FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 X Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 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 No.: 0-19897 SMT HEALTH SERVICES INC. (Exact name of registrant as specified in its charter) DELAWARE 25-1672183 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10521 PERRY HIGHWAY, WEXFORD, PENNSYLVANIA 15090 (Address of principal executive offices) 412-933-3300 (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: At April 30, 1997, 5,684,081 shares of Common Stock, $0.01 par value, of the registrant were outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements SMT Health Services Inc. and Subsidiaries Consolidated Balance Sheets March 31, December 31, 1997 1996 (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents - unrestricted $13,566,007 $ 4,643,158 Cash and cash equivalents - restricted 400,000 400,000 Accounts receivable - no allowance for doubtful accounts 1,985,813 1,726,442 Notes receivable - current portion 39,616 52,240 Receivable from the sale of leases secured by equipment-current portion (Note 4) 357,124 387,999 Other current assets 452,535 615,257 Total current assets 16,801,095 7,825,096 PROPERTY AND EQUIPMENT: Equipment 188,463 200,709 Furniture and fixtures 55,885 43,055 Vehicles 193,762 162,915 Leasehold improvements 28,495 28,495 Mobile MRI equipment 35,980,966 35,932,207 Total property and equipment 36,447,571 36,367,381 Less accumulated depreciation and amortization ( 8,216,184) ( 6,734,353) Property and equipment, net 28,231,387 29,633,028 OTHER ASSETS: Receivable from the sale of leases secured by equipment- noncurrent (Note 4) 428,774 490,591 Contract and license acquisition costs, net of accumulated amortization of $108,000 and $15,000, respectively 611,143 631,933 Deposits and other assets 592,764 594,915 Deferred income taxes 192,000 322,000 Total other assets 1,824,681 2,039,439 TOTAL ASSETS $46,857,163 $39,497,563 See Notes to Consolidated Financial Statements. SMT Health Services Inc. and Subsidiaries Consolidated Balance Sheets (continued) March 31, December 31, 1997 1996 (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 573,687 $ 363,682 Accrued wages and related taxes 23,414 111,664 Current portion of long-term debt and capital lease obligations 5,358,792 6,349,962 Other current liabilities 711,085 412,748 Total current liabilities 6,666,978 7,238,056 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - less current portion 16,060,557 20,859,964 Total liabilities 22,727,535 28,098,020 STOCKHOLDERS' EQUITY: Common Stock, $0.01 par value; authorized 10,000,000 shares; issued and outstanding 5,684,000 and 3,695,030, respectively 56,840 36,950 Cumulative Convertible Preferred Stock; $0.01 par value;authorized 994,600 shares; no shares issued and outstanding -- -- Additional paid-in capital (Note 5) 24,211,041 12,081,614 Retained earnings (accumulated deficit) ( 138,253) ( 719,021) Total stockholders' equity 24,129,628 11,399,543 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $46,857,163 $39,497,563 See Notes to Consolidated Financial Statements. SMT Health Services Inc. and Subsidiaries Consolidated Statements of Earnings (unaudited) Three Months Three Months Ended Ended March 31, 1997 March 31, 1996 REVENUES: Service revenue $ 6,239,307 $ 4,128,035 Interest income 102,068 53,166 Total revenues 6,341,375 4,181,201 COSTS AND EXPENSES: Operating expenses 1,985,299 1,365,973 Depreciation and amortization 1,559,792 989,174 Selling, general and administrative 941,871 682,266 Interest - third parties 568,473 457,307 Interest - related parties 34,172 -- Total costs and expenses 5,089,607 3,494,720 Income before income taxes and extraordinary item 1,251,768 686,481 Income taxes (Note 5) 490,000 229,000 Net income before extraordinary item 761,768 457,481 Extraordinary loss on early extinguishment of debt (net of income tax benefit of $115,000) (Note 10) 181,000 -- Net income $ 580,768 $ 457,481 Earnings Per Common Share: Earnings before extraordinary item $ .16 $ .13 Extraordinary loss per share (Note 10) ( .04) -- Net earnings per Common Share $ .12 $ .13 Weighted Average Shares outstanding (Note 2) 4,442,714 2,840,208 See Notes to Consolidated Financial Statements. SMT Health Services Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) Three Months Three Months Ended Ended March 31, 1997 March 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 580,768 $ 457,481 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt 296,000 -- Depreciation and amortization 1,559,792 989,174 Deferred income taxes 275,000 170,000 Changes in assets and liabilities: Accounts and notes receivable ( 246,747) ( 255,463) Other current assets 162,722 ( 43,083) Accounts payable and other 508,342 98,858 Accrued wages and related taxes ( 88,250) ( 49,575) NET CASH PROVIDED BY OPERATING ACTIVITIES 3,047,627 1,367,392 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment ( 117,859) ( 634,603) Construction of leasehold improvements -- ( 1,330) Payment for purchase of acquired entity -- ( 642,840) Net change in cash restricted for equipment financing purposes -- 330,000 Other ( 17,351) 107,978 NET CASH USED IN INVESTING ACTIVITIES ( 135,210) ( 840,795) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under long-term debt and capital leases: Third parties ( 1,400,110) ( 1,004,909) Related parties ( 61,340) -- Principal pay-off of capital leases ( 4,236,435) -- Extraordinary loss on early extinguishment of debt ( 296,000) -- Issuance of Common Stock from exercise of warrants and stock options 12,004,317 -- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,010,432 ( 1,004,909) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (unrestricted) 8,922,849 ( 478,312) CASH AND CASH EQUIVALENTS - (unrestricted) - Beginning of period 4,643,158 2,341,519 CASH AND CASH EQUIVALENTS - (unrestricted) - End of period $13,566,007 $1,863,207 See Notes to Consolidated Financial Statements. SMT Health Services Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity For The Three Month Period Ended March 31, 1997 (Unaudited) Retained Additional Earnings/ Total Common Stock Preferred Stock Paid-In (Accum. Stockholders' Shares Amount Shares Amount Capital Deficit) Equity BALANCES -December 31, 1996 3,695,030 $36,950 -- $ -- $12,081,614 ($719,021) $11,399,543 Exercise of Warrants and Stock Options (Note 8) 1,988,970 19,890 -- -- 11,984,427 -- 12,004,317 Tax Adjustment Resulting From Stock Option and Warrant Exercises (Note 5) -- -- -- -- 145,000 -- 145,000 Net Income -- -- -- -- -- 580,768 580,768 BALANCES -March 31, 1997 5,684,000 $56,840 -- $ -- $24,211,041 $ 138,253) $24,129,628 See Notes to Consolidated Financial Statements. SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 NOTE 1 - BASIS OF PRESENTATION SMT Health Services Inc. and its wholly owned subsidiaries (the "Company") are engaged primarily in providing medical diagnostic imaging services to hospitals, physicians and patients. The Company, through its subsidiaries, currently operates nineteen (including a new MRI unitacquired in April 1997) mobile Magnetic Resonance Imaging (MRI) Units ("MRI Units") in Pennsylvania, West Virginia, North Carolina, South Carolina, Virginia, Kentucky and Ohio. The Company's Common Stock currently trade on the National Association of Securities Dealers, Inc. Automated Quotations Systems (NASDAQ) National Market System under the symbol "SHED". The unaudited consolidated financial statements as of and for the three month periods ended March 31, 1997 and 1996 include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements included herein have been prepared by management in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with SEC informational requirements. The financial statements reflect normal recurring accounting adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim period. The results of operations for the three month period ended March 31, 1997 are not necessarily indicative of the results for the entire current fiscal year ending December 31, 1997. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended December 31, 1996 which is on file at the Securities and Exchange Commission. Certain amounts in the March 31, 1996 Statements of Earnings and Cash Flows have been reclassified to conform with the March 31, 1997 presentation. NOTE 2 - NET EARNINGS PER COMMON AND COMMON SHARE EQUIVALENT The net earnings per common and common share equivalent are calculated using the weighted average common and common share equivalents outstanding during the year, except where anti-dilutive. Common share equivalents include shares issuable upon the exercise of stock options, rights and warrants less the number of shares assumed purchased with the proceeds available from the assumed exercise of the options, rights and warrants. SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 2 - NET EARNINGS PER COMMON AND COMMON SHARE EQUIVALENT (Continued) The Treasury Stock Method of reflecting use of proceeds from options and warrants may not adequately reflect potential dilution if options and warrants to acquire a substantial number of Common Shares (greater than 20% of the number of Common Shares outstanding for the period for which the computation is being made) are outstanding. In such instances, the Modified Treasury Stock Method must be utilized. The Company's options and warrants to acquire Common Shares exceeded 20% of the number of Common Shares outstanding for the three months ended March 31, 1997 and 1996 and accordingly, the Treasury Stock Method has been modified in determining the dilutive effect of the options and warrants on earnings per share data for those periods. Fully diluted earnings per common share are anti-dilutive and, accordingly, are not presented. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This Statement is effective for financial statements issued for periods ending after December 15, 1997 including "interim" periods and earlier application is not permitted. In summary, the Statement simplifies the standards for computing earnings per share primarily found in APB Opinion No. 15, Earnings Per Share and makes them comparable to international standards. The standard replaces the presentation of Primary Earnings Per Share with a presentation of Basic Earnings Per Share. It also requires dual presentation of basic and diluted earnings per share on the income statement of all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to Common Stockholders by the weighted average number of Common Shares outstanding for the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 2 - NET EARNINGS PER COMMON AND COMMON SHARE EQUIVALENT (Continued) Had the Company been permitted to adopt the Statement as of January 1, 1997, the first quarter pro forma Basic and Diluted EPS would have been: Three Months Three Months Ended Ended March 31, 1997 March 31, 1996 Basic: Earnings before extraordinary item $ .17 $ .16 Extraordinary loss per share ( .04) -- Net Basic Earnings per share $ .13 $ .16 Diluted: Earnings before extraordinary item $ .16 $ .13 Extraordinary loss per share ( .04) -- Net Diluted Earnings per share $ .12 $ .13 Weighted Average Shares Outstanding 4,442,714 2,840,208 NOTE 3 - CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The Company is engaged primarily in providing mobile MRI services to small-to - -medium-sized hospitals in Pennsylvania, West Virginia, North Carolina, South Carolina, Virginia, Kentucky and Ohio. 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. Certain Significant Estimates: The Company operates mobile MRI Units which are capital intensive and subject to changes in technology. The Company primarily leases or finances such equipment over a 60 month period and depreciates the equipment over the respective finance period to an estimated residual value which typically approximates 20% of the original cost of the equipment. The useful lives and residual values estimated by management are considered significant estimates. Management does not currently anticipate significant technological advances which could significantly affect its estimates. SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 3 - CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES (Continued) The Company is not dependent on any one customer or geographic region as a source of its revenues. However, the Company utilizes the services of Hospital Shared Services to process approximately 29% of its billings and collections. NOTE 4 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following: March 31, December 31, 1997 1996 Capital lease and loan obligations $21,419,349 $27,209,926 Less current portion 5,358,792 6,349,962 $16,060,557 $20,859,964 The total cost and accumulated amortization of property securing capital lease and loan obligations at March 31, 1997 were approximately $29,574,000 and $6,279,000, respectively. Interest rates related to such long-term debt and capital leases range from approximately 8.0% to 10.5%. During March 1997, the Company paid-off the remaining principal balance of three capital lease obligations totaling $4,236,000. The interest rates under these capital leases ranged from 10.6% to 13.5% and the monthly cashflow savings approximates $128,000 (Note 10). The long-term debt and capital lease obligations balance includes approximately $786,000 of capital lease obligations due to third parties related to the equipment at the Auburn Regional Center for Cancer Care and Airport Regional Imaging Center, which the Company had treated as discontinued operations and sold in October 1994 and June 1995, respectively. Accordingly, the Company has recorded an offsetting receivable for the lease receivables due from the purchasers of the centers. Such lease receivables are secured by the equipment and accounts receivable of the centers. SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 5 - INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109). Deferred income taxes are provided to account for temporary differences between financial statement accounting and income tax reporting and relate principally to differences in reporting for diagnostic medical equipment, depreciation, accrued expenses and net operating loss carryforwards. As a result of the exercise of stock options and warrants pursuant to the Company's 1991 Employee Stock Option Plan and the 1995 Director Warrant Plan, respectively, during the first quarter of 1997, the Company is entitled to a tax deduction of approximately $582,000. The deduction relates to the difference between the option exercise price and the fair market value of the Common Stock at the time of such exercises. In accordance with SFAS 109, the Company recorded a deferred tax asset of approximately $145,000 related to this deduction and in accordance with Accounting Principles Board Opinion 25 (APB 25) a corresponding credit was made to additional paid-in capital. Management believes no deferred tax asset valuation allowance is necessary as of March 31, 1997. At March 31, 1997, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $5.9 million and $7.1 million, respectively, which are available to offset future federal and state taxable income through 2010 and 1999, respectively. NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION The total amount of interest payments during the three months ended March 31, 1997 and 1996 were approximately $640,000 and $471,000, respectively. In addition, income tax payments for the three month periods ended March 31, 1997 and 1996 were approximately $8,800 and $56,000, respectively. NOTE 7 - ACQUISITION On March 21, 1996, the Company purchased certain assets of a mobile provider which operated mobile units in the state of North Carolina (the "Seller"). The purchase price approximated $600,000 in cash [net of negotiated trade-in value of approximately $500,000 (which approximated the purchase price of the units acquired) for two of the Seller's mobile MRI units] in exchange for MRI Programs including Certificate of Need licenses or exemptions and certain customer service contracts. The Company traded-in and upgraded one of the purchased units to newer technology in April 1996 and traded-in and upgraded the second unit during July 1996. SMT HEALTH SERVICES INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 1997 NOTE 8 - STOCK OPTIONS AND WARRANTS During the first quarter of 1997, stock options and Warrants covering 20,000 and 80,250 shares of Common Stock, respectively, were exercised pursuant to the Company's 1991 Employee Stock Option Plan and the 1995 Director Warrant Plan. The Company received approximately $46,000 and $291,000 as a result of such stock option and Warrant exercises, respectively. At March 31, 1997 options to purchase 619,432 shares and Warrants to purchase 454,750 shares were exercisable pursuant to the employee stock option plans and director warrant plan, respectively. During January through March 4, 1997 (the publicly traded Warrants expired at 5:00 p.m. on March 4, 1997) 1,677,000 Warrants were exercised and the Company issued 1,882,000 shares of Common Stock of the Company. The Company received net cash proceeds of approximately $11.7 million as a result of such Warrant exercises. The Warrants ceased trading on March 5, 1997. NOTE 9 - COMMON STOCK DIVIDEND On January 14, 1997, the Company issued 247,130 Common Shares in accordance with a 7% Common Stock dividend for all shareholders of record on January 10, 1997. The December 31, 1996 financial statements have been adjusted to reflect this post balance sheet equity activity. Further, in accordance with APB 15, the Company has reflected the 7% Common Stock dividend in calculating earnings per share for both periods presented. NOTE 10 - EXTINGUISHMENT OF DEBT During March 1997 the Company paid-off the remaining principal balance of three capital lease obligations totaling $4,236,000. The total amount paid to extinguish the capital leases totaled $4,532,000. The difference between the amount paid to extinguish the capital leases and the net carrying amount of the debt totaled $296,000, relating primarily to pre-payment penalties, and has been recorded as an extraordinary loss, net of income taxes, in accordance with Accounting Principles Board Opinion No. 26 Early Extinguishment of Debt (APB 26). The interest rates under the capital leases ranged from 10.6% to 13.5%. The monthly cashflow savings approximates $128,000 and the interest expense savings for 1997 approximates $400,000 before income taxes. SMT HEALTH SERVICES INC. AND SUBSIDIARIES MARCH 31, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Any statements released by the Company that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties which may affect the Company's business and prospects, including economic, competitive, governmental, technological and other factors discussed in the Company's filings with the Securities and Exchange Commission. The discussion that follows should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes thereto of SMT Health Services Inc. and Subsidiaries. Results of Operations The following table sets forth for the periods indicated the percentages which the items in the Statement of Earnings bear to revenues and the dollar increase (decrease) of such items as compared to the corresponding period in the prior year. Percentage of Revenue Increase (Decrease) Prior Year Three Three Months Ended Months Ended 3/31/97 3/31/96 3/31/97 Revenues 100% 100% $2,160,000 Cost & Expenses: Operating 31% 33% 619,000 Depreciation & Amortization 24% 24% 571,000 S, G & A 15% 16% 260,000 Interest 10% 11% 145,000 Total Costs and Expenses 80% 84% 1,595,000 Income Before Income Taxes and Extraordinary Item 20% 16% 565,000 Income Taxes 8% 5% 261,000 Net Income Before Extraordinary Item 12% 11% 304,000 Extraordinary Loss on Early Extinguishment of Debt 3% -- 181,000 Net Income 9% 11% $123,000 SMT HEALTH SERVICES INC. AND SUBSIDIARIES MARCH 31, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (continued) Three Months Ended March 31, 1997 Compared To The Three Months Ended March 31, 1996 Revenues for the first quarter of 1997 increased $2,160,000, or 52%, to $6,341,000 compared to $4,181,000 for the first quarter of 1996. The increase in revenue is principally due to three new units placed into service during the latter part of the 1996 first quarter as well as four additional units subsequently placed into service during 1996. In addition, the upgrade of three units to newer technology during 1996 and increased utilization of the Company's mobile MRI units also contributed to the increased revenue. Revenues derived from hospitals which the Company serviced in both comparable periods increased approximately 22% during the first quarter of 1997 compared to the first quarter of 1996 primarily as a result of increased MRI procedures. The Company operated an average of approximately 18 units during the first quarter of 1997 compared to approximately 12 units during the 1996 first quarter. During the first quarter of 1997, the Company performed 15,137 MRI scans representing an increase of 5,645, or 59%, over the 9,492 MRI scans during the first quarter of 1996. Average scans per day per unit increased .6 to 11.6 scans per day during the first quarter 1997 compared to 11.0 during the first quarter 1996. The average fee per scan approximated $398 for the first quarter of 1997 versus $420 for the first quarter of 1996. The $22, or 5%, decrease in average fee per scan primarily related to discounted fees provided to customers based upon higher scan volumes. Operating expenses increased $619,000, or 45%, to $1,985,000 during the first quarter of 1997 compared to $1,366,000 during the first quarter of 1996. Approximately $542,000, or 88%, of the increase is due to operating expenses associated with the three new units purchased between February and March of the 1996 first quarter as well as the four additional units subsequently purchased during 1996. The remaining increase of $77,000, or 12%, is primarily due to higher payroll costs for operational personnel slightly offset by lower maintenance contract and employee benefits expense. Operating expenses per scan decreased $13, or 9%, to approximately $131 compared to $144 per scan during the first quarter of 1996 primarily due to higher scan volumes. Depreciation and amortization expenses increased $571,000, or 58%, in the first quarter of 1997 to $1,560,000 from $989,000 during the first quarter of 1996. This increase was primarily due to depreciation expense associated with the three new units purchased between February and March of the 1996 first quarter, the four additional units subsequently purchased during 1996 as well as the upgrade of three units to newer technology during 1996. Selling, general and administrative costs in the first quarter of 1997 increased $260,000 to $942,000, or 15% of revenues, compared to $682,000, or 16% of revenues during the first quarter of 1996. The increase is primarily due to an approximate $139,000 increase in executive compensation and costs related to the Company's management bonus plan. The remaining increase is primarily due to higher marketing and advertising related to the Company's Joint Commission accreditation and stock promotion costs. SMT HEALTH SERVICES INC. AND SUBSIDIARIES MARCH 31, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (continued) Three Months Ended March 31, 1997 Compared To The Three Months Ended March 31, 1996 (Continued) Interest expense for the first quarter of 1997 increased $145,000 to $602,000 from $457,000 in the first quarter of 1996, primarily as a result of the three new units purchased between February and March of the 1996 first quarter, the four additional units subsequently purchased during 1996 as well as the upgrade of three units to newer technology during 1996. However, interest expense decreased as a percentage of revenue to 10% in the first quarter of 1997 compared to 11% of revenue in the first quarter of 1996. This decrease as a percentage of revenue is primarily due to higher down payments on new and upgraded mobile MRI units as well as more favorable lease terms obtained on unit financings and refinancings during 1996. The Company reported net income before an extraordinary loss of $762,000, or $.16 per share, during the first quarter of 1997 versus $458,000, or $.13 per share during the first quarter of 1996. Income tax expense for the first quarter of 1997 was $490,000, an effective tax rate of approximately 39%, as compared to income tax expense of $229,000, an effective tax rate of approximately 33%, for the first quarter of 1996. The increase in income tax expense reflects the significant increase in profitability of the Company during the first quarter of 1997. The Company reported an extraordinary loss on early extinguishment of debt (see Note 10 to the Company's Unaudited Consolidated Financial Statements included in Item 1 and incorporated herein by reference) of $181,000, or $.04 per share, net of an income tax benefit of $115,000, primarily as a result of pre-payment penalties related to the debt pay-off. During the three months ended March 31, 1997, the Company's cash provided by operations was $3,048,000 as compared to $1,367,000 during the three months ended March 31, 1996. This increase of $1,681,000 is primarily due to approximately $991,000 of increased income before depreciation and amortization and an extraordinary loss on financing activities, $105,000 increase in deferred income tax expense, increased accounts payable and other current liabilities of $409,000, and a $205,000 decrease in other assets primarily due to the collection of a sales tax refund in January 1997. The Company used cash in investing activities during the three months ended March 31, 1997 of $135,000, primarily related to the purchase of various types of equipment. SMT HEALTH SERVICES INC. AND SUBSIDIARIES MARCH 31, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (continued) LIQUIDITY AND CAPITAL RESOURCES The Company obtained cash from financing activities during the three months ended March 31, 1997 of approximately $6,010,000 primarily related to the $12,004,000 received upon the exercise of warrants and stock options during the first quarter of 1997, including the conversion of 1,677,000 publicly traded warrants which resulted in the issuance of 1,882,000 shares of Common Stock and proceeds of approximately $11,700,000 (see Note 8 to the Company's Unaudited Consolidated Financial Statements included in Item 1 and incorporated herein by reference). This increase was offset by $1,461,000 of principal payments under long-term debt and capital leases as well as the principal pay-off of three capital leases totaling $4,532,000. The interest rates under these capital leases ranged from 10.6% to 13.5% and will result in monthly cashflow savings of approximately $128,000 (see Note 10 to the Company's Unaudited Consolidated Financial Statements included in Item 1 and incorporated herein by reference). The Company experienced a net increase in unrestricted cash and cash equivalents of approximately $8,923,000 during the three months ended March 31, 1997 and maintained an unrestricted cash balance at March 31, 1997 of approximately $13,566,000. The Company also maintained a restricted cash balance of $400,000 at March 31, 1997. The Company's trade accounts receivable balance increased by $259,000 to $1,986,000 at March 31, 1997, primarily due to higher service revenues during the quarter ended March 31, 1997. In the experience of the Company, average accounts receivable collections typically do not exceed 40 days, as there are no billings subject to traditional third-party payors, and the accounts receivable balance turned over approximately three times during the three months ended March 31, 1997. Approximately 29% of the Company's billings and collections are processed through Hospital Shared Services ("HSS"), a representative of certain hospitals. As a fee for these services, HSS retains approximately 2.5% of gross billings to these hospitals and the Company records the service revenues and related receivables net of such fees. At March 31, 1997, the Company had working capital of $10,134,000. In addition, the Company's cash flow from operations totaled $3,048,000 for the three months ended March 31, 1997 and the Company continues to generate a positive cash flow. The Company has been able to meet all past debt service obligations, currently is able to meet all such obligations, and anticipates it will continue to meet such obligations. As in the past, management anticipates that such obligations will be funded by the revenues generated by the Mobile Units. To date, the Company has financed its equipment acquisitions and working capital requirements with loans and leases, from internal cash flow and capital contributions. As of March 31, 1997, the Company was a party to leases and loans covering all but three of its mobile MRI units. The aggregate outstanding principal balance of all such leases and loans was approximately $21,419,000 at March 31, 1997. SMT HEALTH SERVICES INC. AND SUBSIDIARIES MARCH 31, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) The Company has outstanding a letter-of-credit totaling $400,000 related to equipment financing at a freestanding diagnostic imaging center which it sold in June 1995 and on which it remains obligated (see Note 4 of the Company's Unaudited Consolidated Financial Statements included in Item 1, which is incorporated herein by reference). During the three months ended March 31, 1997, the Company signed long-term contracts with 6 new customers and extended for an additional two to three years 2 existing customer contracts. As of March 31, 1997, the Company serviced approximately 81 total customers. At March 31, 1997, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $5.9 million and $7.1 million, respectively, which are available to offset future federal and state taxable income through 2010 and 1999, respectively (See Note 5 of the Company's Unaudited Consolidated Financial Statements included in Item 1 and incorporated herein by reference). On January 14, 1997, the Company paid a 7% Common Stock dividend to all shareholders of record on January 10, 1997 (See Note 9 of the Company's Unaudited Consolidated Financial Statements included in Item 1 and incorporated herein by reference). The Company received Accreditation with Commendation from the Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO") in January 1997. During January through March 4, 1997, approximately 1,677,000 Warrants were exercised and the Company issued approximately 1,882,000 shares of its Common Stock. The Company received net cash proceeds of approximately $11.7 million as a result of such Warrant exercises (See Note 8 of the Company's Unaudited Consolidated Financial Statements included in Item 1, which is incorporated herein by reference). On April 12, 1997 the Company took delivery of and began operation of a new 1.0 Tesla mobile MRI unit. This unit cost approximately $1.9 million and the Company financed approximately $1.5 million over a 60 month period requiring monthly payments of approximately $30,000. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This Statement is effective for financial statements issued for periods ending after December 15, 1997 including "interim" periods and earlier application is not permitted. In summary, the Statement simplifies the standards for computing earnings per share primarily found in APB Opinion No. 15, Earnings Per Share and makes them comparable to international standards. The standard replaces the presentation of Primary Earnings Per Share with a presentation of Basic Earnings SMT HEALTH SERVICES INC. AND SUBSIDIARIES MARCH 31, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) Per Share. It also requires dual presentation of basic and diluted earnings per share on the income statement of all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to Common Stockholders by the weighted average number of Common Shares outstanding for the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. Had the Company been permitted to adopt the Statement as of January 1, 1997, the first quarter pro forma Basic and Diluted EPS would have been: Three Months Three Months Ended Ended March 31, 1997 March 31, 1996 Basic: Earnings before extraordinary item $ .17 $ .16 Extraordinary loss per share ( .04) -- Net Basic Earnings per share $ .13 $ .16 Diluted: Earnings before extraordinary item $ .16 $ .13 Extraordinary loss per share ( .04) -- Net Diluted Earnings per share $ .12 $ .13 Weighted Average Shares Outstanding 4,442,714 2,840,208 Management believes that the healthcare industry continues to be in a period of consolidation characterized by mergers, joint ventures, acquisitions, sales of all or part of healthcare companies or their assets, and other partnering and investment transactions of various structures and sizes involving healthcare companies. The Company continues to evaluate new opportunities that allow for the expansion of its business through the acquisition of additional Mobile Units in geographic proximity to its existing regional markets or in locations that can serve as a basis for new market areas. The Company, like other healthcare companies, has participated from time to time and is participating in preliminary discussions with third parties regarding a variety of potential transactions, and the Company has considered and expects to continue to consider and explore potential transactions of various types with other healthcare companies. However, no assurances can be given as to whether any such transactions may be consummated or, if so, when. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 11.01 Earnings Per Share Computation .Filed herewith. 27.01 Financial Data Schedule . .Filed herewith. 99.01 Press release dated March 17, 1997. .Filed herewith. 99.02 Press release dated April 23, 1997. .Filed herewith. (b) Report on Form 8-K. During the quarter ended March 31, 1997, the Company filed one report on Form 8-K for the press release dated February 5, 1997 regarding the 1996 earnings. 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 understanding thereunto duly authorized. SMT Health Services Inc. (Registrant) Date: May 12, 1997 By: /s/ Jeff D. Bergman Jeff D. Bergman Chairman and Chief Executive Officer Date: May 7, 1997 By: /s/ David A. Zynn David A. Zynn Chief Financial Officer, Treasurer and Principal Accounting Officer EXHIBIT INDEX Exhibit No. Reference 11.01 Earnings Per Share Computation Filed herewith. 27.01 Financial Data Schedule Filed herewith. 99.01 Press release dated March 17, 1997 Filed herewith. 99.02 Press release dated April 23, 1997 Filed herewith. 11.01 SMT EPS Calculation-Modified Treasury Stock Method Year Ended December 31, 1997 (First Quarter 3/31/97) (Before Extraordinary Item) Exercise Assumed Tax Total Assumptions Shares Price Proceeds Benefit Proceeds Net income before extraordinary item $761,768 Common Shares Outstanding 4,442,714 20% of Common Shares Outstanding 888,543 Common Stock Equivalent (Aggregate): Warrants-IPO 0 $7.00 $0 Effect of 5% Dividend 0 Options- employees 1993 Grant 129,764 $3.10 $402,268 $274,165 1994 Grant 54 $1.27 $69 $152 1995 Grant 19,323 $2.29 $44,250 $46,773 1995 Grant- #2 160,500 $3.54 $568,170 $312,269 1996 Grant 42,479 $4.19 $177,987 $72,155 1996 Grant #2 267,500 $6.40 $1,712,000 $229,729 1997 Grant 0 $10.00 $0 $0 Options- Directors: 1992 Grant 2,247 $2.99 $6,719 $4,841 1993 Grant 2,247 $1.66 $3,730 $5,977 1994 Grant 2,247 $2.05 $4,606 $5,644 1995 Grant 2,247 $4.07 $9,145 $3,919 1996 Grant 6,741 $6.21 $41,862 $6,276 Warrants-Directors All 425,000 $3.88 $1,649,000 $771,970 7% Dividend 29,750 $0.00 $0 Warrants- Commonwealth 0 $4.47 $0 Underwriter options 0 $5.94 $0 Underwriter Warrants (Unit) 0 $7.00 $0 5% dividend on Warrants 0 Total CSE Aggregate 1,090,099 4,619,805 1,733,870 $6,353,676 Average and Quarter End Market Value: Average Closing Bid $8.66 Quarter End Closing Bid $8.50 Computation: Primary Fully Diluted Total Proceeds $6,353,676 $6,353,676 Application of assumed proceeds: Toward repurchase of o/s shares $6,353,676 $6,353,676 Toward Paydown of debt $0 $0 $6,353,676 $6,353,676 Adjustment to Net Income: Net income $761,768 $761,768 Interest expense reduction: Debt paydown * avg. int rate * tax effec $0 $0 Adjusted Net Income $761,768 $761,768 Adjustments to Shares Outstanding: Actual shares o/s 4,442,714 4,442,714 Net additional shares 356,418 342,608 Adjusted shares o/s 4,799,132 4,785,322 Earnings Per Share before extraordinary item: Before adjustment $0.17 $0.17 After adjustment $0.159 $0.16 SMT EPS Calculation-Modified Treasury Stock Method Year Ended December 31, 1997 (First Quarter 3/31/97) (After Extraordinary Item) Exercise Assumed Tax Total Assumptions Shares Price Proceeds Benefit Proceeds Net income after Extraordinary item $580,768 Common Shares Outstanding 4,442,714 20% of Common Shares Outstanding 888,543 Common Stock Equivalent (Aggregate): Warrants-IPO 0 $7.00 $0 Effect of 5% Dividend 0 Options- employees 1993 Grant 129,764 $3.10 $402,268 $274,165 1994 Grant 54 $1.27 $69 $152 1995 Grant 19,323 $2.29 $44,250 $46,773 1995 Grant- #2 160,500 $3.54 $568,170 $312,269 1996 Grant 42,479 $4.19 $177,987 $72,155 1996 Grant #2 267,500 $6.40 $1,712,000 $229,729 1997 Grant 0 $10.00 $0 $0 Options- Directors: 1992 Grant 2,247 $2.99 $6,719 $4,841 1993 Grant 2,247 $1.66 $3,730 $5,977 1994 Grant 2,247 $2.05 $4,606 $5,644 1995 Grant 2,247 $4.07 $9,145 $3,919 1996 Grant 6,741 $6.21 $41,862 $6,276 Warrants-Directors All 425,000 $3.88 $1,649,000 $771,970 7% Dividend 29,750 $0.00 $0 Warrants- Commonwealth 0 $4.47 $0 Underwriter options 0 $5.94 $0 Underwriter Warrants (Unit) 0 $7.00 $0 5% dividend on Warrants 0 Total CSE Aggregate 1,090,099 4,619,805 1,733,870 $6,353,676 Average and Quarter End Market Value: Average Closing Bid $8.66 Quarter End Closing Bid $8.50 Computation: Primary FullyDiluted Total Proceeds $6,353,676 $6,353,676 Application of assumed proceeds: Toward repurchase of o/s shares $6,353,676 $6,353,676 Toward Paydown of debt $0 $0 $6,353,676 $6,353,676 Adjustment to Net Income: Net income $580,768 $580,768 Interest expense reduction: Debt paydown * avg. int rate * tax effec $0 $0 Adjusted Net Income $580,768 $580,768 Adjustments to Shares Outstanding: Actual shares o/s 4,442,714 4,442,714 Net additional shares 356,418 342,608 Adjusted shares o/s 4,799,132 4,785,322 Earnings Per Share after extraordinary item: Before adjustment $0.13 $0.13 After adjustment $0.121 $0.12 99.01 Contact: David Zynn, CFO James K. White, Managing Director SMT Health Services Inc. Kehoe, White, Savage & Company, Inc. (412) 933-3300 (310) 437-0655 http://www.smthealth.com SMT HEALTH SERVICES INC. ANNOUNCES 99.5% WARRANT CONVERSION Pittsburgh, PA, March 17, 1997 -- SMT Health Services Inc. (NASDAQ/NMS: SHED) today announced that 1,677,000, or 99.5%, of the publicly- traded warrants (SHEDW) were converted to Common Stock on or before March 4, 1997, the Warrant expiration date. As a result of the Warrant conversions, the Company issued 1,882,000 shares of Common Stock and received proceeds of approximately $11.7 million. The Company's total Common Shares outstanding as of the date of this announcement totaled approximately 5,685,000 and the Company maintained a total cash balance of approximately $18.0 million. SMT Health Services Inc., through its current fleet of eighteen mobile MRI units, provides diagnostic imaging services to healthcare providers in Pennsylvania, West Virginia, North Carolina, South Carolina, Virginia, Ohio and Kentucky. 99.02 Contact: David Zynn, CFO James K. White, Managing Director SMT Health Services Inc. Kehoe, White, Savage & Company, Inc. (412) 933-3300 (310) 437-0655 http://www.smthealth.com SMT HEALTH SERVICES INC. REPORTS FIRST QUARTER NET INCOME BEFORE AN EXTRAORDINARY ITEM INCREASES 67%; REVENUES RISE 52%; REVENUES DERIVED FROM EXISTING CUSTOMERS INCREASES 22% Pittsburgh, PA, April 23, 1997 -- SMT Health Services Inc. (NASDAQ/NMS: SHED) today reported that net income for the quarter ended March 31, 1997, before an extraordinary loss on extinguishment of debt, increased 67% to $762,000, or $.16 per share, from $457,000, or $.13 per share, for the first quarter of 1996. Revenues for the first quarter of 1997 increased $2,160,000, or 52%, to $6,341,000 from $4,181,000 for the first quarter of 1996. The Company attributed the income and revenue gain to increased revenues from six new mobile units placed into service during 1996 as well as a 22% increase in revenues derived from hospitals which the Company serviced during both comparable quarters. Earnings gains were partially offset by a higher effective tax rate of approximately 39% in the first quarter of 1997 versus approximately 33% during the first quarter of 1996. On March 17, 1997, the Company announced the conversion of 99.5% of its publicly traded warrants which raised approximately $11.7 million. As a result of the warrant conversion, at March 31, 1997 the Company had 5,684,000 shares of Common Stock outstanding. The Company utilized approximately $4.5 million of the proceeds to pay off three MRI unit leases with interest rates ranging from 10.6% to 13.5%. The Company reported an extraordinary loss, net of income tax benefit, of $181,000, or $.04 per share, related to the early extinguishment of such leases. At March 31, 1997 the Company's cash balance totaled $13,966,000 and its long term debt and capital lease obligations totaled $21,420,000, reflecting the pay off of the three leases. The Company also reported that it took delivery and began operation on April 12, 1997 of a previously announced mobile MRI unit servicing hospital clients in the North Carolina and South Carolina regions. SMT Health Services Inc., through its current fleet of nineteen mobile MRI units, provides diagnostic imaging services to healthcare providers in Pennsylvania, West Virginia, North Carolina, South Carolina, Virginia, Ohio and Kentucky. (table follows) SMT HEALTH SERVICES INC. AND SUBSIDIARIES CONSOLIDATED SUMMARY OF OPERATIONS For The Three Months Ended March 31, 1997 1996 Total Revenues $6,341,000 $4,181,000 Operating Expenses 1,985,000 1,366,000 Depreciation and Amortization 1,560,000 989,000 Selling, General and Administrative 942,000 683,000 Interest Expense 602,000 457,000 Total Costs and Expenses 5,089,000 3,495,000 Income Before Income Taxes and Extraordinary Item 1,252,000 686,000 Income Taxes 490,000 229,000 Net Income Before Extraordinary Item 762,000 457,000 Extraordinary Loss On Early Extinguishment of Debt Net of Income Tax Benefit of $115,000 181,000 -- Net Income $ 581,000 $ 457,000 Earnings Per Common Share: Earnings Before Extraordinary Items $ .16 $ .13 Extraordinary Loss Per Share ( .04) -- Net Earnings Per Common Share $ .12 $ .13 Average Number of Shares Outstanding 4,442,714 2,654,400 # # # # # #