bad debts 148,269 -- (392,286)
Consulting and marketing fees 620,361 582,687 72,344
Professional fees 534,060 538,392 457,797
Depreciation and amortization 2,029,723 1,509,649 1,450,074
Interest 1,427,267 540,652 469,133
Gain on sale of property, plant and equipment (317,937) (105,000) --
Non-cash compensation charge 135,617 398,646 1,445,473
------------ ------------ ------------
13,712,457 10,579,034 10,183,847
------------ ------------ ------------
INCOME/(LOSS) BEFORE MINORITY INTERESTS IN
JOINT VENTURES AND INCOME TAXES 2,738,600 (331,094) (396,256)
MINORITY INTERESTS IN JOINT VENTURES (479,170) (430,172) (416,192)
------------ ------------ ------------
INCOME/(LOSS) BEFORE INCOME TAXES 2,259,430 (761,266) (812,448)
INCOME TAX PROVISION 97,661 43,039 49,348
------------ ------------ ------------
NET INCOME/(LOSS) 2,161,769 (804,305) (861,796)
PREFERRED DIVIDENDS 183,066 -- --
------------ ------------ ------------
NET INCOME/(LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 1,978,703 $ (804,305) $ (861,796)
============ ============ ============
NET INCOME/(LOSS) PER COMMON SHARE - BASIC $ .19 $ (0.13) $ (0.18)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 10,511,893 6,187,822 4,711,974
============ ============ ============
NET INCOME/(LOSS) PER COMMON SHARE - DILUTED $ .10 $ (0.13) $ (0.18)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 21,461,901 6,187,822 4,711,974
============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES D SERIES C COMMON STOCK
---------------- ------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 -- -- -- -- 4,711,974 $ 47,120
Proceeds from sale of Series C Preferred
Stock (each convertible into seven
shares of common stock), net of expenses
of $151,746 -- -- 660,000 $ 66,000 -- --
Issuance of restricted stock to CEO -- -- -- -- 250,000 2,500
Unearned compensation in connection
with stock option grant -- -- -- -- -- --
Amortization of unearned
compensation for stock option
and restricted stock grants -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- -- 660,000 66,000 4,961,974 49,620
--------------------------------------------------------------------------
Conversion of Series C Preferred Stock -- -- (475,000) (47,500) 3,325,000 33,250
Amortization of unearned
compensation for stock option and
restricted stock grants -- -- -- -- -- --
Purchase of assets of M.R. Radiology
Imaging of Lower Manhattan, P.C -- -- -- -- 1,000,000 10,000
Net loss -- -- -- -- -- --
Other -- -- -- -- -- --
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 -- -- 185,000 18,500 9,286,974 92,870
--------------------------------------------------------------------------
Conversion of Series C Preferred Stock -- -- (185,000) (18,500) 1,295,000 12,950
Beran Acquisition Issuance 872 $ 87 -- -- -- --
Issuance of stock to financial advisor -- -- -- -- 750,000 7,500
Compensation in connection with stock
option grants -- -- -- -- -- --
Record cashless exercise of stock options -- -- -- -- 25,000 250
Net income -- -- -- -- -- --
Other -- -- -- -- -- --
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 872 $ 87 -- $ -- 11,356,974 $ 113,570
==========================================================================
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED UNEARNED STOCKHOLDERS'
CAPITAL DEFICIT COMPENSATION EQUITY
------- ------- ------------ ------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 8,902,805 ($ 5,727,049) -- $ 3,222,876
Proceeds from sale of Series C Preferred
Stock (each convertible into seven
shares of common stock), net of expenses
of $151,746 1,132,254 -- -- 1,198,254
Issuance of restricted stock to CEO 466,244 -- (468,744) --
Unearned compensation in connection
with stock option grant 1,375,375 -- (1,375,375) --
Amortization of unearned
compensation for stock option
and restricted stock grants -- -- 1,445,473 1,445,473
Net loss -- (861,796) -- (861,796)
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 11,876,678 (6,588,845) (398,646) 5,004,807
-------------------------------------------------------------
Conversion of Series C Preferred Stock 14,250 -- -- --
Amortization of unearned
compensation for stock option and
restricted stock grants -- -- 398,646 398,646
Purchase of assets of M.R. Radiology
Imaging of Lower Manhattan, P.C 821,250 -- -- 831,250
Net loss -- (804,305) -- (804,305)
Other (17,500) -- -- (17,500)
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 12,694,678 (7,393,150) -- 5,412,898
-------------------------------------------------------------
Conversion of Series C Preferred Stock 5,550 -- -- --
Beran Acquisition Issuance 9,153,210 -- -- 9,153,297
Issuance of stock to financial advisor 695,625 -- -- 703,125
Compensation in connection with stock
option grants 490,689 -- -- 490,689
Record cashless exercise of stock options (250) --
Net income -- 1,978,703 -- 1,978,703
Other 10,574 -- -- 10,574
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 23,050,076 ($ 5,414,447) $ -- $ 17,749,286
=============================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 1,978,703 $ (804,305) $ (861,796)
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities
Depreciation and amortization 2,029,723 1,509,649 1,450,074
Amortization of non-cash compensation 135,617 398,646 1,445,473
Gain on sale of property, plant and equipment (317,937) (105,000) --
Minority interests in joint ventures 479,170 430,172 416,192
Allowance for doubtful accounts 1,140,000 659,000 17,000
Changes in assets and liabilities, exclusive of changes resulting
from acquisitions:
Accounts receivable (3,703,492) (1,258,052) (632,022)
Prepaid expenses and other (42,676) (26,061) 57,741
Deferred taxes (48,325) -- --
Due from officer -- (88,076) 55,855
Deferred costs -- -- (4,767)
Other 17,029 153,586 (351,401)
Accounts payable and accrued expenses 768,716 160,977 317,965
Income taxes payable 90,538 7,740 8,304
Deferred transaction and financing costs (1,069,503) 7,605 (156,762)
------------ ------------ ------------
Net cash provided by operating activities 1,457,563 1,045,881 1,761,856
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Beran Acquisition (11,500,000) -- --
Loan to the Beran Entities (2,550,000) -- --
Purchase of assets of M.R. Radiology Imaging of Lower
Manhattan,
P.C -- (1,203,721) --
Purchases of property, plant and equipment (105,379) (120,169) (171,654)
Proceeds from sale of marketable securities -- 625,000 375,000
Purchase of marketable securities -- -- (1,000,000)
Proceeds from sale of property, plant and equipment 844,000 105,000 --
------------ ------------ ------------
Net cash used in investing activities (13,311,379) (593,890) (796,654)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from the sale of Series C Preferred Stock -- -- 1,198,254
Borrowings pursuant to bridge financing 14,000,000 -- --
Borrowings under the revolving line of credit 1,376,275 1,462,000 --
Payments on capital lease obligations (1,908,258) (1,363,860) (1,037,614)
Payments on reserved subleased equipment (49,505) (251,576) (861,840)
Distributions to limited partners of joint ventures (129,199) (384,308) (371,539)
Other -- (17,500) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 13,289,313 (555,244) (1,072,739)
------------ ------------ ------------
INCREASE/(DECREASE) IN CASH 1,435,497 (103,253) (107,537)
CASH:
Beginning of the year 70,626 173,879 281,416
------------ ------------ ------------
End of the year $ 1,506,123 $ 70,626 $ 173,879
============ ============ ============
</TABLE>
F-5
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $1,272,446 $ 535,784 $ 477,196
========== ========== ==========
Income taxes paid $ 31,558 $ 35,300 $ 53,756
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital leases principally for property, plant and equipment $2,427,063 $2,221,584 $ 306,634
========== ========== ==========
Preferred stock issued as partial consideration for the Beran Acquisition
(See Note 2) $9,153,297
==========
Stock issued as partial consideration for the purchase of assets of M.R
Radiology Imaging of Lower Manhattan, P.C. (See Note 2) $ 831,250
==========
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
- --------------------------------------------------------------------------------
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY - The Company is principally engaged in the business
of establishing and operating fixed-site diagnostic imaging ("MRI")
centers.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include HealthCare Imaging Services, Inc. (together with its
subsidiaries and majority-owned joint ventures hereinafter referred to
as the "Company" unless the context indicates otherwise) and its
wholly-owned subsidiaries, which include corporations formed to be the
general partner of the Company's various limited partnership
arrangements. The Company's consolidated financial statements also
include 100% of the assets, liabilities and results of operations of
its operating joint ventures in which the Company has a majority
interest (ranging from 51% to 60%) and exercises unilateral management
control including day-to-day management of operations, strategic
planning, equipment financing and capital transactions. The ownership
interests of the limited partners in these joint ventures are recorded
as minority interests. All intercompany balances and transactions
(including management fees paid by the joint ventures to the Company)
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include highly
liquid, short-term investments purchased with original maturities of
three months or less, which are maintained primarily with several
regional banks.
REVENUES - The Company provides administrative, management and billing
and collections services, as well as equipment and real property, to
health care providers, consisting primarily of individual physicians
and private group medical practices. Generally, the Company licenses
use of its diagnostic imaging equipment to professional practice groups
("Medical Licensees") in New Jersey, New York and Pennsylvania who, in
turn, use the equipment to provide diagnostic imaging services to their
patients or patients of other health care providers with whom they or
the Company have contractual relationships. A Medical Licensee
typically pays the Company a flat fee on a monthly, daily or per scan
basis for the use of the equipment and property, and an administrative
charge for the use of the Company's support personnel and support
services, such as clerical work, billing and collection services and
other associated nonmedical functions. Such fees, under certain
arrangements, are received by the Company following the receipt of
payment by the Medical Licensee from either the patients or third party
payors. Under other arrangements and pursuant to the laws of certain
states in which the Company does business, the Medical Licensee pay
such fees to the Company following the conduct of the procedure or
passage of the applicable payment period irrespective of whether the
patients or third party payors have reimbursed the Medical Licensee for
the respective procedures. Where the Company has entered into written
agreements with Medical Licensees, such agreements typically have been
for terms ranging from five to ten years.
For certain licensed facilities in New Jersey owned by the Company, the
Company is itself the provider of the diagnostic imaging services and,
as such, directly bills and collects from patients and third party
payors for such services. In such facilities, qualified radiologists
are either employed by the Company or are retained and compensated by
the Company as independent contractors.
F-7
<PAGE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, stated
at cost, are depreciated on a straight-line basis over the estimated
useful lives of the assets. Assets held under capital leases are stated
at the lower of the fair market value or the present value of the
future minimum lease payments. Leasehold improvements are amortized
over the shorter of the life of the lease or the useful life. The
estimated useful lives are as follows:
Office and computer equipment
and furniture and fixtures 5-8 years
Medical equipment 5-8 years
Leasehold improvements 6-8 years
GOODWILL - Goodwill is being amortized on a straight-line basis over
ten to twenty years.
DEFERRED TRANSACTION AND FINANCING COSTS - Deferred transaction and
financing costs relate to expenses incurred in connection with the
financing of the Beran Acquisition (See Notes 2 and 4) and in
connection with the Company's proposed acquisition of a management
services organization ("MSO") (See Note 2). Deferred financing costs
are being expensed over the applicable agreement term. In the event
such proposed acquisition is not consummated, the related deferred
transaction costs will be expensed.
NET INCOME/(LOSS) PER COMMON SHARE - In accordance with Statement of
Financial Accounting Standards No. 128, "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 years ended December 31, 1998, 1997 and 1996, 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 years ended December 31, 1998, 1997 and 1996, 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.
INCOME TAXES - Deferred tax assets and liabilities are determined based
on the difference between the financial statement basis and tax basis
of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For financial instruments
including cash, accounts receivable and payable, and accruals, it was
assumed that the carrying amount approximated fair value because of
their short maturity. The fair values of the Company's long-term debt
and capital lease obligations were estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The carrying amount and
fair value for the Company's long-term debt and capital lease
obligations were $18,946,400 and $19,187,886, respectively, at December
31, 1998, and $4,427,595 and $4,478,970, respectively, at December 31,
1997.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily
of accounts receivable. As described under "Revenues," the Company
furnishes services to Medical Licensees, which in turn provide
diagnostic imaging services to their patients and the patients of
individual physicians, physicians' groups and other health care
providers. The Company also directly provides diagnostic imaging
services at certain of its New Jersey facilities. Although the
Company's right to payment for services rendered to Medical Licensees
is not dependent upon payments received by the Medical Licensees, as
part of its arrangements with certain Medical Licensees, the Company
does not seek payment from the Medical
F-8
<PAGE>
Licensee until the Medical Licensee has been paid for the medical
services it has provided. Therefore, the Company bears the risk of
delayed payment. However, most amounts due to the Medical Licensees (as
well as to the Company for diagnostic imaging services it directly
provides) are subject to third-party reimbursement from health
insurance companies, which historically have proven to be credit
worthy. Upon the expiration or other termination of the arrangements
with such Medical Licensees, the Company is contractually entitled to
seek payment from such Medical Licensees for all services provided,
including those with respect to which the Medical Licensees have not
been paid. However, the Company generally does not seek to recover
unpaid claims from Medical Licensees. The Company's accounts receivable
consist of the Company's proportionate share of Medical Licensees'
procedure fees as well as administrative fees payable by Medical
Licensees and accounts receivable for diagnostic imaging services
provided directly by the Company. Such accounts receivable are shown
net of an allowance for doubtful accounts which consists of the
Company's estimate of amounts that will not be collected.
LONG-LIVED ASSETS - The Company evaluates long-lived assets and certain
identifiable intangibles held and used by the Company for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
STOCK OPTIONS AND WARRANTS - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require, companies to adopt the fair value
method of accounting for employee stock-based transactions. Companies
are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," but are required to disclose in a note to the
annual audited financial statements pro forma net income (loss) and pro
forma earnings (loss) per share as if the Company had applied the newer
method of accounting. The Company has elected to continue to follow the
provisions of APB Opinion No. 25 and related interpretations in
accounting for employee stock options.
NEW ACCOUNTING PRONOUNCEMENTS - During 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and SFAS No. 134, "Accounting for Mortgage-Backed
Securities". The Company does not expect adoption of these new
accounting pronouncements to have a material effect, if any, on its
financial condition or results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made to the
prior year's financial statements to conform with the current year's
presentation.
2. ACQUISITIONS, PROPOSED ACQUISITION AND OTHER MATTERS
ACQUISITIONS - 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 each of Voorhees and Williamstown, New Jersey and a
radiology facility in each of Atco and Williamstown, New Jersey
(collectively, the "Beran Entities"). The consideration given by the
Company in the Beran Acquisition was (A) the assumption of certain
obligations and liabilities of the Beran Entities, (B) cash in the
amount of $11,500,000 and (C) the issuance of 887.385 shares of Series
D Cumulative Accelerating Redeemable Preferred Stock of the Company
(the "Series D Stock") having an aggregate liquidation preference of
$9,317,542.50 (i.e., $10,500 per share liquidation preference) (See
Note 8). The purchase price was subject to an adjustment based on the
value of the Beran
F-9
<PAGE>
Entities' accounts receivable as of the closing date and, in accordance
therewith, 15.642 shares of Series D Stock having an aggregate
liquidation preference of $164,241 were transferred back to the Company
and canceled. 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 $2,500,000, 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 $14,000,000
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 Loan") (See Note 4).
The acquisition of the assets of the Beran Entities has been recorded
in accordance with the purchase method of accounting whereby assets
acquired and liabilities assumed were recorded at their fair values.
The fair value of accounts receivable acquired in the Beran Acquisition
have been recorded at their estimated net collectible value based upon
the Company's analysis of the number of open accounts at that date, the
past collection experience of the Beran Entities, the Company's
experience in collecting similar accounts, and actual collections
subsequent to October 1, 1998. As collections are made on these
acquired accounts receivable, the carrying value thereof is reduced. If
the Company's actual experience in collecting these receivables differs
significantly from the Company's estimates, the Company will adjust the
estimated net collectible value of the acquired accounts receivable
through an adjustment to goodwill. The excess of the cost of the
acquisition (including transaction costs) over the fair value of net
assets acquired is reflected as goodwill in the accompanying balance
sheet and is being amortized over a period of 20 years.
On November 4, 1997, the Company acquired substantially all of the
assets of M.R. Radiology Imaging of Lower Manhattan, P.C. ("NYC MRI"),
a professional corporation owned by Dr. George Braff, a related party.
This professional corporation operated a fixed-site MRI facility, with
ultrasound, located at 45 Beekman Street in New York City (the "New
York City Facility"). The consideration for the acquisition was (i) the
assumption of certain obligations and liabilities of NYC MRI, including
payments to be made under a capital lease of up to approximately
$300,000, (ii) cash in the amount of $900,000, (iii) the issuance of
1,000,000 shares of the Company's common stock (the "Common Stock"),
and (iv) the issuance of a $300,000 promissory note that was due and
paid on December 31, 1997. The Company also assumed certain contractual
obligations of NYC MRI on a going-forward basis under the contracts
assigned to the Company in the acquisition (including operating leases
and equipment maintenance agreements). The total purchase price for the
acquisition of the New York City Facility has been allocated to
tangible and identifiable intangible assets and liabilities based upon
their respective fair market values with the excess of cost over fair
market value of net assets acquired allocated to goodwill. In
connection with the acquisition, the Company also entered into a
consulting services agreement with NYC MRI which, among other things,
provides that Dr. Braff will continue to provide all medical services
at the New York City Facility. Dr. Braff is the Medical Director of the
Company and the supervising radiologist, majority shareholder and
officer of three of the Medical Licensees: Monmouth Diagnostic Imaging,
P.A., Kings Medical Diagnostic Imaging, P.C. and M.R. Radiology Imaging
of Lower Manhattan, P.C. Dr. Braff was a director of the Company from
December 1995 until April 1997.
The following table presents the Company's unaudited pro forma results
of operations, as if the Beran Acquisition and the acquisition of NYC
MRI occurred on January 1, 1997:
F-10
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Revenues $24,134,670 $22,357,639
=========== ===========
Net income/(loss) $1,772,828 $(150,019)
========== ==========
Net income/(loss) per common
share - basic $0.16 $(0.02)
===== =======
Net income/(loss) per common
share - diluted $0.13 $(0.02)
===== =======
</TABLE>
PROPOSED ACQUISITION - The Company has decided to expand its strategic
focus into the area of physician practice management and, in connection
therewith, the Company has entered into letters of intent with respect
to the acquisition of all of the outstanding capital stock of Jersey
Integrated HealthPractice, Inc. ("JIHP"), a MSO formed and owned by
Pavonia Medical Associates, P.A. ("PMA") and Liberty Health Care
Systems, Inc. ("Liberty") of Jersey City, New Jersey. JIHP provides
management services to PMA. PMA is comprised of over 55 physicians
servicing over 75,000 patients in five locations in New Jersey. In
consideration for the acquisition, the letters of intent provides,
among other things, that the Company will pay and/or issue to PMA and
Liberty, in the aggregate, (i) $7,000,000 in cash, (ii) 5,500,000
shares of Common Stock (500,000 shares of which may be subject to
certain post-closing adjustments), and (iii) convertible redeemable
preferred stock of the Company having an aggregate liquidation
preference of $5,000,000. The preferred stock is redeemable by the
Company at any time and is convertible, after the second anniversary of
issuance, at the election of the Company or the holder at the then fair
market value of the Common Stock. The consummation of the transaction
is subject to several material conditions including among others, the
receipt of necessary financing, the approval of the issuance of the
stock by the Company's stockholders, the negotiation of definitive
documentation, the absence of adverse changes and the satisfactory
completion of due diligence. Although there can be no assurance that
the transaction will be completed, the Company expects, subject to the
satisfaction of all conditions, to consummate it during 1999. A merger
agreement with PMA was executed as of January 29, 1999 (subject to the
approval of its physician stockholders), and the Company hopes to
execute a merger agreement with Liberty within the next several weeks.
In December 1997, the Company agreed to guarantee a loan of $1,000,000
from DFS to JIHP. 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 December
31, 1998, approximately $810,000 of the loan was outstanding. PMA and
each physician stockholders 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.
OTHER MATTERS - In July 1994, the Company's MRI facility located in
Catonsville, Maryland ceased operations. This facility was operated by
a joint venture in which the Company owned 60% and the limited partners
owned the remaining 40%. The Company entered into a sublease
arrangement with a radiology group, of which one of the members was
among the limited partners in this joint venture, to sublease the
medical equipment and facility from the Company. This sublease
arrangement commenced April 1, 1995 and provided for 60 monthly
payments of $10,000 commencing on June 15, 1995. In addition, the
sublessee was responsible for paying the rent for the office space and
for all future operating costs incurred. At September 30, 1998 the
sublessee was
F-11
<PAGE>
current with its monthly payment obligations to the Company. In
December 1998, the Company terminated the sublease agreement and sold
the medical equipment to the sublessee for an aggregate of $189,000
representing: (i) a payment for the Company's agreement to terminate
the sublease agreement ($116,400), (ii) reimbursement for personal
property tax payments made by the Company on the sublessee's behalf
($42,600) and (iii) the purchase price for the medical equipment
($30,000). As a result of the cessation of the sublease arrangement and
sale of the equipment, the Company recorded a gain on sale of property,
plant and equipment of $166,170 in December 1998, which primarily is
due to a reversal of an early sublease termination reserve established
in 1994 and the recoupment of taxes paid by the Company on the
sublessee's behalf.
In November 1996, the Company, with Practice Management Corporation
("PMC"), formed a limited liability company, of which the Company owned
60% and PMC owned 40%, to provide on-site diagnostic imaging 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 expectation of continuing losses,
the Company decided to sell the mobile MRI unit and to close 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 40% joint venture interest
owned by PMC effective as of December 31, 1997. In May 1998, the
Company sold this mobile MRI unit to an unaffiliated third party. As a
result of the sale of the mobile MRI unit, the Company recorded a gain
on sale of property, plant and equipment of $151,767, which was
recorded in the second quarter of fiscal 1998.
Prior to September 1994, the Company operated four mobile MRI units in
addition to its fixed-site facilities. The Company entered into an
arrangement, effective September 1, 1994, pursuant to which it operated
solely as a sublessor of its mobile MRI equipment rather than as an
operator of such equipment. Mark R. Vernon, the President and a
significant stockholder of Omni Medical Imaging, Inc. (the
"sublessee"), has been an officer of the Company since April 1997 and
is the brother of the Company's Chairman of the Board, President and
Chief Executive Officer (the "CEO"). The other stockholders of the
sublessee include certain former customers of the Company with whom the
Company had agreements for the use of the mobile MRI equipment. The
Company decided to enter into this arrangement due to the competitive
pressures associated with the mobile MRI business and in order to focus
its energy and management expertise on fixed-site imaging sites as well
as further diversification in the health care industry. As a result of
the arrangement, the Company recorded a restructuring charge in fiscal
1994 in the amount of $2,375,000. At December 31, 1994, the sublessee
was current with its monthly payment obligations. During fiscal 1995,
the Company was entitled to receive from this sublessee approximately
$1,047,000 in rental income of which it received approximately
$685,000, resulting in past due amounts of approximately $362,000. Due
to the sublessee's failure to remain current with its 1995 monthly
payment obligations, the Company repossessed and sold one of its mobile
MRI units for $625,000. As a result of the sale of the mobile MRI unit,
the Company incurred a loss of approximately $31,000 representing the
difference between the remaining sublease income attributable to such
mobile MRI unit and the sale proceeds received. In February 1996, the
Company terminated its master agreement with the sublessee and
repossessed the remaining three mobile MRI units from the sublessee as
a result of the failure of the sublessee and certain of its customers
to satisfy their obligations to the Company. At such time, the
sublessee owed the Company approximately $456,000. In an attempt to
satisfy the past due amounts, the sublessee and its customers provided
the Company with cash (aggregating approximately $75,000) and
additional patient receivable claims (aggregating approximately
$504,000) to partially offset the amounts owed to the Company. The
additional patient receivable claims were to supplement the amounts
previously submitted to the Company to satisfy prior past due
indebtedness . The Company soon after returned the three mobile MRI
units to the sublessee. Effective July 27, 1996, the Company again
repossessed the three mobile MRI units due to the sublessee's
continuing failure to meet its obligations to the Company. At such
time, the sublessee owed the Company approximately $532,000. In August
1996, the Company sold another one of its mobile MRI units. There was
no significant gain or loss resulting from such disposition. In October
1996, the Company entered into an agreement with certain other
creditors of the sublessee with respect to the collection and
application of the sublessee's receivables. The Company's collection
efforts on behalf of the parties to this agreement, together with the
F-12
<PAGE>
Company's intended use of one of its two remaining mobile MRI unit at
the Meadowlands MRI Facility, resulted in the Company recording a
recovery on accounts receivable (approximately $392,000) relating to a
provision for bad debts that had been recorded at the time of the
restructuring of the Company's mobile MRI operations. In May 1997, the
Company sold one of its two remaining mobile MRI units to an
unaffiliated party for $105,000. As of December 31, 1997 and 1998, the
amount of the sublessee's past due indebtedness was approximately
$347,000 and $257,000, respectively (which amount has been fully
reserved for by the Company in its financial statements). In May 1998,
the Company sold its remaining mobile MRI unit that had been used at
the Meadowlands MRI Facility to an unaffiliated party.
At December 31, 1998, the Company reevaluated its future obligations
under a note payable which was due (and paid) in February 1998 relating
to this mobile equipment and concluded that the remaining reserve at
December 31, 1998 was adequate.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Medical equipment under capital leases $7,499,049 $7,179,680
Medical equipment 3,707,250 540,771
Office equipment under capital leases 45,466 45,466
Office equipment 122,300 106,039
Furniture and fixtures under capital leases 88,959 88,959
Furniture and fixtures 383,563 354,040
Computer equipment under capital leases 16,880 16,880
Computer equipment 242,085 366,309
Leasehold improvements under capital lease 1,161,381 1,231,655
Leasehold improvements 1,512,543 1,219,917
Building/Land 1,535,336 -
Automobiles 15,400 -
---------- ----------
16,330,212 11,149,716
Less accumulated depreciation and
amortization 6,751,405 5,630,944
--------- ---------
$9,578,807 $5,518,772
========== ==========
</TABLE>
4. BORROWINGS
LINE OF CREDIT
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
$2,000,000, which amount increased to $3,000,000 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 are repayable on May 1, 1999. This credit facility 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 May 1, 1999,
management believes that the credit facility can be refinanced on a
longer-term basis or the repayment due date 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
F-13
<PAGE>
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 December 31, 1998 and 1997, the
Company had $2,838,275 and $1,462,000, respectively, of borrowings
under this credit facility. The Company believes that cash to be
provided by operating activities together with borrowings available
from this credit facility will provide adequate financing to maintain
its normal operations for the next twelve months.
BRIDGE FINANCING
In October 1998, the Company used the proceeds of a $14,000,000 bridge
loan from DFS to pay the cash portion of the purchase price in the
Beran Acquisition and to fund the $2,500,000 loan to the Beran
Entities. The terms of the DFS Loan provide for 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). This bridge loan 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 May 1, 1999, management believes that
the bridge loan can be refinanced on a longer-term basis. Options to
purchase 50,000 and 400,000 shares of Common Stock at exercise prices
of $.90625 and $1.03125 per share, respectively, were issued to DFS for
providing the DFS Loan. The value of these options will be expensed
over the term of the DFS Loan (See Note 8).
5. LEASE OBLIGATIONS
The Company leases various pieces of medical equipment (primarily from
DFS), at interest rates ranging from 11.5% to 15.5% due through
September 2008. Future minimum lease payments under noncancellable
operating leases, the present value of future minimum capital lease
payments and long-term debt payments as of December 31, 1998 (excluding
amounts relating to subleased equipment) are:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL LEASE
DECEMBER 31, OBLIGATIONS OPERATING LEASES
<S> <C> <C>
1999 $1,984,117 $565,159
2000 1,093,767 538,555
2001 1,064,409 516,669
2002 930,955 510,811
2003 324,382 363,842
Thereafter 1,205,508 -
---------- ----------
Total minimum lease/debt payments 6,603,138 $2,495,036
==========
Less amounts representing interest 1,656,738
----------
Present value of minimum capital
lease payments 4,946,400
Less current portion of obligations 1,505,510
----------
$3,440,890
==========
</TABLE>
The carrying value of property, plant and equipment under capital lease
obligations was $5,397,235 and $4,550,208 at December 31, 1998 and
1997, respectively.
F-14
<PAGE>
Rent expense was $678,858, $723,136 and $711,188 for 1998, 1997 and
1996, respectively.
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
STATE AND
FEDERAL LOCAL TOTAL
<S> <C> <C> <C>
December 31, 1998:
Current $ - $ 97,661 $ 97,661
Deferred - - -
------------- ------------- -------------
$ - $ 97,661 $ 97,661
============= ============= =============
December 31, 1997:
Current $ - $ 43,039 $ 43,039
Deferred - - -
------------- ------------- -------------
$ $ 43,039 $ 43,039
============= ============= =============
December 31, 1996:
Current $ - $ 49,348 $ 49,348
Deferred - - -
------------- ---------------- -------------
$ $ 49,348 $ 49,348
============= ============= =============
</TABLE>
The difference between the income tax provision/(benefit) and the tax
provision/(benefit) computed by applying the statutory Federal income
tax rate to the income/(loss) before taxes is attributable to the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Dollars Percentage Dollars Percentage Dollars Percentage
<S> <C> <C> <C> <C> <C> <C>
Statutory Federal income tax rate $768,206 34.0 $(258,830) (34.0) $(276,232) (34.0)
State income taxes -
net of Federal benefit $64,456 2.9 28,406 3.7 32,570 4.0
Other - net $50,351 2.2 (242,474) (31.9) (146,173) (18.0)
Valuation allowance (785,352) (34.8) 515,937 67.9 439,183 54.1
-------- ---- --------- ---- --------- ----
Actual income tax $ 97,661 4.3 $ 43,039 5.7 $ 49,348 6.1
======== ==== ========= ==== ========= ====
</TABLE>
F-15
<PAGE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
tax effects of significant items comprising the Company's net deferred
tax position as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Difference between financial reporting and tax
basis of property, plant and equipment $ 211,737 $ 321,396
Restructuring charges 15,187 -
----------- -----------
226,924 321,396
----------- -----------
Deferred tax assets:
Federal and State tax NOL carryforwards 1,707,639 2,510,004
Non cash compensation 792,947 756,088
Provision for bad debts 145,345 172,774
Restructuring charges 9,881 43,183
Federal AMT tax credit carryforward 48,325 -
Other - 53,587
----------- -----------
2,704,137 3,535,636
Valuation allowances (2,428,888) (3,214,240)
----------- -----------
Total deferred tax assets - net 275,249 321,396
----------- -----------
Net deferred tax asset $ 48,325 $ -
=========== ===========
</TABLE>
At December 31, 1998 and 1997, in view of operating losses in prior
years, the limited period of ownership of the Beran facilities, and the
uncertainties inherent in the planned acquisition of JIHP, the Company
has provided valuation allowances of $2,105,149 and $2,830,294,
respectively, against Federal deferred tax assets and $323,739 and
$383,946, respectively, against state deferred tax assets. Management
will continue to evaluate the need for these valuation allowances until
the Beran facilities have been managed by the Company for a longer
period and after the JIHP transaction has been consummated or
terminated.
The Company has net operating loss ("NOLs") carryforwards of
approximately $4,432,000 for Federal income tax purposes which expire
in varying amounts from December 31, 2006 through December 31, 2013.
F-16
<PAGE>
7. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings (loss) per share computations: For the
Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Per- Per- Per-
Income Shares Share Loss Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income (Loss) $1,978,703 10,511,893 $.19 $(804,305) 6,187,822 $(.13) $(861,796) 4,711,974 $(.18)
ADD:
PREFERRED DIVIDENDS 183,066 - - - - -
EFFECT OF DILUTIVE
SECURITIES
Series D Stock - 10,031,010 - - - -
Stock Options - 638,163 - - - -
Series C Stock - 280,835 - - - -
-------------------------- ----------- -------------------
DILUTED EPS
Net Income (Loss) $2,161,769 21,461,901 $.10 $(804,305) 6,187,822 $(.13) $(861,796) 4,711,974 $(.18)
================================== ================================== =================================
</TABLE>
8. STOCK OPTIONS AND OTHER EQUITY TRANSACTIONS
The following is a summary of the number of options outstanding under
each of the Company's employee benefit plans and otherwise:
<TABLE>
<CAPTION>
1997
Omnibus
Plan and
Employee
1996 Stock
1991 Directors' Purchase Other
Plan Plans Plan Options
---- ----- ---- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 419,400 24,000 - -
Options granted at exercise prices
ranging from $.75 to $2.09 per share 15,000 150,000 - 1,400,000
Options forfeited at exercise prices
ranging from $1.50 to $5.00 per share (363,800) (24,000) - -
------- ------- ------- ---------
Balance at December 31, 1996 70,600 150,000 - 1,400,000
======= ======= ======= =========
Options granted at exercise prices
ranging from $.75 to $1.09 per share 648,600 25,000 28,800 -
Options forfeited at exercise prices
ranging from $.75 to $1.69 per share (70,750) (25,000) - -
------- ------- ------- ---------
Balance at December 31, 1997 648,450 150,000 28,800 1,400,000
======= ======= ======= =========
F-17
<PAGE>
Options granted at exercise prices
ranging from $.91 to $12.50 per share - 145,000 867,500 850,000
Options exercised - - - (50,000)
Options forfeited at exercise prices
ranging from $1.06 to $5.00 per share (40,275) (90,000) - -
------- ------- ------- ---------
Balance at December 31, 1998 608,175 205,000 896,300 2,200,000
======= ======= ======= =========
Options exercisable at December 31,
1998 (exercisable at prices ranging
from $.75 to $5.00 per share) 57,244 60,000 100,000 2,000,000
======= ======= ======= =========
</TABLE>
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its employee stock options.
Accordingly, no compensation cost has been recognized for the foregoing
options, except as discussed below under the heading "Other Options."
Had compensation cost for these options been determined using the
Black-Scholes option-pricing model, the pro forma impact of following
the provisions of SFAS Statement No. 123 on the Company's operations
and net income/(loss) per share would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
Net income (loss) available to
common shareholders - as reported $1,978,703 $(804,305)
========== ==========
- pro forma $1,908,106 $(970,051)
========== ==========
Net income (loss) per
common share - Basic - as reported $ .19 $ (.13)
========== ==========
- pro forma $ .18 $ (.16)
========== ==========
Net income (loss) per
common share - Diluted -as reported $ .10 $ (.13)
========== ===========
-pro forma $ .10 $ (.16)
========== ===========
</TABLE>
As of December 31, 1998, the Company has reserved Common Stock for
issuance upon conversion of the Series D Stock and exercise of stock
options as follows:
Series D Stock (*) 2,094,768
1991 Plan 608,175
1996 Directors' Plan 750,000
1997 Omnibus Plan and Employee Stock Purchase Plan 5,000,000
Other Options 2,200,000
----------
10,652,943
==========
(*) The Series D Stock accrues dividends at the rate of 8% of the
liquidation preference and increases 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 are payable quarterly in cash commencing January 10,
1999.
F-18
<PAGE>
After March 1, 1999, the holders of the Series D Stock became
entitled to convert the Series D Stock into Common Stock equal to
the quotient obtained by dividing (x) the aggregate liquidation
preference of the Series D Stock being converted by (y) $1.049
(subject to adjustment in certain circumstances) (i.e.,
approximately 8,723,921 shares of Common Stock in the event of the
conversion of all outstanding shares of Series D Stock); provided
that until the Company obtains stockholder approval of the
issuance of the Series D Stock, the holders of the Series D Stock
only will be able to convert into Common Stock representing in the
aggregate 19.9% of the outstanding Common Stock as of October 2,
1998 (i.e., approximately 2,094,768 shares). The holders of the
Series D 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 Stock, the holders of the Series D Stock will not be
able to exercise their aggregate voting rights in excess of 19.9%
of the outstanding Common Stock as of October 2, 1998. The Company
may redeem the Series D 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 Company expects to
solicit stockholder approval of the issuance of the Series D Stock
during the second quarter of fiscal 1999.
1991 PLAN
The 1991 Stock Option Plan (the "1991 Plan") provided for the issuance
of stock options exercisable to purchase up to 700,000 shares of Common
Stock (subject to appropriate adjustments in the event of stock splits,
stock dividends and similar dilutive events) to key employees
(including officers who may also be directors) of the Company and its
subsidiaries, as selected by the Stock Option Committee of the Board of
Directors. The 1991 Plan was replaced by the 1997 Omnibus Incentive
Plan pursuant to which there will be no further grants of awards under
this plan.
Stock options granted to employees under the 1991 Plan were either
incentive stock options or nonqualified stock options. The purchase
price of the shares of Common Stock issuable upon exercise of a stock
option was not to be less than the fair market value of the Common
Stock on the date of grant, in the case of incentive stock options, or
85% of such value, in the case of nonqualified stock options. The terms
of each option and the increments in which it was exercisable was
determined by the Stock Option Committee, but the term of a
nonqualified stock option generally could not exceed ten years from the
date of grant and the term of an incentive stock option could in no
event be more than ten years from the date of grant (and otherwise be
consistent with the Internal Revenue Code of 1986 (the "Code")). The
stock options granted under the 1991 Plan are non-transferable during
the life of the option holder except as otherwise provided in the 1991
Plan.
1996 DIRECTORS' PLAN
The 1996 Stock Option Plan for Non-Employee Directors (the "1996
Directors' Plan") also is administered by the Stock Option Committee.
Up to an aggregate of 750,000 shares of Common Stock may be issued to
non-employee directors pursuant to stock options awarded under the 1996
Directors' Plan. The 1996 Directors' Plan provides for appropriate
adjustment of shares of Common Stock available thereunder and of shares
of Common Stock subject to outstanding awards in the event of any
changes in the outstanding Common Stock by reason of any
recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction. This plan replaced
the 1991 Directors' Stock Option Plan for Non-Employee Directors.
Under the 1996 Director's Plan, nonqualified stock options exercisable
to purchase an aggregate of 25,000 shares of Common Stock are granted
to each non-employee director upon his initial appointment to the
Board. In addition, each non-employee director has the right, prior to
each annual organizational meeting of the Board, to elect to receive
nonqualified stock options under the 1996 Directors' Plan exercisable
to purchase an aggregate of 5,000 shares of Common Stock in lieu of the
annual cash director's fee expected to be earned by such non-employee
director for the upcoming fiscal year of the Company. In the event that
the Board decides that no annual cash director's fee will be
F-19
<PAGE>
paid in any year, these stock options will, nonetheless, be granted to
each non-employee director for his services for such year. The purchase
price of the shares of Common Stock subject to such stock options equal
the fair market value of such shares on the date of the grant. Stock
options awarded under the 1996 Directors's Plan vest in increments of
40% after the sixth month, 80% after the eighteenth month and 100%
after the thirtieth month anniversary of the date of grant. No stock
option may be granted under the 1996 Directors' Plan after ten years
from the effective date of the Plan. The stock options are
non-transferable during the life of the option holder except as
otherwise provided in the 1996 Directors' Plan.
In December 1998, the three non-employee directors were granted under
the 1996 Directors' Plan additional nonqualified stock options
exercisable to purchase an aggregate of 25,000 shares of Common Stock
subject to the same terms and provisions as other options granted under
the plan as described above.
1997 OMNIBUS INCENTIVE PLAN
In November 1997, the 1997 Omnibus Incentive Plan (the "Omnibus Plan")
was adopted to replace the 1991 Plan under which there will be no
further grants of awards. The Omnibus Plan provides for compensatory
equity-based awards (each an "Award") to employees, directors and
consultants of the Company and its affiliates.
There are reserved for issuance pursuant to, or by reason of, stock
awards and stock-based awards under the Omnibus Plan an aggregate
number of shares of Common Stock equal to the lesser of (i) 12.5% of
the number of shares of Common Stock outstanding, from time to time,
calculated on a fully diluted basis (including the maximum number of
shares of Common Stock that may be issued, or subject to awards, under
the Omnibus Plan, the Stock Purchase Plan, the 1991 Plan and the 1996
Directors' Plan (collectively, the "Employee Stock Plans")) less the
number of shares of Common Stock that are issued under the Employee
Stock Plans after the effective date of the Omnibus Plan or are subject
to outstanding awards under the Employee Stock Plans plus the number of
shares of Common Stock forfeited under the Employee Stock Plans or
surrendered to the Company in payment of the exercise price of options
issued under any of the Employee Stock Plans or (ii) 5,000,000 shares
of Common Stock. Awards may be granted for no consideration and may
consist of stock options, stock awards, SARs, dividend equivalents,
other stock-based awards (such as phantom stock) and performance awards
consisting of any combination of the foregoing. No participant may
receive stock awards or stock-based awards to acquire more than 600,000
shares in any fiscal year. The Stock Option Committee administers the
Omnibus Plan and has the full power and authority, subject to the
provisions of the Omnibus Plan, to designate participants, grant awards
and determine the terms of all awards. Members of the Stock Option
Committee are not eligible to receive awards under the Omnibus Plan.
The Omnibus Plan will terminate on November 3, 2007, unless earlier
terminated by the Board..
In February 1998, the Company entered into a consulting agreement with
Dr. Manmohan A. Patel, a director of the Company since December 1998,
for a one-year term commencing February 27, 1998. Such agreement, upon
its expiration of its initial one year term, was extended for an
additional six month period. Pursuant to such agreement, Dr. Patel will
provide such consultation and advice as the Company may reasonable
request, including advice in respect of the Company's development of
its physician practice management operations. Such agreement shall be
terminated upon the earlier to occur of (i) the negotiation and
execution of an employment agreement between the Company and Dr. Patel
on terms and conditions satisfactory to the parties thereto (the
"Employment Agreement"), or (ii) the expiration or termination of such
agreement pursuant to the terms thereof. Pursuant to such agreement,
and in contemplation of the services to be rendered pursuant to the
Employment Agreement, the Company granted Dr. Patel stock options
exercisable to purchase an aggregate of 300,000 shares of Common Stock
under the terms and conditions of the Omnibus Plan. Such stock options
are exercisable at $1.71875 per share, the closing sales price of the
Common Stock on The Nasdaq National Market on the date of grant, and
vest in increments of 25% (i.e., 75,000 shares) upon the Common Stock
attaining, for a period of 20 consecutive trading days, a fair market
value (as defined in the Omnibus Plan) of $2.50, $5.00, $7.50 and
$10.00, respectively. Notwithstanding the foregoing, such stock options
shall become fully vested upon the earlier to occur of (x) the fifth
anniversary of the grant date of the stock options and (y) a "Change in
Control" as defined in the Omnibus Plan; provided however, that in no
event shall any shares be
F-20
<PAGE>
purchasable under such stock options unless and until Dr. Patel has
become a full-time employee of the Company. Dr. Patel is also a
stockholder of PMA and an executive officer of JIHP.
1997 STOCK PURCHASE PLAN
In November 1997, the Company adopted the 1997 Employee Stock Purchase
Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is
administered by the Stock Option Committee. It is the Company's
intention that the Stock Purchase Plan qualify as an "employee stock
purchase plan" under Section 423 of the Code.
The Stock Purchase Plan authorizes the Stock Option Committee to grant
options to purchase shares of Common Stock to eligible employees
pursuant to one or more offerings to be made under the Stock Purchase
Plan. Subject to certain prescribed restrictions, the Stock Option
Committee has the discretion to determine when offerings will be made
under the Stock Purchase Plan, the number of shares of Common Stock to
be made available in any such offering, the length of the period
pursuant to which employees can elect to participate in any offering
and the period pursuant to which installment payments of the option
price must be paid.
There are reserved for issuance upon the exercise of options to be
granted under the Stock Purchase Plan an aggregate number of shares of
Common Stock equal to the lesser of (i) 12.5% of the number of shares
of Common Stock outstanding, from time to time, calculated on a fully
diluted basis (including the maximum number of shares of Common Stock
that may be issued, or subject to awards, under the Employee Stock
Plans) less the number of shares of Common Stock that are issued under
the Employee Stock Plans after the effective date of the Omnibus Plan
or are subject to outstanding awards under the Employee Stock Plans
plus the number of shares of Common Stock forfeited under the Employee
Stock Plans or surrendered to the Company in payment of the exercise
price of options issued under any of the Employee Stock Plans or (ii)
5,000,000 shares of Common Stock.
Options granted under the Stock Purchase Plan will be subject to
adjustment upon a recapitalization, stock split, stock dividend,
merger, reorganization, liquidation, extraordinary dividend or other
similar event affecting the Common Stock. Options will not be
transferable, other than by will or the laws of descent and the
distribution, or, if permitted pursuant to the Codes and the
regulations thereunder, without affecting the options or the Stock
Purchase Plan's qualifications under Section 423 of the Code, pursuant
to qualified domestic relations order.
The Stock Purchase Plan will terminate November 3, 2007, and an option
shall not be granted under the Stock Purchase Plan after such date.
OTHER OPTIONS
In consideration for the execution by Biltmore Securities Inc.
("Biltmore") of a consulting agreement with the Company, the Company
granted Biltmore, as of January 30, 1996, stock options exercisable to
purchase an aggregate of 750,000 shares of Common Stock over a five
year period at a cash exercise price of $0.75 per share. In connection
with the issuance of these options, the Company recorded a non-cash
compensation charge of $685,800 amortized over the initial one year
term of the consulting agreement. In addition, during fiscal 1998, upon
consummation of the Beran Acquisition, certain transferees of Biltmore
were issued 750,000 shares of Common Stock.
As of January 30, 1996, the Company granted stock options to each of
two former directors of the Company immediately exercisable to purchase
50,000 shares of Common Stock over a five year period at a cash
exercise price of $0.75 per share. These options were granted in
consideration of certain past services to the Company including
services rendered to the Company in connection with the refinancing of
certain leases. In connection with the issuance of these options, the
Company recorded a non-cash compensation charge of $91,441 in the
quarter ended March 31, 1996. In February 1998 one of the two directors
exercised his options.
As of February 1, 1996, the Company amended its employment agreement
with the CEO. Pursuant to such amendment, the employment agreement's
expiration date of October 22, 1996 was extended to October 22, 1997
and during such one-year extension the CEO's annual base compensation
was reduced from $200,000 to $100,000. In addition, upon execution of
such amendment, options that the CEO held as of such date exercisable
to purchase an
F-21
<PAGE>
aggregate of 270,000 shares of Common Stock under the 1991 Plan were
terminated, and the Company granted the CEO stock options exercisable
until February 1, 2001 to purchase an aggregate of 500,000 shares of
Common Stock at a cash exercise price of $0.75 per share. In connection
with the issuance of these options, the Company recorded a non-cash
compensation charge of $562,506 which was amortized over the 21 months
ending October 31, 1997. Furthermore, as incentive compensation the CEO
received a restricted stock grant of 250,000 shares of Common Stock.
The restrictions related to this restricted stock grant lapsed upon
consummation of the Beran Acquisition. In connection with the issuance
of this restricted stock grant, the Company recorded a non-cash
compensation charge of $468,744 which was amortized over the
twelve-month initial contingency period ended January 30, 1997.
As consideration for the execution of a one-year consulting agreement,
as of October 15, 1996, the Company granted to a consultant stock
options exercisable to purchase an aggregate of 50,000 shares of Common
Stock over a five-year period at a cash exercise price of $1.0625 per
share. These options vested quarterly in equal installments over the
one-year term of the consulting agreement term. In connection with the
issuance of these options, the Company recorded a non-cash compensation
charge of $35,628 which was amortized over the one year term of the
consulting agreement. (See Note 10).
As of April 13, 1998, the Company granted to an officer of a
subsidiary, subject to stockholder ratification and approval (which was
obtained in December 1998), stock options, not issued under the Omnibus
Plan but nonetheless subject to the terms and conditions of the Omnibus
Plan, exercisable to purchase an aggregate of 150,000 shares of Common
Stock at an exercise price of $7.50 per share (with respect to 50,000
of the shares subject to the options), $10.00 per share (with respect
to 50,000 of the shares subject to the options), and $12.50 per share
(with respect to 50,000 of the shares subject to the options). These
options were granted in connection with such officers's execution of an
employment agreement with the subsidiary and vest upon the earlier of
(i) the third anniversary of the grant date, (ii) attainment of certain
performance objectives and (iii) a "Change in Control" of the
subsidiary (as defined in the option).
In October 1998, upon execution of a consulting agreement with DFS (the
"DFS Consulting Agreement"), the Company granted DFS stock options
immediately exercisable for a five-year period (subject to certain
prescribed restrictions) to purchase an aggregate of 500,000 shares of
Common Stock, at an exercise price of $0.90625 per share (with respect
to 50,000 of the shares subject to the options), $1.03125 per share
(with respect to 400,000 of the shares subject to the options),
$1.28125 per share (with respect to 20,000 of the shares subject to the
options), $1.25 per share (with respect to 10,000 of the shares subject
to the options) and $1.46875 (with respect to 20,000 shares subject to
the options). In connection with the issuance of the 50,000 and 400,000
options, the Company will expense in the aggregate $320,111 over the
term of the DFS Loan (See Note 4) and in the case of the 20,000, 10,000
and 20,000 options, the Company recorded a non-cash compensation charge
of $47,197 in October 1998.
During fiscal 1998, a director was granted stock options immediately
exercisable for a ten-year period to purchase an aggregate of 150,000
shares of Common Stock at an exercise price of $1.00 per share. These
options were granted in consideration for his agreement, in his
individual capacity and not as a director, to sell the Company's
Brooklyn facility (See Note 10). In addition, during fiscal 1998 a
consultant to the Company was granted stock options exercisable for a
five-year period to purchase an aggregate of 50,000 shares of Common
Stock at an exercise price of $0.96875 per share. These options vest
quarterly, in equal installments over a one year period commencing
August 15, 1998. In connection with the issuance of these options to
such director and consultant, the Company recorded a non-cash
compensation charge of $88,420 and $34,961 respectively. These amounts
were amortized into expense in December 1998 and July 1998,
respectively.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution profit sharing plan
covering substantially all employees. Matching contributions by the
Company are discretionary. During the years ended December 31, 1998 and
1997, matching contributions were made by the Company in the amount of
$16,994 and $17,163, respectively. During the year ended
F-22
<PAGE>
December 31, 1996, no matching contributions were made by the Company.
10. RELATED PARTY AND CERTAIN OTHER TRANSACTIONS
DUE FROM OFFICER - At December 31, 1998 and 1997, Elliott H. Vernon
(the CEO) owed the Company $264,125 in connection with certain
non-interest bearing advances under the Company's bonus plan. In
accordance with this bonus plan and Mr. Vernon's employment agreement
with the Company, Mr. Vernon is entitled to monthly bonus payments
based upon an estimate of his full years' bonus entitlement, subject to
adjustment. These advances represent such payments which were
determined not to have been earned by Mr. Vernon under the terms of the
bonus plan and are repayable to the Company.
BROOKLYN, NEW YORK MRI FACILITY - Prior to September 1998, the Company
leased its Brooklyn, New York fixed-site MRI facility (the "Brooklyn
Facility") from DMR Associates, L.P. ("DMR"). The Company leases the
MRI equipment at such facility from DFS. DMR is owned by MR General
Associates, as the general partner ("MR Associates"), and DFS, as a
limited partner. MR Associates is in turn owned by the CEO and another
director of the Company. For fiscal 1997 and the nine months ended
September 30, 1998, the Company paid DMR an aggregate of approximately
$407,000 and $208,000, respectively, in lease payments for the Brooklyn
Facility. The Company's lease payments to DMR were structured to fully
satisfy DMR's costs and expenses related to the facility, including
mortgage payments, taxes and other related costs. Effective December
1996, the Company agreed to guarantee an approximately $250,000 loan
(the "DMR Loan") from DFS to DMR in connection with DMR's refinancing
of an equipment lease related to the Brooklyn Facility. This loan bore
interest at 12% per annum and was repayable over 34 months commencing
February 15, 1997. The outstanding balance of this loan was
approximately $145,000 at September 16, 1998. In September 1998, DMR
sold its interest in the Brooklyn Facility to an affiliate of DFS,
which in turn, has entered into a lease arrangement (the "DVI Lease")
with the Company in respect of this facility. A portion of the proceeds
from such sale were used to repay the outstanding balance of the DMR
Loan. In consideration for the director's agreement to such sale (as
well as in appreciation of his participation in the original lease
transaction), the Company granted the director (subject to stockholder
ratification and approval) a ten year stock option to purchase 150,000
shares of Common Stock at an exercise price per share equal to $1.00
(the closing sales price of the Common Stock on The Nasdaq National
Market on December 22, 1998, the date of stockholder ratification and
approval of such stock option grant), which option is 100% exercisable.
In addition, the Company has agreed that, to the extent the Company
exercises its purchase option under the DVI Lease 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), the director 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.
DVI FINANCIAL SERVICES, INC.- The Company has numerous financing
arrangements with DFS and its affiliates relating to equipment
financing, as well as the DVI Lease, the DFS Bridge Loan provided in
connection with the Beran Acquisition in October 1998 and the Company's
$3.0 million secured revolving line of credit provided by another
affiliate of DFS. DFS was a significant stockholder of the Company from
its inception until April 1996 and is a leading provider of medical
equipment financing. In addition, the Company entered into the DFS
Consulting Agreement in October 1998 in connection with the DFS Bridge
Loan, and in December 1997 the Company agreed to guarantee a $1,000,000
loan from DFS to JIHP (See Note 2).
During fiscal 1998 Dr. George Braff, a director of the Company from
December 1995 until April 1997, the Company's Medical Director since
October 1997 and the supervising radiologist at three of the Company's
MRI facilities, was the majority shareholder and officer of three of
the Company's Medical Licensees: M.R. Radiology Imaging of Lower
Manhattan, P.C. ("MRILM"), Monmouth Diagnostic Imaging, P.A. ("MDI")
and Kings Medical Diagnostic Imaging, P.C. ("KMDI"). For fiscal 1998,
MRILM, MDI and KMDI paid the Company approximately $753,290, $3,869,117
and $1,306,254, respectively, in fees for services previously rendered.
In addition, revenues generated to the Company by MRILM, MDI and KMDI
accounted for approximately 6%, 27% and 6%, respectively, of the
Company's total
F-23
<PAGE>
revenues in fiscal 1998. For fiscal 1998, MRILM, MDI and KMDI paid Dr.
Braff approximately $53,865, $442,026 and $119,150, respectively, in
fees for professional services rendered by him on their behalf. Such
entities have continued to be Medical Licensees of the Company's in
fiscal 1999. Prior to October 1997, Dr. Braff was also a majority
shareholder and officer of another of the Company's Medical Licensees,
Edgewater Diagnostic Imaging, P.A., which paid the Company
approximately $1.4 million in fees during fiscal 1997 and generated
revenue to the Company in fiscal 1997 representing 18% of the Company's
total revenues for such fiscal year. (See Notes 2 and 11).
In May 1997, the Company entered into a consulting agreement with Munr
Kazmir, M.D., a director of the Company from November 1997 until
October 1998, for a one year term commencing June 1, 1997. In January
1998, such agreement was terminated and a new consulting agreement for
a one year term commenced effective as of January 1, 1998. Pursuant to
such agreement, Dr. Kazmir agreed to provide such consultation and
advise as the Company may reasonably request, including advice in
respect to new developments in the diagnostic imaging market and the
Company's relationships with current and potential referral sources,
and assistance in the development of Company newsletters and the
preparation and arrangement of seminars, luncheons and other training
and education vehicles for current and potential referral sources. Dr.
Kazmir also provided assistance to the Company in the expansion of its
business into physician practice management. Dr. Kazmir was entitled to
an annual consulting fee of $72,000 under such consulting agreement.
The consulting agreement was terminated in October 1998. During fiscal
1997 and 1998, Dr. Kazmir was paid an aggregate of $35,000 and $54,000
in consulting fees under the consulting agreement.
In October 1996, the Company entered into a consulting agreement with
Dr. Ulises C. Sabato, a significant stockholder of the Company, for a
one year term which commenced on October 15, 1996. Pursuant to such
agreement, Dr. Sabato agreed to provide such consultation and advice as
the Company may reasonable request, including advice in respect of new
developments in the diagnostic imaging market and the Company's
relationships with current and potential referral sources, and
assistance in the development of Company newsletters and the
preparation and arrangement of seminars, luncheons and other training
and education vehicles for current and potential referral sources. Dr.
Sabato also provided assistance to the Company in the expansion of its
business into physician practice management. Pursuant to such agreement
Dr. Sabato was entitled to an annual consulting fee of $48,000. In
addition, upon execution of such agreement, the Company granted Dr.
Sabato stock options exercisable to purchase an aggregate of 50,000
shares of Common Stock over a five year period at an exercise price of
$1.0625 per share. The options vested quarterly in equal installments
over the term of the one-year consulting agreement. (See Note 8). In
December 1997, the term of the consulting agreement was extended until
October 16, 1998, at which time it expired. During fiscal 1997 and
1998, Dr. Sabato was paid an aggregate of $44,000 and $48,000 in
consulting fees under the consulting agreement. Dr. Sabato also was a
limited partner in Edgewater Imaging Associates, L.P., which leased
real estate and equipment to the Company in respect of its fixed-site
MRI facility in Edgewater, New Jersey. Edgewater Imaging Associates,
L.P. was dissolved as of January 1, 1998.
11. CONCENTRATION OF REVENUES
For the years ended December 31, 1998, 1997 and 1996, the Company had
five Medical Licensees (Monmouth Diagnostic Imaging, P.A.; Edgewater
Diagnostic Imaging, P.A.; Wayne MRI, P.A.; Rittenhouse Square Imaging
Associates, LP; and Kings Medical Diagnostic Imaging, P.C.) which
accounted for approximately 27%, 14%, 14%, 9% and 6% of total revenues,
respectively; 30%, 18%, 17%, 15% and 12% of total revenues,
respectively; and 30%, 19%, 21%, 12% and 18% of total revenues,
respectively. To the extent the Company were to lose any of its
existing Medical Licensees, the impact on revenues and operations would
not be materially affected because the Company believes it will be
readily able to replace any such Medical Licensee.
F-24
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits. The Company
believes the claims are without merit and will be defended vigorously.
At December 31, 1998, the Company believes that the resolution of these
matters will not have a material impact on the Company's financial
condition or results of operations.
F-25
<PAGE>
13. SELECTED QUARTERLY DATA (UNAUDITED)
The following table sets forth selected quarterly financial information
for the years ended December 31, 1998 and 1997:
NET EARNINGS (LOSS)
<TABLE>
<CAPTION>
QUARTER NET BASIC DILUTED
ENDED REVENUES AMOUNT PER SHARE PER SHARE
----- -------- ------ --------- ---------
<S> <C> <C> <C> <C>
3-31-98 $ 3,198,641 $ 305,840 $ .03 $ .03
6-30-98 3,304,013 509,292 .05 .04
9-30-98 3,257,547 392,430 .04 .04
12-31-98 6,690,856 771,141 .07 $ .04
----------- ---------- ----- -----
$16,451,057 $1,978,703 $ .19 $ .10
=========== ========== ===== =====
3-31-97 $ 2,680,450 $ 2,812 $ .00 $ .00
6-30-97 2,425,181 (51,154) (.01) (.01)
9-30-97 2,566,669 (287,993) (.04) (.04)
12-31-97 2,575,640 (467,970) (.06) (.06)
----------- ---------- ----- -----
$10,247,940 $ (804,305) $(.13) $(.13)
=========== ========== ===== =====
</TABLE>
F-26
<PAGE>
SCHEDULE II
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1998 Expenses Deductions 1998 (C)
----------- ---- -------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable - $ 421,400 $ 148,269 $ 67,042(A) $502,627
========== ========= ======== ========
<CAPTION>
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1997 Expenses Deductions 1997 (C)
----------- ---- -------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable - $ 471,150 $ - $ 49,750(A) $421,400
========== ========= ======== ========
<CAPTION>
Additions
Balance at Charged to Balance at
January 1, Costs and December 31,
Description 1996 Expenses Deductions 1996(C)
----------- ---- -------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable - $1,082,000 $ - $610,850(B) $471,150
========== ========= ======== ========
</TABLE>
Notes:
- ------
(A) Represents recoveries of accounts receivable of $67,042 and $49,750 for
December 31, 1998 and 1997, respectively.
(B) Represents recoveries and write-offs of accounts receivable of $392,286
and $218,564, respectively for December 31, 1996.
(C) The above noted amounts are included in the allowance for doubtful
accounts receivable as disclosed on the consolidated balance sheets. Such
allowance for doubtful accounts receivable disclosed on the consolidated
balance sheets also represents the Medical Licensee's allowance of
approximately $5,677,833 and $4,555,584 in 1998 and 1997, respectively.
F-27
<PAGE>
ENCLOSURE 2
HealthCare Integrated Services, Inc.'s Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1999
<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 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
<PAGE>
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
<PAGE>
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 87 87
respectively ($10,500 per share liquidation preference)
Common stock, $.01 par value: 50,000,000 shares authorized, 11,356,974
outstanding 113,570 113,570
at March 31, 1999 and December 31, 1998, respectively
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
<PAGE>
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
============ ============
$ .04 $ .03
============ ============
Net Income per Common Share - Basic
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
<PAGE>
HEALTHCARE IMAGING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
PREFERRED STOCK COMMON STOCK PAID-IN (DEFICIT) TOTAL
--------------- ------------ CAPITAL RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT ------ 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
674,588 674,588
Net income
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998
------------------------------------------------- ----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income
Available to $ 445,755 11,356,974 $ .04 $ 305,840 9,762,235 $ .03
Common
Shareholders
ADD: 228,833 -- -- --
Preferred Dividends
EFFECT OF DILUTIVE
SECURITIES -- 537,513 -- 803,544
Stock Options -- -- -- 831,405
Series C Stock -- 8,723,921 -- --
Series D Stock
-------------------------------- -----------------------------
DILUTED EPS $ 674,588 20,618,408 $ .03 $ 305,840 11,397,184 $ .03
Net Income
================================================ ==============================================
</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 ABeran 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 ABeran 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
ASeries 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. (ADFS@) to pay the cash portion of the purchase price and to fund
the loan to the Beran Entities (the ADFS 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.,
8
<PAGE>
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 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
9
<PAGE>
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.
10
<PAGE>
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 of which
were partially offset by decreased consulting and marketing fees
11
<PAGE>
(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.
12
<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,
13
<PAGE>
management believes (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
14
<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
15
<PAGE>
availability of certain resources, Year 2000 modification plans and other
factors. New developments 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.
16
<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.
17
<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)
18
<PAGE>
ENCLOSURE 3
HealthCare Intergrated Services, Inc.'s Quarterly Report on Form 10-Q
for the fiscal year ended June 30, 1999
<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, 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 INTEGRATED 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.)
1040 Broad Street, Shrewsbury, New Jersey 07702
(Address of principal executive offices) (Zip Code)
(732) 544-8200
(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 13, 1999
----- ------------------------------
Common Stock, $.01 par value 11,356,974 shares
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three and six months ended June 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders
Equity - For the six months ended June 30, 1999 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About 16
Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
Assets 1999 1998
- ------ ------ -----
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,045,119 $ 1,506,123
Accounts receivable - net 11,670,922 9,869,696
Accounts receivable acquired in the Beran Acquisition 2,647,696 4,653,831
Loan receivable 2,649,589 2,550,000
Prepaid expenses and other 371,896 228,758
------------ ------------
Total current assets 18,385,222 18,808,408
------------ ------------
Property, Plant and Equipment - Net 8,678,225 9,578,807
------------ ------------
Deferred Tax Asset - Net 911,025 48,325
------------ ------------
Other Assets:
Due from officer 264,125 264,125
Deferred transaction and financing costs 979,449 1,122,175
Other 433,365 273,975
Goodwill - net 12,688,206 12,858,838
------------ ------------
Total other assets 14,365,145 14,519,113
------------ ------------
Total Assets $ 42,339,617 $ 42,954,653
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Borrowings under revolving line of credit $ 2,832,355 $ 2,838,275
Accounts payable and accrued expenses 2,217,962 2,122,916
Current portion of capital lease obligations 1,040,566 1,505,510
Bridge financing 13,471,562 14,000,000
Reserve for subleased equipment 40,609 294,790
Income taxes payable 21,787 106,582
------------ ------------
Total current liabilities 19,624,841 20,868,073
------------ ------------
Noncurrent Liabilities:
Capital lease obligations 3,069,945 3,440,890
------------ ------------
Minority Interests 893,142 896,404
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Cumulative accelerating redeemable preferred stock, 871.743 shares
outstanding at June 30, 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 June 30, 1999 and December 31, 1998, respectively 113,570 113,570
Additional paid-in capital 23,136,160 23,050,076
Accumulated deficit (4,498,128) (5,414,447)
------------ ------------
Total stockholders' equity 18,751,689 17,749,286
------------ ------------
Total Liabilities and Stockholders' Equity $ 42,339,617 $ 42,954,653
============ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
(UNAUDITED) (UNAUDITED)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 5,750,799 $ 3,304,013 $ 11,773,301 $ 6,502,654
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries 1,864,827 918,318 3,606,662 1,689,704
Other operating expenses 1,697,447 1,008,765 3,438,924 2,018,721
Provision for bad debts 116,256 -- 255,248 --
Consulting and marketing fees 149,046 123,751 267,042 374,200
Professional fees 106,900 156,340 283,638 251,764
Depreciation and amortization 770,198 425,374 1,572,607 850,245
Interest 676,582 192,850 1,522,947 387,449
Gain on sale of property, plant and
equipment -- (151,767) -- (151,767)
------------ ------------ ------------ ------------
5,381,256 2,673,631 10,947,068 5,420,316
------------ ------------ ------------ ------------
Income Before Minority Interests in Joint
Ventures and Income Taxes 369,543 630,382 826,233 1,082,338
Minority Interests in Joint Ventures (101,370) (111,590) (184,290) (247,720)
------------ ------------ ------------ ------------
Income Before Income Taxes 268,173 518,792 641,943 834,618
Income Tax (Benefit) Provision (520,446) 9,500 (821,264) 19,486
------------ ------------ ------------ ------------
Net Income 788,619 509,292 1,463,207 815,132
Preferred Dividends 272,216 -- 501,049 --
------------ ------------ ------------ ------------
Net Income Available to Common
Shareholders $ 516,403 $ 509,292 $ 962,158 $ 815,132
============ ============ ============ ============
Net Income per Common Share - Basic $ .05 $ .05 $ .08 $ .08
============ ============ ============ ============
Weighted Average Common Shares
Outstanding - Basic 11,356,974 10,428,012 11,356,974 10,096,963
============ ============ ============ ============
Net Income per Common Share- Diluted $ .04 $ .04 $ .07 $ .07
============ ============ ============ ============
Weighted Average Common Shares 20,523,053 11,318,017 20,587,147 11,366,540
============ ============ ============ ============
Outstanding - Diluted
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL (DEFICIT) TOTAL
--------------- -------------------- PAID-IN RETAINED UNEARNED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION EQUITY
------ ------ ------ ------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 872 $87 11,356,974 $113,570 $23,050,076 $(5,414,447) $17,749,286
Net income 1,463,207 1,463,207
Unearned compensation
in connection with stock
option grant 86,084 (86,084)
Amortization of unearned
compensation for stock
options 40,245 40,245
Preferred dividends (501,049) (501,049)
--- --- ---------- -------- ----------- ----------- -------- -----------
BALANCE, JUNE 30, 1999 872 $87 11,356,974 $113,570 $23,136,160 $(4,452,289) $(45,839) $18,751,689
=== === ========== ======== =========== =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income available to common shareholders $ 962,158 $ 815,132
Adjustments to reconcile net income available to common
shareholders to net cash provided by operating activities:
Depreciation and amortization 1,572,607 850,245
Gain on sale of property, plant and equipment -- (151,767)
Non-cash compensation charge 40,245 --
Minority interests in joint ventures 184,290 247,720
Allowance for doubtful accounts 403,000 448,519
Changes in Assets and Liabilities:
Accounts receivable (198,091) (1,419,856)
Prepaid expenses and other (143,138) 5,275
Deferred taxes (862,700) --
Goodwill (144,699) --
Other (159,390) 71,590
Accounts payable and accrued expenses 95,046 118,993
Income taxes payable (84,795) (6,950)
Deferred transaction and financing costs 142,726 (496,505)
----------- -----------
Net cash provided by operating activities 1,807,259 482,396
----------- -----------
Cash Flows from Investing Activities:
Loan receivable (99,589) --
Proceeds from sale of property, plant and equipment -- 655,000
Purchases of property, plant and equipment (356,694) (4,785)
----------- -----------
Net cash (used in) provided by
investing activities (456,283) 650,215
----------- -----------
Cash Flows from Financing Activities:
(Payments) borrowings against the revolving line of credit (5,920) 183,269
Distributions to limited partners of joint ventures (187,552) (85,995)
Payments on capital lease obligations (835,889) (1,128,159)
Payments on bridge financing (528,438) --
Payments on reserve for subleased equipment (254,181) (59,026)
----------- -----------
Net cash used in financing activities (1,811,980) (1,089,911)
----------- -----------
(Decrease) increase in cash and cash equivalents (461,004) 42,700
Cash and cash equivalents at beginning of period 1,506,123 70,626
----------- -----------
Cash and cash equivalents at end of period $ 1,045,119 $ 113,326
=========== ===========
Supplemental Cash Flow Information:
Interest paid during the period $ 1,259,179 $ 386,856
=========== ===========
Income taxes paid during the period $ 180,325 $ 26,436
=========== ===========
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Capital leases principally for medical equipment $ -- $ 891,726
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 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 June 30, 1999 and the related statements of income and
cash flows for the periods ended June 30, 1999 and 1998. There is no substantial
income tax provision for the three and six month periods ended June 30, 1998 due
to the availability of net operating loss carryforwards. For the three and six
month periods ended June 30, 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 because 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 six months ended June 30, 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 and six month periods ended June 30, 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 and six month periods ended June 30, 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
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
1999 1998
---------------------------------------------- ----------------------------------------------
Income Shares Per-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 $516,403 11,356,974 $.05 $ 509,292 10,428,012 $.05
ADD:
Preferred Dividends 272,216 - - -
EFFECT OF DILUTIVE
SECURITIES
Stock Options - 442,158 - 711,043
Series C Stock - - - 178,962
Series D Stock - 8,723,921 - -
-------- ---------- --------- ----------
DILUTED EPS
Net Income $788,619 20,523,053 $.04 $ 509,292 11,318,017 $.04
======== ========== ==== ========= ========== ====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1999 1998
---------------------------------------------- ----------------------------------------------
Income Shares Per-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 $962,158 11,356,974 $.08 $ 815,132 10,096,963 $.08
ADD:
Preferred Dividends 501,049 - - -
EFFECT OF DILUTIVE
SECURITIES
Stock Options - 506,252 - 766,196
Series C Stock - - - 503,381
Series D Stock - 8,723,921 - -
---------- ---------- --------- ----------
DILUTED EPS
Net Income $1,463,207 20,587,147 $.07 $ 815,132 11,366,540 $.07
========== ========== ==== ========= ========== ====
</TABLE>
NOTE 3. - RELOCATION OF CORPORATE OFFICES AND COMPANY NAME CHANGE
Effective August 1, 1999, the Company's corporate name was changed to
HealthCare Integrated Services, Inc. and its corporate offices were relocated to
Shrewsbury Executive Center II, 1040 Broad Street, Shrewsbury, New Jersey 07702.
In conjunction with the relocation of the Company's corporate offices, the
Company entered into a five year lease for approximately 10,300 square feet of
space. The lease provides for fixed annual rent in each of years one and two of
$196,308 and $206,640 in each of years three through five. The Company's trading
symbol on The Nasdaq Stock Market, HISS, was not affected by this name change.
NOTE 4. - BERAN ACQUISITION
On October 2, 1998 (effective October 1, 1998), HIS Imaging Co., a
wholly-owned subsidiary of the Company (which, effective July 1, 1999, was
merged into another wholly-owned subsidiary, HIS Imaging, LLC), acquired (the
"Beran Acquisition") all of the assets and business of,
8
<PAGE>
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 (x) the assumption of certain obligations and
liabilities of the Beran Entities, (y) cash in the amount of $11.5 million and
(z) 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), which balloon payment date was extended to August 1, 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
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 further
extend the term of the DFS Bridge Loan until January 1, 2000, subject to the
negotiation of terms and conditions acceptable to DFS.
NOTE 5. - DEFERRED TRANSACTION AND FINANCING COSTS
Deferred transaction and financing costs relate to expenses incurred in
connection with the Company's proposed acquisition of a management services
organization ("MSO") and the related financing therefore. In the event such
proposed acquisition of an MSO and the related financing is not consummated, the
related deferred transaction and financing costs will be expensed.
NOTE 6. - SEGMENT INFORMATION
The Company currently operates in two industry segments -- diagnostic
imaging and physician practice management. The diagnostic imaging segment
primarily involves 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 and six month periods ended June 30, 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:
9
<PAGE>
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
Net revenues:
Diagnostic imaging $ 5,441,774 $11,196,433
Physician practice management 309,025 576,868
----------- -----------
Total $ 5,750,799 $11,773,301
=========== ===========
Operating income:
Diagnostic imaging $ 244,753 $ 570,959
Physician practice management 124,790 255,274
----------- -----------
Total $ 369,543 $ 826,233
=========== ===========
NOTE 7. - ACQUISITION OF LIMITED PARTNERS' INTEREST
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.
NOTE 8. NEWLY FORMED VENTURES
Effective April, 1999, the Company, in a 50/50 joint venture with
HealthMark Alliance, Inc. ("HAI"), formed Atlantic Imaging Group, LLC ("Atlantic
Imaging") to develop, market and manage statewide networks of diagnostic imaging
facilities. The scope of the network will initially be in New Jersey. The
Company will provide day-to-day administrative and management services to
Atlantic Imaging, and both the Company and HAI will provide marketing services.
Atlantic Imaging has entered into a five-year arrangement with National
Healthcare Resources, Inc. ("NHR"), which provides medical case management
services to several insurance carriers, whereby, among other things, NHR has
agreed to utilize the network on an exclusive basis for any MRI services it
refers claimants to on behalf of its clients (unless otherwise instructed by
such client) and will utilize the network for other radiology services to the
extent practicable. Atlantic Imaging is being accounted for by the Company using
the equity method. Amounts attributable to the Company's investment in Atlantic
Imaging for the three and six months ended June 30, 1999 are not significant.
In addition, in June 1999 the Company announced its establishment of
clinical research operations through a wholly-owned subsidiary, HIS Clinical
Research Co. LLC ("HISCR"). HISCR will focus on arranging clinical research
trials for pharmaceutical companies. To date, HISCR has arranged four clinical
studies in the areas of rheumatology pain management medication, chronic
prostatitis medication, diabetes drug therapies and pneumonia medication.
Amounts attributable to the operations of HISCR for the three and six months
ended June 30, 1999 are not significant.
10
<PAGE>
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 Six Months Ended June 30, 1999 vs. June 30, 1998
For the six months ended June 30, 1999, revenues were $11,773,301 as
compared to $6,502,654 for the six months ended June 30, 1998, an increase of
approximately $5,271,000 or 81%. 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 $5,025,000) (the "Beran Acquisition") and (ii) revenues
associated with the Company's physician practice management operations
(approximately $382,000), 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 $358,000).
For the six months ended June 30, 1999, operating expenses were
$10,947,068 as compared to $5,420,316 for the six months ended June 30, 1998, an
increase of approximately $5,527,000 or 102%. This increase was primarily due to
(i) expenses incurred in connection with the operation of the Beran Facilities
acquired in October 1998 (approximately $4,348,000), (ii) increased expenses
associated with facilities that were operated by the Company for both of the six
month periods ended June 30, 1999 and 1998 (approximately $913,000) primarily
due to increased salary expenses relating to new personnel, temporary help
costs, and increased depreciation and amortization and maintenance agreement
costs relating to new equipment, (iii) increased interest expense (approximately
$332,000) 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,
(iv) expenses relating to the Company's physician practice management operations
(approximately $262,000) and (v) a gain on sale of property, plant and equipment
in the second quarter of fiscal 1998 relating to the sale of the mobile MRI unit
utilized at the Secaucus Facility to an unaffiliated party (approximately
$152,000), all of
11
<PAGE>
which were partially offset by decreased consulting and marketing fees
(approximately $207,000) and the closure of the Secaucus Facility in May 1998
(approximately $258,000).
For the Three Months Ended June 30, 1999 vs. June 30, 1998
For the three months ended June 30, 1999, revenues were $5,750,799 as
compared to $3,304,013 for the three months ended June 30, 1998, an increase of
approximately $2,447,000 or 74%. This increase was primarily due to (i) revenues
associated with the operation of the Beran Facilities acquired in October 1998
(approximately $2,410,000) and (ii) revenues associated with the Company's
physician practice management operations (approximately $114,000), all of which
were partially offset by the closure of the Secaucus Facility in May 1998
(approximately $120,000).
For the three months ended June 30, 1999, operating expenses were
$5,381,256 as compared to $2,673,631 for the three months ended June 30, 1998,
an increase of approximately $2,708,000 or 101%. This increase was primarily due
to (i) expenses incurred in connection with the operation of the Beran
Facilities acquired in October 1998 (approximately $2,157,000), (ii) increased
expenses associated with facilities that were operated by the Company for both
of the quarters ended June 30, 1999 and 1998 (approximately $323,000) primarily
due to increased salary expenses relating to new personnel, temporary help
costs, and increased depreciation and amortization and maintenance agreement
costs relating to new equipment, (iii) increased interest expense (approximately
$92,000) 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,
(iv) a gain on sale of property, plant and equipment in the second quarter of
fiscal 1998 relating to the sale of the mobile MRI unit utilized at the Secaucus
Facility to an unaffiliated party (approximately $152,000) and (v) expenses
relating to the Company's physician practice management operations
(approximately $124,000), all of which were partially offset by a reduction in
operating costs resulting from the closure of the Secaucus Facility in May 1998
(approximately $95,000).
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 long-term
administrative service agreements with respect to its physician practice
management operations. The Company has been providing certain management
services to PMA and another
12
<PAGE>
New Jersey-based multi-specialty physician practice in the interim. 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 June 30, 1999, the Company had a cash balance of $1,045,119,
current assets of $18,385,222 and a working capital deficit of $1,239,619. 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), which balloon payment date was extended to August 1, 1999. The
Company has been notified by DFS that it is prepared to further 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.
Cash flows provided by operating activities were $1,807,259 for the six
months ended June 30, 1999, which consisted primarily of (i) net income of
$962,158, (ii) depreciation and amortization of $1,572,607, (iii) an increase in
the allowance for doubtful accounts receivable of $403,000 and (iv) minority
interests in joint ventures of $184,290. Other significant components of cash
flows provided by operating activities include (x) an increase in accounts
receivable, net of $1,801,226, (y) an increase in deferred tax asset of $862,700
and (z) an increase in prepaid expenses and other of $143,138, all of which were
partially offset by a decrease in the accounts receivable acquired in the Beran
Acquisition of $2,006,135 and an increase in accounts payable and accrued
expenses of $95,046.
Cash flows used in investing activities were $456,283, which related to
interest income of $99,589 associated with a $2.5 million loan to the Beran
Entities and purchases of property, plant and equipment of $356,694. 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 $1,811,980, which
consisted primarily of payments on capital lease obligations of $835,889,
payments on the DFS Bridge Loan of $528,438, payments on obligations related to
subleased equipment of $254,181 and distributions to limited partners of joint
venture of $187,552.
13
<PAGE>
In December 1997, the Company agreed to guarantee a $1.0 million loan
from DFS to JIHP. 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 June 30, 1999, approximately $698,000 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 originally repayable on May 1,
1999, which maturity date had been extended to August 1, 1999. The Company has
been notified by DVIBC that it is prepared to further extend the term of the
revolving line of credit until January 1, 2000, subject to the negotiation of
terms and conditions acceptable to DVIBC. 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 (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 may be used to fund working capital needs
as well as acquiring businesses which are complementary to the Company. At June
30, 1999 and December 31, 1998, respectively, the Company had $2,832,355 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
14
<PAGE>
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 original maturity
dates of May 1, 1999 which were extended to August 1, 1999. The Company has been
notified by DFS and DVIBC that they are prepared to further 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 them. 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 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. However, the Company does
not consider all of these upgrades to be Year 2000 related because they would
have been made otherwise in the ordinary course of business irrespective of a
Year 2000 issue. 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
15
<PAGE>
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 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 that 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.
16
<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) Exhibits:
Exhibit 3.6 - Certificate of Ownership and Merger merging HealthCare
Integrated Services, Inc. into Healthcare Imaging
Services, Inc.
Exhibit 10.73 - Amendment to Loan and Security Agreement No. 0001969
dated May 1, 1999 by and between DVI Financial
Services, Inc. and HealthCare Imaging Services, Inc.
Exhibit 10.74 - Allonge to Note dated May 1, 1999 by and between
HealthCare Imaging Services, Inc. and DVI Financial
Services, Inc.
Exhibit 21.1 - Subsidiaries of the Registrant
Exhibit 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1999.
17
<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 INTEGRATED SERVICES, INC.
(Registrant)
Date: August 13, 1999 /s/ Elliott H. Vernon
----------------------------------
Elliott H. Vernon
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 /s/ Scott P. McGrory
----------------------------------
Scott P. McGrory
Vice President - Controller
(Principal Financial and
Accounting Officer)
18
<PAGE>
ENCLOSURE 4
Audited Financial Statements of Irving N. Beran, M.D., P.A.
and affiliates for the fiscal years ended December 31, 1997 and 1996
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
DECEMBER 31, 1997 AND 1996
CONTENTS
PAGE
----
Independent Auditors' Report 1
Financial Statements:
Combined Balance Sheets 2-3
Combined Statements of Income and Retained
Earnings/Partners' Capital 4
Combined Statements of Cash Flows 5
Notes to Combined Financial Statements 6-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Officers and Directors
North Jersey Imaging Management Associates, L.P.
Bloomfield Imaging Associates, P.A.
Mainland Imaging Center, P.C.
Irving N. Beran, M.D., P.A.
Echelon MRI, P.C.
1751 Rolling Lane
Cherry Hill, New Jersey
We have audited the accompanying combined balance sheets of North Jersey Imaging
Management Associates, L.P., Bloomfield Imaging Associates, P.A., Mainland
Imaging Center, P.C., Irving N. Beran, M.D., P.A., and Echelon MRI, P.C.
(collectively the "Entities") as of December 31, 1997 and 1996, and the related
combined statements of income and retained earnings/partners' capital and cash
flows for the years then ended. These combined financial statements are the
responsibility of the Entities' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principals used and significant
estimates made by management, as well as evaluating the overall financial
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Entities as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principals.
Morristown, New Jersey
August 18, 1998
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
------------ ------------
Current Assets:
Cash and cash equivalents $ 1,129,146 $ 1,634,420
Accounts receivable, net 5,817,540 6,547,378
Prepaid expenses 123,139 48,720
Loans receivable 16,035 12,464
Deferred income taxes 229,000 288,000
------------ ------------
Total Current Assets 7,314,860 8,530,982
------------ ------------
Property and Equipment
Medical equipment 8,464,035 7,631,912
Leasehold improvements 1,331,933 1,276,862
Office furniture 134,971 105,740
Vehicles 27,863 36,380
Signs 6,068 6,068
------------ ------------
9,964,870 9,056,962
Accumulated Depreciation (6,643,026) (6,587,676)
------------ ------------
3,321,844 2,469,286
------------ ------------
Other Assets 327,855 256,716
------------ ------------
Total Assets $ 10,964,559 $ 11,256,984
============ ============
The accompanying notes are an integral part of the combined financial
statements.
- 2 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS'/PARTNERS' EQUITY
1997 1996
----------- -----------
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt $ 413,733 $ 505,623
Notes payable-OFFICER 597,159 887,390
Accounts payable and accrued expenses 308,691 247,916
Income taxes payable 3,635,239 1,733,347
Deferred income taxes 1,495,000 2,126,000
----------- -----------
Total Current Liabilities 6,449,822 5,500,276
----------- -----------
Long-term debt, net of current portion 1,218,552 1,056,285
----------- -----------
Minority interests 562,468 1,013,270
----------- -----------
Commitments and Contingencies
Stockholders' and Partners' Equity:
Common stock ($1.00 and $10.00 par value, 1,100 and 200
shares authorized, issued, and outstanding, respectively.) 3,100 3,100
Additional paid-in-capital 429,250 429,250
Retained earnings/partners' capital 2,301,367 3,254,803
----------- -----------
2,733,717 3,687,153
----------- -----------
Total Liabilities and Stockholders'/Partners' Equity $10,964,559 $11,256,984
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
- 3 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS/PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Income-Fees $ 11,284,932 $ 11,963,317
Operating Expenses - (INCLUDES RENT EXPENSE TO RELATED
PARTIES OF $222,200 AND $203,700 IN 1997 AND 1996, RESPECTIVELY) 5,775,612 5,856,883
Depreciation and amortization 1,128,478 816,699
------------ ------------
Income Before Other Income (Expense) 4,380,842 5,289,735
------------ ------------
Other Income (Expense)
Interest income 29,616 29,022
Interest expense (148,249) (128,256)
Gain (loss) on disposal and abandonment (259,120) 9,116
------------ ------------
(377,753) (90,118)
------------ ------------
Income Before Provision (Benefit) for Income Taxes 4,003,089 5,199,617
------------ ------------
Provision (Benefit) for Income Taxes
Current 2,004,333 1,789,946
Deferred (572,000) 39,770
------------ ------------
1,432,333 1,829,716
------------ ------------
Minority Interests in Income of Combined Entities (417,091) (480,180)
------------ ------------
Net Income 2,153,665 2,889,721
Beginning Retained Earnings/Partners' Capital 3,254,803 3,045,082
Increase in Controlling Interests 220,433 --
Distributions (3,327,534) (2,680,000)
------------ ------------
Ending Retained Earnings/Partners' Capital $ 2,301,367 $ 3,254,803
============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
- 4 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,153,665 $ 2,889,721
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,128,478 816,699
(Gain) loss on disposal or abandonment 259,120 (9,116)
Minority interest 417,091 480,180
(Increase) Decrease in:
Accounts receivable 729,837 (468,435)
Prepaid expenses (74,419) 60,935
Deposits 12,325 (7,533)
Deferred income taxes 59,000 (31,000)
Increase (decrease) in:
Accounts payable and accrued expenses 60,775 43,562
Deferred income taxes (631,000) 197,000
Income taxes payable 1,901,893 1,604,246
----------- -----------
Total Adjustments to net income 3,863,100 2,686,538
----------- -----------
Net Cash Provided by Operating Activities 6,016,765 5,576,259
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment 384,876 12,766
Capital expenditures (2,658,497) (1,250,560)
Deposits on equipment (50,000) (227,500)
Loans receivable (3,571) 11,701
----------- -----------
Net Cash Used in Investing Activities (2,327,192) (1,453,593)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 675,000 900,000
Payments on long-term debt (604,622) (714,208)
Increase in loan fees -- (2,413)
Increase in controlling interest 220,433 --
Controlling interest distributions (3,327,534) (2,680,000)
Minority interest distributions (867,893) (720,000)
Note payable - officer 475 25,000
Loan payable (290,706) (10,500)
----------- -----------
Net Cash Used in Financing Activities (4,194,847) (3,202,121)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (505,274) 920,545
Cash and Cash Equivalents - Beginning 1,634,420 713,875
----------- -----------
Cash and Cash Equivalents - Ending $ 1,129,146 $ 1,634,420
=========== ===========
Supplemental Disclosures of Cash Flow Information Cash paid during the years
for:
Interest $ 148,249 $ 128,256
=========== ===========
Income Taxes $ 116,415 $ 56,572
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
- 5 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. BUSINESS ACTIVITY AND ORGANIZATION
Irving N. Beran, M.D., P.A. (a corporation) was incorporated on July 5, 1972 and
operates several radiology offices in New Jersey. The Entity also operated a
separate office in Norristown, Pennsylvania, which was closed in January, 1997.
The results of operations from this closed office in 1997 and 1996 were not
material. Revenues from the closed office for 1997 and 1996 were approximately
$82,000 and $181,000 with related expenses of approximately $249,000 and
$220,000, respectively.
Bloomfield Imaging Associates, P.A. (an S corporation) was incorporated on July
1, 1990 for the purpose of operating a medical diagnostic imaging facility in
Bloomfield, New Jersey.
Echelon MRI, P.C. (an S corporation) was incorporated on June 8, 1988 for the
purpose of operating a medical diagnostic imaging facility in Voorhees, New
Jersey.
Mainland Imaging Center, P.C. (an S corporation) was incorporated on July 29,
1991 for the purpose of operating a medical diagnostic imaging facility in
Northfield, New Jersey.
North Jersey Imaging Management Associates, L.P. (a limited partnership) was
formed to provide management, administrative, billing and collection services
("Management Services") to Bloomfield Imaging Associates, P.A. ("Physician
Group") to enable Physician Group to operate a medical practice. The Limited
Partnership provides non-professional and non-technical personnel, medical
equipment, a facility for the Physician Group practice, and maintains the
medical equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant policies followed:
A. BASIS OF COMBINATION
The accompanying combined financial statements include the accounts of
Irving N. Beran, M.D., P.A., North Jersey Imaging Management Associates,
L.P., Bloomfield Imaging Associates, P.A., ALL OF WHICH ARE 100% OWNED BY
COMMON OWNERS, Echelon MRI, P.C. WHICH WAS OWNED 71% AND 69% IN 1997 AND
1996, RESPECTIVELY, BY THE COMMON OWNERS and Mainland Imaging Center, P.C.
WHICH WAS OWNED 72% AND 62% IN 1997 AND 1996, RESPECTIVELY, BY THE COMMON
OWNERS (collectively the "Entities" or "Irving N. Beran, M.D., P.A. and
Affiliates"). THE COMMON OWNERS EXERCISE PERMANENT CONTROL OVER THE
ENTITIES. Since Mainland Imaging Center, P.C. and Echelon MRI, P.C. are not
100% owned, the accompanying financial statements include amounts for
minority interests. All significant intercompany accounts and transactions
between the Entities have been eliminated in combination.
B. BASIS OF ACCOUNTING
The accompanying combined financial statements have been prepared on the
accrual basis of accounting whereby revenues are recognized when earned and
expenses are recognized when the obligation is incurred.
C. USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the combined financial statements and the reported amounts of revenues
and expenses during the reporting period. Accordingly, actual results could
differ from those estimates.
- 6 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all cash balances and highly liquid
investments with an initial maturity of three months or less. The Entities
place its cash with one (1) high credit quality financial institution
located in New Jersey. On several occasions during 1997 and 1996, the
Entities' cash balances exceeded the Federal Deposit Insurance Corporation
insurance limit of $100,000 per financial institution. The Entities have
not experienced any losses in such accounts, and Management believes they
are not exposed to any significant credit risk with respect to such
accounts.
E. ACCOUNTS RECEIVABLE
The Entities extend credit without collateral to their patients, most of
whom are residents of New Jersey and are insured under third-party payor
agreements. The portion of accounts receivable from patients and
third-party payors, included in the Entities' accounts receivable as of
December 31, 1997 and 1996, were as follows:
1997 1996
---- ----
No fault insurance 77% 79%
Commercial 8% 7%
Liability and Workers' Compensation 10% 9%
Self Pay and Other Third-Party Payors 5% 5%
--- ---
100% 100%
=== ===
The Entities' accounts receivable are shown net of an allowance for
doubtful accounts which consists of the Entities' estimate of amounts that
will not be collected from patients and other third-party payors. The
allowances as of December 31, 1997 and 1996 were approximately $3,859,000
and $3,614,000, respectively.
F. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
accelerated cost recovery methods, which approximates the straight-line
method, over the following estimated useful lives:
Medical equipment 5-7 years
Leasehold improvements 39 years, or life of lease
(whichever is shorter)
Furniture and fixtures 5-7 years
Signage 7 years
Vehicles 5 years
- 7 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for 1997 and 1996 was as follows:
ENTITY 1997 1996
- ------------------------------------------------ ---------- ----------
Irving N. Beran, M.D., P.A $ 74,753 $ 147,878
Echelon MRI, P.C 236,610 18,952
Mainland Imaging Center, P.C 192,252 289,719
North Jersey Imaging Management Associates, L.P. 622,666 358,338
---------- ----------
$1,126,281 $ 814,887
========== ==========
G. LOAN FEES
Loan fees for Mainland Imaging Center, P.C. were amortized on the
straight-line basis over the term of the capital lease obligation of sixty
(60) months which ended in 1997. Amortization expense for 1997 and 1996 was
$650 and $1,561, respectively.
Loan fees for North Jersey Imaging Management Associates, L.P. are being
amortized on the straight-line basis over the terms of the respective bank
loans from forty-eight (48) to sixty (60) months. Amortization expense for
1997 and 1996 was $1,547 and $251, respectively.
H. IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the sum for the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Entities for bank loans
with similar terms and maturities, the fair value of the Entities' notes
payable and long-term debt approximates the carrying value. Furthermore,
the carrying value of all other financial instruments potentially subject
to valuation risk (principally consisting of cash and cash equivalents,
accounts receivable, deposits, accounts payable and accrued expenses) also
approximates fair value due to the short maturity of those instruments.
J. REVENUE RECOGNITION
The Entities record fee income for providing magnetic resource imaging
(MRI) and radiology services to their patients. Fee income is recorded net
of estimated contractual adjustments by third party payors in the year in
which the services are rendered. Any difference between such estimates and
the ultimate settlements are reflected upon settlement of the receivable.
- 8 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. INCOME TAXES
The Entities account for income taxes under the asset and liability method.
Accordingly, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Accordingly, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
L. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," both of which
were required to be adopted on January 1, 1998. Statement 130 required
financial statement reporting of all non-owner related changes in equity
for the periods being presented. Statement 131 requires disclosure of
revenue, earnings, and other financial information pertaining to business
segments by which a company is managed, as well as factors used by
management to determine segments. The Entities believe adoption of
Statement 130 and Statement 131 will not have a material impact on the
financial statements.
3. LOANS RECEIVABLE
Loans receivable represent unsecured and non-interest bearing demand loans
from Irving N. Beran, M.D., P.A. and Echelon MRI, P.C. to employees and a
stockholder.
4. NOTES PAYABLE - OFFICER
The Entities' notes payable to one (1) officer as of December 31, 1997 and
1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Irving N. Beran, M.D., P.A. - Unsecured and non-interest bearing
loans due on demand $555,642 $862,142
Mainland Imaging Center, P.C. - Loan payable to an officer,
unsecured, due on demand and without interest 8,758 --
North Jersey Imaging Management Associates, L.P. - Note payable
to an officer, unsecured, due on demand and without interest 25,723 25,248
Echelon MRI, P.C. - Note payable to an officer, unsecured, due
on demand and without interest 7,036 --
-------- --------
$597,159 $887,390
======== ========
</TABLE>
- 9 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
The Entities' long-term debt and capitalized lease obligations as of
December 31, 1997 and 1996 consist of the following
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Irving N. Beran, M.D., P.A. - Note payable - bank, due in monthly
installments of $4,458 plus interest at 9.5%. The note was scheduled to
mature in February 1998 and was repaid in May 1997. The note was
secured by equipment. $ - $44,814
Echelon MRI, P.C. - Note payable - individual, unsecured, payable in
sixty (60) monthly installments of $3,597 including interest at 8%.
Payments began February 1, 1993 with final payment due January 1, 1998.
The Entity acquired 75 shares of common stock from a former stockholder
in exchange for this note. 3,573 44,648
Mainland Imaging Center, P.C. - Unsecured note payable to an officer in
one hundred twenty (120) monthly installments of $6,885 including
interest at 7%. The loan is scheduled to mature in December 2004. 456,208 505,027
Capital lease obligation - G.E. Medical Systems - payable in monthly
installments of $36,017 including interest at 10%. The lease was secured
by medical equipment and was due and paid in May 1997. - 141,127
North Jersey Imaging Management Associates, L.P. - Note payable to
Commerce Bank, N.A. in the original amount of $900,000. The loan is
payable in forty-eight (48) monthly installments of $22,077 including
interest. The interest rate at December 31, 1997 was 8.5%. The loan is
secured by all of the assets of the Entity and the personal guarantees of
its partners. Final payment is due September 1, 2000. 596,504 826,292
</TABLE>
- 10 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
North Jersey Imaging Management Associates, L.P. - Note payable to
Corestates Bank, N.A. in the original amount of $675,000. The note was
issued in the name of all of the Entities but the loan proceeds were
utilized by North Jersey Imaging Management Associates, L.P. The loan is
payable in sixty (60) monthly principal installments of $11,250 plus
interest at 1% below the prime rate. The interest rate at December 31, 1997
was 7.5%. The loan is secured by a lien on the equipment, the personal
guarantees of the partners, the Estate of Irving N. Beran, M.D. and Irving
N. Beran, M.D., P.A. Final payment is due in May 2002. 576,000 -
---------- ----------
1,632,285 1,561,908
Less, Current Portion (413,733) (505,623)
---------- ----------
$1,218,552 $1,056,285
========== ==========
</TABLE>
The required principal payments for the years subsequent to December 31,
1997 are as follows:
YEAR AMOUNT
----- -----------
1998 $ 413,733
1999 433,638
2000 326,379
2001 199,542
2002 105,208
Thereafter 153,785
-----------
$ 1,632,285
6. RENT
Irving N. Beran, M.D., P.A.
In addition to the leases described in Note 7, the Entity leases other
offices under month to month or year to year operating leases. These annual
rentals amounted to $28,865 and $113,550 for 1997 and 1996, respectively.
Mainland Imaging Center, P.C.
In addition to the rent paid to a related party, the Entity leases an
office in Ocean City, New Jersey under a month to month operating lease.
Included in rent expense is $1,500 paid under the Ocean City lease for
1997.
- 11 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
7. RELATED PARTY TRANSACTIONS
Irving N. Beran, M.D., P.A.
Irving N. Beran, M.D., P.A. leases part of its operating facilities on a
year to year basis from a non-combined related party at a monthly rental of
$4,500. Rent expense was $54,000 in 1997 and 1996.
Irving N. Beran, M.D., P.A. has annual contracts for management services
and radiologist fees with related Entities. These transactions have been
eliminated in combination.
Bloomfield Imaging Associates, P.A.
Bloomfield Imaging Associates, P.A. has an annual contract for management
services with a related Entity. These transactions have been eliminated in
combination.
Echelon MRI, P.C.
Echelon MRI, P.C. leases its operating facility on a month to month basis
from a non-combined related party at a monthly rental of $6,000. Rent
expense was $72,000 in 1997 and 1996. During 1997, additional space was
leased from the same party. Rent expense for this additional space was
$18,500.
Echelon MRI, P.C. has an annual contract for management services with a
related Entity. These transactions have been eliminated in combination.
Mainland Imaging Center, P.C.
Mainland Imaging Center, P.C. has an annual contract for radiologist's
services with a related Entity. These transactions have been eliminated in
combination.
Mainland Imaging Center, P.C. leases its operating facility under a month
to month operating lease from a non-combined related party. Rent expense
paid was $72,000 for 1997 and 1996.
North Jersey Imaging Management Associates, L.P.
North Jersey Imaging Management Associates, L.P. has an annual management
services contract with a related Entity in which it earns revenue. These
transactions have been eliminated in combination.
Rent expense of $5,700 for 1997 and 1996 was paid to a related limited
partner for office space rented on a month to month basis.
8. INCOME TAXES
Although Bloomfield Imaging Associates, P.A., Echelon MRI, P.C., and
Mainland Imaging Center, P.C. are organized as sub-chapter S corporations
and North Jersey Imaging Management Associates, L.P. as a partnership under
Federal and state laws, the accompanying financial statements include a
provision for income taxes as if the Entities were taxable as C
corporations.
- 12 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. INCOME TAXES (CONTINUED)
The 1997 and 1996 provisions for income taxes consists of the
following:
1997 FEDERAL STATE AND LOCAL TOTAL
----------- --------------- -----------
Current $ 1,473,324 $ 531,009 $ 2,004,333
Deferred (486,000) (86,000) (572,000)
----------- ----------- -----------
$ 987,324 $ 445,009 $ 1,432,333
=========== =========== ===========
1996
Current $ 1,342,759 $ 447,187 $ 1,789,946
Deferred 33,800 5,970 39,770
----------- ----------- -----------
$ 1,376,559 $ 453,157 $ 1,829,716
=========== =========== ===========
The 1997 income tax provision for Irving N. Beran, M.D., P.A. includes a
benefit of approximately $60,000, as a result of the utilization of Federal
and state net operating loss carryforwards. Irving N. Beran, M.D., P.A. has
available as of December 31, 1997 Federal and state net operating loss
carryovers of approximately $576,000 and $550,000, respectively, expiring
at various dates through 2011.
The difference between the actual income tax expense and the tax expense
computed by applying the statutory Federal income tax rate to the net
income before taxes is attributable to the following:
<TABLE>
<CAPTION>
1997 1996
DOLLARS PERCENTAGE DOLLARS PERCENTAGE
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Statutory Federal income tax rate $ 1,361,050 34.0% $ 1,767,869 34.0%
State and local income taxes 350,465 8.8 295,143 5.7
Deferred state taxes (56,760) (1.4) 3,940 .1
Other (222,422) (5.6) (237,236) (4.6)
------------- ---- ------------- ----
Actual income tax expense $ 1,432,333 35.8% $ 1,829,716 35.2%
============= ==== ============= ====
</TABLE>
- 13 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Entities' net deferred income taxes,
PRIMARILY RELATING TO THE USE OF THE ACCRUAL BASIS OF ACCOUNTING FOR
FINANCIAL STATEMENT PURPOSES VERSUS THE CASH BASIS OF ACCOUNTING FOR TAX
PURPOSES, as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
----------- -----------
Federal and state net operating loss carryforwards $ 229,000 $ 288,000
----------- -----------
Deferred tax liability:
Conversion of cash to accrual basis of accounting:
ACCOUNTS RECEIVABLE, NET (2447,000) (3,291,000)
PREPAID EXPENSES (40,000) (12,000)
ACCOUNTS PAYABLE AND ACCRUAL EXPENSES 992,000 1,177,000
----------- -----------
(1,495,000) (2,126,000)
----------- -----------
NET DEFERRED INCOME TAXES $(1,266,000) $(1,838,000)
=========== ===========
Current tax asset 229,000 288,000
Current tax liability (1,495,000) (2,126,000)
----------- -----------
Net deferred income taxes $(1,266,000) $(1,838,000)
=========== ===========
</TABLE>
9. COMMITMENTS
North Jersey Imaging Management Associates, P.A. leases its operating
facilities under a non-cancelable operating lease expiring March 31, 2001.
The lease was executed by the general partner and assigned to the Entity.
The following is a schedule of future minimum rental payments required
under the operating lease for years subsequent to December 31, 1997:
YEAR AMOUNT
---- --------
1998 $137,370
1999 144,239
2000 151,450
2001 38,319
--------
$471,378
========
Rent expense for 1997 and 1996 was $130,829 and $113,837, respectively.
The Entities have entered into several contracts for the purchase of
equipment and equipment upgrades from Picker International, Inc. ("Picker")
The Entities' have deposited $277,500 with Picker. The Entities have
requested a release from these contracts and refund of the deposits. Picker
has denied the cancellation and refund request and offered a
counter-proposal which would require the Entities to purchase three (3) MRI
units or upgrades. The Picker proposal would require application of the
deposit and an additional investment of $697,500 to purchase the equipment.
The Picker proposal has been rejected by the Entities and no legal action
has been taken either by the Entities or Picker regarding the dispute.
- 14 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
10. CONTINGENCIES
Irving N. Beran, M.D., P.A. and Echelon MRI, P.C. are each a codefendant in
lawsuits alleging malpractice. Management is of the opinion that the
RESOLUTION OF THESE MATTERS will not have a material adverse effect on the
Entities' financial position or results of operations.
Bloomfield Imaging Associates, P.A. has been named as an interested party
and not as an actual participant in multiple lawsuits alleging fraud in
connection with claims submitted by policy beneficiaries. Similar claims
have been settled upon refund by the Entity of the fees collected.
Management is of the opinion that the RESOLUTION OF THESE MATTERS will not
have a material adverse effect on the Entities' financial position or
results of operations.
Mainland Imaging Center, P.C. is a codefendant in a lawsuit alleging
malpractice. The Entity is also a codefendant in a lawsuit filed by an
employee of a related company alleging hazardous working conditions.
Management is of the opinion that the RESOLUTION OF THESE MATTERS will not
have a material adverse effect on the Entities' financial position or
results of operations.
11. SUBSEQUENT EVENT
The Entities are currently negotiating an agreement with Healthcare Imaging
Services, Inc. ("HIS") to sell substantially all of their assets. In
exchange, HIS agreed to pay the Entities approximately $21,000,000, subject
to adjustment, payable in cash and by delivery of convertible, redeemable
preferred stock. HIS has also agreed to lend the Entities an additional
$2,500,000 secured by the HIS preferred stock. In addition, HIS agreed to
assume certain liabilities due under continuing contracts and operating
leases.
- 15 -
<PAGE>
ENCLOSURE 5
Unaudited Combined Financial Statements of Irving H. Beran, M.D., P.A.
for the nine months ended September 30, 1998 and 1997
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
ASSETS
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,972,871 $ 2,096,483
Accounts receivable, net 5,653,297 6,475,857
Prepaid expenses 131,278 82,298
Loans receivable 18,658 84,060
Deferred income taxes 269,000 347,000
----------- -----------
Total Current Assets 8,045,104 9,085,698
----------- -----------
Property and Equipment
Medical equipment 8,478,232 8,464,035
Leasehold improvements 1,353,610 1,331,933
Office furniture 140,316 118,963
Vehicles 27,863 27,863
Signs 6,068 6,068
----------- -----------
10,006,089 9,948,862
Accumulated Depreciation (7,423,615) (6,360,198)
----------- -----------
2,582,474 3,588,664
----------- -----------
Other Assets 331,553 332,817
----------- -----------
Total Assets $10,959,131 $13,007,179
=========== ===========
</TABLE>
- 1-
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS'/PARTNERS' EQUITY
<TABLE>
1998 1997
-------- -------
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt $ 1,328,136 $ 485,482
Notes payable-officer 602,159 892,426
Accounts payable and accrued expenses 597,175 254,407
Income taxes payable 4,673,030 3,162,033
Deferred income taxes 1,504,000 1,659,000
----------- -----------
Total Current Liabilities 8,704,500 6,453,348
----------- -----------
Long-term debt, net of current portion -- 1,528,202
----------- -----------
Minority interests 437,535 921,521
----------- -----------
Commitments and Contingencies
Stockholders' and Partners' Equity:
Common stock ($1.00 and $10.00 par value,
1,100 and 200 shares authorized, issued,
and outstanding, respectively.) 3,100 3,100
Additional paid-in-capital 429,250 429,250
Retained earnings/partners' capital 1,384,746 3,671,758
----------- -----------
1,817,096 4,104,108
----------- -----------
Total Liabilities and Stockholders'/
Partners' Equity $10,959,131 $13,007,179
=========== ===========
</TABLE>
- 2-
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS/PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Income-Fees $ 7,683,613 $ 8,843,987
Operating Expenses 4,662,497 4,099,542
Depreciation and amortization 781,891 845,262
----------- -----------
Income Before Other Income (Expense) 2,239,225 3,899,183
----------- -----------
Other Income (Expense)
Interest income 11,810 25,010
Interest expense (84,872) (122,993)
Loss on disposal and abandonment -- (259,121)
----------- ------------
(73,062) (357,104)
----------- -----------
Income Before Provision (Benefit) for Income Taxes 2,166,163 3,542,079
----------- -----------
Provision (Benefit) for Income Taxes
Current 1,056,717 1,511,071
Deferred (31,000) (524,196)
------------ ------------
1,025,717 986,875
----------- -----------
Minority Interests in Income of Combined Entities (229,066) (487,682)
------------ -----------
Net Income 911,380 2,067,522
Beginning Retained Earnings/Partners' Capital 2,301,366 3,254,803
Increase in Controlling Interests -- 208,931
Distributions (1,828,000) (1,859,498)
----------- -----------
Ending Retained Earnings/Partners' Capital $ 1,384,746 $ 3,671,758
=========== ===========
</TABLE>
- 3 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 911,380 $ 2,067,522
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 781,891 845,262
Loss on disposal or abandonment -- 259,121
Minority interest 229,066 487,682
(Increase) Decrease in:
Accounts receivable 164,243 71,521
Prepaid expenses (8,139) (33,578)
Other assets (4,999) (76,101)
Increase (decrease) in:
Accounts payable and accrued expenses 288,484 6,491
Deferred income taxes (31,000) (526,000)
Income taxes payable 1,037,791 1,428,686
----------- -----------
Total Adjustments to net income 2,457,337 2,463,084
----------- -----------
Net Cash Provided by Operating
Activities 3,368,717 4,530,606
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment -- 383,686
Capital expenditures (41,220) (2,607,447)
Loans receivable -- --
----------- -----------
Net Cash Used in Investing
Activities (41,220) (2,223,761)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt -- 1,001,000
Payments on long-term debt (299,149) (560,381)
Loans receivable (2,623) (71,596)
Increase in controlling interest -- 208,931
Distributions (1,828,000) (1,859,498)
Minority interest distributions (354,000) (579,431)
Note payable - officer -- 16,193
----------- -----------
Net Cash Used in Financing
Activities (2,483,772) (1,844,782)
----------- -----------
Net Increase in Cash and Cash Equivalents 843,725 462,063
Cash and Cash Equivalents - Beginning 1,129,146 1,634,420
----------- -----------
Cash and Cash Equivalents - Ending $ 1,972,871 $ 2,096,483
=========== ===========
Supplemental Disclosures of Cash Flow
Information Cash paid during the years for:
Interest $ 84,872 $ 122,993
=========== ===========
Income Taxes $ 75,754 $ 94,565
=========== ===========
</TABLE>
- 4 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1. BUSINESS ACTIVITY AND ORGANIZATION
Irving N. Beran, M.D., P.A. (a corporation) was incorporated on July 5,
1972 and operates several radiology offices in New Jersey.
Bloomfield Imaging Associates, P.A. (an S corporation) was incorporated on
July 1, 1990 for the purpose of operating a medical diagnostic imaging
facility in Bloomfield, New Jersey.
Echelon MRI, P.C. (an S corporation) was incorporated on June 8, 1988 for
the purpose of operating a medical diagnostic imaging facility in Voorhees,
New Jersey.
Mainland Imaging Center, P.C. (an S corporation) was incorporated on
July 29, 1991 for the purpose of operating a medical diagnostic imaging
facility in Northfield, New Jersey.
North Jersey Imaging Management Associates, L.P. (a limited partnership)
was formed to provide management, administrative, billing and collection
services ("Management Services") to Bloomfield Imaging Associates, P.A.
("Physician Group") to enable Physician Group to operate a medical
practice. The Limited Partnership provides non-professional and
non-technical personnel, medical equipment, a facility for the Physician
Group practice, and maintains the medical equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant policies followed:
a. BASIS OF COMBINATION
The accompanying combined financial statements include the accounts of
Irving N. Beran, M.D., P.A., North Jersey Imaging Management
Associates, L.P., Bloomfield Imaging Associates, P.A., all of which
are 100% owned by common owners; Echelon MRI, P.C., which was owned
71% and 69% in 1998 and 1997, respectively, by the common owners; and
Mainland Imaging Center, P.C., which was owned 72% and 62% in 1998 and
1997, respectively, by the common owners, (collectively the "Entities"
or "Irving N. Beran, M.D., P.A. and Affiliates"). The common owners
exercise permanent control over the Entities. Since Mainland Imaging
Center, P.C. and Echelon MRI, P.C. are not 100% owned, the
accompanying financial statements include amounts for minority
interests. All significant intercompany accounts and transactions
between the Entities have been eliminated in combination.
b. BASIS OF ACCOUNTING
The accompanying combined financial statements have been prepared on
the accrual basis of accounting whereby revenues are recognized when
earned and expenses are recognized when the obligation is incurred.
c. USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the combined financial statements and the reported amounts
of revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
- 5 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all cash balances and highly liquid
investments with an initial maturity of three months or less. The
Entities place its cash with one (1) high credit quality financial
institution located in New Jersey. On several occasions during 1998
and 1997, the Entities' cash balances exceeded the Federal Deposit
Insurance Corporation insurance limit of $100,000 per financial
institution. The Entities have not experienced any losses in such
accounts, and Management believes they are not exposed to any
significant credit risk with respect to such accounts.
e. ACCOUNTS RECEIVABLE
The Entities extend credit without collateral to their patients, most
of whom are residents of New Jersey and are insured under third-party
payor agreements. The portion of accounts receivable from patients and
third-party payors, included in the Entities' accounts receivable as
of September 30, 1998 and 1997, were as follows:
<TABLE>
1998 1997
------ ------
<S> <C> <C>
No fault insurance 76% 77%
Commercial 10% 8%
Liability and Workers' Compensation 8% 10%
Self Pay and Other Third-Party Payors 6% 5%
--- ---
100% 100%
=== ===
</TABLE>
The Entities' accounts receivable are shown net of an allowance for
doubtful accounts and contractual adjustments which consists of the
Entities' estimate of amounts that will not be collected from patients
and other third-party payors. The combined allowances as of September
30, 1998 and 1997 were approximately $2,514,000 and $2,895,000,
respectively.
f. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
using accelerated cost recovery methods, which approximates the
straight-line method, over the following estimated useful lives:
<TABLE>
<S> <C>
Medical equipment 5-7 years
Leasehold improvements 39 years, or life of lease
(whichever is shorter)
Furniture and fixtures 5-7 years
Signage 7 years
Vehicles 5 years
</TABLE>
- 6 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for 1998 and 1997 was as follows:
<TABLE>
ENTITY 1998 1997
------------------------------ ------ ------
<S> <C> <C>
Irving N. Beran, M.D., P.A. $ 42,267 $ 55,081
Echelon MRI, P.C. 271,457 177,457
Mainland Imaging Center, P.C. 28,303 144,189
North Jersey Imaging Management
Associates, L.P. 438,562 466,725
-------- --------
$780,589 $843,452
======== ========
</TABLE>
g. LOAN FEES
Loan fees for Mainland Imaging Center, P.C. were amortized on the
straight-line basis over the term of the capital lease obligation of
sixty (60) months which ended in 1997. Amortization expense for 1997
was $650.
Loan fees for North Jersey Imaging Management Associates, L.P. are
being amortized on the straight-line basis over the terms of the
respective bank loans from forty-eight (48) to sixty (60) months.
Amortization expense for 1998 and 1997 was $1,302 and $1,160,
respectively.
h. IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum for the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and carrying
value of the asset.
i. FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Entities for bank
loans with similar terms and maturities, the fair value of the
Entities' notes payable and long-term debt approximates the carrying
value. Furthermore, the carrying value of all other financial
instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable,
deposits, accounts payable and accrued expenses) also approximates
fair value due to the short maturity of those instruments.
j. REVENUE RECOGNITION
The Entities record fee income for providing magnetic resource imaging
(MRI) and radiology services to their patients. Fee income is recorded
net of estimated contractual adjustments by third party payors in the
year in which the services are rendered. Any difference between such
estimates and the ultimate settlements are reflected upon settlement
of the receivable.
- 7 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
k. INCOME TAXES
The Entities account for income taxes under the asset and liability
method. Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Accordingly, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
l. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income," and Statement No.
131, "Disclosures about Segments of an Enterprise and Related
Information," both of which were adopted on January 1, 1998. Statement
130 required financial statement reporting of all non-owner related
changes in equity for the periods being presented. Statement 131
requires disclosure of revenue, earnings, and other financial
information pertaining to business segments by which a company is
managed, as well as factors used by management to determine segments.
The adoption of Statement 130 and Statement 131 did not have a
material impact on the financial statements.
3. LOANS RECEIVABLE
Loans receivable represent unsecured and non-interest bearing demand loans
from Irving N. Beran, M.D., P.A. and Echelon MRI, P.C. to employees and a
stockholder.
4. NOTES PAYABLE - OFFICER
The Entities' notes payable to one (1) officer as of September 30, 1998 and
1997 consist of the following:
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Irving N. Beran, M.D., P.A. - Unsecured and
non-interest bearing loans due on demand. The
note payable was paid in full in December,
1998. $560,142 $860,142
Mainland Imaging Center, P.C. - Loan payable
to an officer, unsecured, due on demand and
without interest. The note payable was paid
in full in December, 1998. 9,258 --
North Jersey Imaging Management Associates,
L.P. - Note payable to an officer, unsecured,
due on demand and without interest. The note
payable was paid in full in December, 1998. 25,723 25,248
Echelon MRI, P.C. - Note payable to an
officer, unsecured, due on demand and without
interest. The note payable was paid in full
in December, 1998. 7,036 7,036
----- -------- --------
$602,159 $892,426
======== ========
</TABLE>
- 8 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
The Entities' long-term debt and capitalized lease obligations as of
September 30, 1998 and 1997 consist of the following:
1998 1997
------ ------
Echelon MRI, P.C. - Note payable - individual,
unsecured, payable in sixty (60) monthly
installments of $3,597 including interest at 8%.
Payments began February 1, 1993 with final
payment due January 1, 1998. The Entity acquired
75 shares of common stock from a former stockholder
in exchange for this note. $ -- $ 14,151
Mainland Imaging Center, P.C. - Unsecured note
payable to an officer in one hundred twenty
(120) monthly installments of $6,885 including
interest at 7%. The loan was scheduled to
mature in December 2004. The loan was paid in
full in December, 1998. 421,717 467,365
North Jersey Imaging Management Associates,
L.P. - Note payablto Commerce Bank, N.A. in the
original amount of $900,000. The loan is
payable in forty-eight (48) monthly
installments of $22,077 including interest.
The interest rate at September 30, 1998 and
1997 was 8.5%. The loan is secured by all of
the assets of the Entity and the personal
guarantees of its partners. Final payment was
due September 1, 2000. The loan was paid in
full in December, 1998. 431,669 631,401
Irving N. Beran, M.D., P.A. - Note payable to
Corestates Bank, N.A. in the original amount of
$326,000. The loan was payable in sixty (60)
monthly installments of $5,433 plus interest.
The interest rate at September 30, 1997 was
7.5%. The loan was secured by a lien on the
equipment and the personal guarantee. -- 302,267
North Jersey Imaging Management Associates,
L.P. - Note payable to Corestates Bank, N.A. in
the original amount of $675,000. The note was
issued in the name of all of the Entities but
the loan proceeds were utilized by North Jersey
Imaging Management Associates, L.P. The loan
is payable in sixty (60) monthly principal
installments of $11,250 plus interest at 1%
below the prime rate. The interest rate at
September 30, 1998 and 1997 was 7.5%. The loan
is secured by a lien on the equipment, the
personal guarantees of the partners, the Estate
of Irving N. Beran, M.D. and Irving N. Beran,
M.D., P.A. Final payment was due in May 2002.
The loan was paid in full in December, 1998. 474,750 598,500
----------- -----------
1,328,136 2,013,684
Less, Current Portion (1,328,136) (485,482)
----------- -----------
$ -- $ 1,528,202
=========== ===========
- 9 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION (CONTINUED)
The required principal payments for the years subsequent to September 30,
1998 are as follows:
<TABLE>
YEAR AMOUNT
------ --------
<S> <C>
1998 $ 1,328,136
1999 --
2000 --
2001 --
2002 --
Thereafter --
-----------
$ 1,328,136
===========
</TABLE>
6. RENT
Irving N. Beran, M.D., P.A.
---------------------------
In addition to the leases described in Note 7, the Entity leases other
offices under month to month or year to year operating leases. These
rentals amounted to $9,750 and $21,790 for 1998 and 1997, respectively.
Mainland Imaging Center, P.C.
-----------------------------
In addition to the rent paid to a related party, the Entity leases an
office in Ocean City, New Jersey under a month to month operating lease.
Included in rent expense is $11,250 paid under the Ocean City lease for
1998.
7. RELATED PARTY TRANSACTIONS
Irving N. Beran, M.D., P.A.
---------------------------
Irving N. Beran, M.D., P.A. leases part of its operating facilities on a
year to year basis from a non-combined related party at a monthly rental of
$4,500. Rent expense was $40,500 in 1998 and 1997.
Irving N. Beran, M.D., P.A. has annual contracts for management services
and radiologist fees with related Entities. These transactions have been
eliminated in combination.
Bloomfield Imaging Associates, P.A.
-----------------------------------
Bloomfield Imaging Associates, P.A. has an annual contract for management
services with a related Entity. These transactions have been eliminated in
combination.
Echelon MRI, P.C.
-----------------
Echelon MRI, P.C. leases its operating facility on a month to month basis
from a non-combined related party at a monthly rental of $6,000. Rent
expense was $54,000 in 1998 and 1997. During 1997, additional space was
leased from the same party. Rent expense for this additional space was
$40,500 and $9,000 for 1998 and 1997, respectively.
Echelon MRI, P.C. has an annual contract for management services with a
related Entity. These transactions have been eliminated in combination.
- 10 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
Mainland Imaging Center, P.C.
Mainland Imaging Center, P.C. has an annual contract for radiologist's
services with a related Entity. These transactions have been eliminated in
combination.
Mainland Imaging Center, P.C. leases its operating facility under a month
to month operating lease from a non-combined related party. Rent expense
paid was $54,000 for 1998 and 1997.
North Jersey Imaging Management Associates, L.P.
North Jersey Imaging Management Associates, L.P. has an annual management
services contract with a related Entity in which it earns revenue. These
transactions have been eliminated in combination.
Rent expense of $4,475 and $4,275 for 1998 and 1997, respectively, was paid
to a related limited partner for office space rented on a month to month
basis.
8. INCOME TAXES
Although Bloomfield Imaging Associates, P.A., Echelon MRI, P.C., and
Mainland Imaging Center, P.C. are organized as sub-chapter S corporations
and North Jersey Imaging Management Associates, L.P. as a partnership under
Federal and state laws, the accompanying financial statements include a
provision for income taxes as if the Entities were taxable as C
corporations.
The 1998 and 1997 provisions for income taxes consists of the following:
<TABLE>
1998 FEDERAL STATE AND LOCAL TOTAL
------ --------- ----------------- -------
<S> <C> <C> <C>
Current $ 788,444 $ 268,273 $ 1,056,717
Deferred (79,211) 48,211 (31,000)
----------- ---------- -----------
$ 709,233 $ 316,484 $ 1,025,717
=========== ========== ===========
1997
------
Current $ 1,118,076 $ 392,995 $ 1,511,071
Deferred (352,008) (172,188) (524,196)
----------- ---------- -----------
$ 766,068 $ 220,807 $ 986,875
=========== ========== ===========
</TABLE>
Irving N. Beran, M.D., P.A. has available as of September 30, 1998 Federal
and state net operating loss carryovers of approximately $673,000 and
$445,000, respectively, expiring at various dates through 2013.
- 11 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Entities' net deferred income taxes,
primarily relating to the use of the accrual basis of accounting for
financial statement purposes versus the cash basis of accounting for tax
purposes, as of September 30, 1998 and 1997 are as follows:
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Federal and state net operating loss
carryforwards $ 269,000 $ 347,000
----------- -----------
Deferred tax liability:
Conversion of cash to accrual basis of
accounting:
Accounts receivable, net (2,505,000) (2,769,000)
Prepaid expenses (45,000) (29,000)
Accounts payable and accrued
expenses 1,046,000 1,139,000
----------- -----------
(1,504,000) (1,659,000)
----------- -----------
Net deferred income taxes $(1,235,000) $(1,312,000)
=========== ===========
Current tax asset 269,000 347,000
Current tax liability (1,504,000) (1,659,000)
----------- -----------
Net deferred income taxes $(1,235,000) $(1,312,000)
=========== ===========
</TABLE>
9. COMMITMENTS
North Jersey Imaging Management Associates, P.A. leases its operating
facilities under a non-cancelable operating lease expiring March 31, 2001.
The lease was executed by the general partner and assigned to the Entity.
The following is a schedule of future minimum rental payments required
under the operating lease for years subsequent to September 30, 1998:
<TABLE>
YEAR AMOUNT
---- --------
<S> <C>
1999 $142,501
2000 149,626
2001 76,638
2002 --
2003 --
Thereafter --
--------
$368,765
========
</TABLE>
Rent expense for 1998 and 1997 was $102,614 and $97,727, respectively.
The Entities have entered into several contracts for the purchase of
equipment and equipment upgrades from Picker International, Inc. ("Picker")
The Entities' have deposited $277,500 with Picker. The Entities have
requested a release from these contracts and refund of the deposits. Picker
has denied the cancellation and refund request and offered a
counter-proposal which would require the Entities to purchase three (3) MRI
units or upgrades. The Picker proposal would require application of the
deposit and an additional investment of $697,500 to purchase the equipment.
The Picker proposal has been rejected by the Entities and no legal action
has been taken either by the Entities or Picker regarding the dispute.
- 12 -
<PAGE>
IRVING N. BERAN, M.D., P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
10. CONTINGENCIES
Irving N. Beran, M.D., P.A. and Echelon MRI, P.C. are each a codefendant in
lawsuits alleging malpractice. Management, based upon advice of legal
counsel, is of the opinion that the liability, if any, will be covered by
insurance and will not have a material adverse effect on the Entities'
financial position or results of operations.
Bloomfield Imaging Associates, P.A. has been named as an interested party
and not as an actual participant in multiple lawsuits alleging fraud in
connection with claims submitted by policy beneficiaries. Similar claims
have been settled upon refund by the Entity of the fees collected.
Management, based upon advice of legal counsel, is of the opinion that the
liability, if any, will be covered by insurance and will not have a
material adverse effect on the Entities' financial position or results of
operations.
Mainland Imaging Center, P.C. is a codefendant in a lawsuit alleging
malpractice. It is management's belief, based upon advice of legal counsel,
that any potential assessment will be covered by the Entity's malpractice
insurance. The Entity is also a codefendant in a lawsuit filed by an
employee of a related company alleging hazardous working conditions.
Management, based upon advice of legal counsel, is of the opinion that the
liability, if any, will be covered by insurance and will not have a
material adverse effect on the Entities' financial position or results of
operations.
11. SUBSEQUENT EVENT
On October 2, 1998, Healthcare Imaging Services, Inc. ("HIS") acquired all
of the assets and business of, and assumed certain liabilities of the
Entities. The consideration given by HIS was (i) the assumption of certain
obligations and liabilities of the 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 HIS. HIS also loaned
the Entities an aggregate of $2.5 million at 8% interest and matures upon
the terms and conditions contained in the related promissory notes.
- 13 -
