UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED : SEPTEMBER 30, 1996
------------------
COMMISSION FILE NUMBER: 0-16334
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ALLIANCE IMAGING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0239910
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3111 NORTH TUSTIN AVENUE
SUITE 150
ORANGE, CA 92865
(Address of principal executive office)
(714) 921-5656
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 October 31, 1996:
Common Stock, $.01 par value, 10,867,388.
1
ALLIANCE IMAGING, INC.
FORM 10-Q
September 30, 1996
Index
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements:
Condensed Consolidated Balance Sheets - 3
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Income 4
Three and nine months ended September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows 5
Nine months ended September 30, 1996 and 1995
Note to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis 8
of Financial Condition and Results of
Operations
PART II - OTHER INFORMATION 14
SIGNATURES 20
2
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 11,677,000 $ 11,128,000
Accounts receivable, net of allowance
for doubtful accounts 8,111,000 5,583,000
Prepaid expenses 953,000 369,000
Other receivables 49,000 109,000
------------- ---------------
Total current assets 20,790,000 17,189,000
Equipment, at cost 119,233,000 112,014,000
Less--Accumulated depreciation (46,543,000) (52,368,000)
------------- ---------------
72,690,000 59,646,000
Goodwill 28,511,000 23,971,000
Deferred charges 371,000 361,000
Deposits and other assets 3,466,000 2,160,000
------------- ---------------
Total assets $125,828,000 $ 103,327,000
------------- ---------------
------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,418,000 $ 692,000
Accrued compensation and related expenses 3,193,000 2,310,000
Other accrued liabilities 6,750,000 5,025,000
Current portion of long-term debt 13,842,000 9,948,000
------------- ---------------
Total current liabilities 26,203,000 17,975,000
Long-term debt, net of current portion 74,756,000 65,932,000
Other liabilities 1,035,000 596,000
Deferred income taxes 790,000 790,000
------------- ---------------
Total liabilities 102,784,000 85,293,000
Redeemable preferred stock 16,197,000 16,430,000
Convertible preferred stock 396,000 --
Common stock 120,000 108,000
Additional paid-in capital 32,398,000 31,908,000
Accumulated deficit (26,067,000) (30,412,000)
------------- ---------------
Total liabilities and stockholders' equity $125,828,000 $103,327,000
------------- ---------------
------------- ---------------
See Note to Condensed Consolidated Financial Statements
3
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ----------- -----------
Revenues $17,795,000 $15,058,000 $49,097,000 $44,305,000
Costs and expenses:
Operating expenses, excluding depreciation 8,530,000 7,121,000 23,549,000 21,438,000
Depreciation expense 3,122,000 3,074,000 9,170,000 9,090,000
Selling, general and administrative expenses 1,719,000 1,549,000 4,879,000 4,688,000
Amortization expense, primarily goodwill 564,000 340,000 1,309,000 1,003,000
Interest expense, net of interest income 1,501,000 1,273,000 4,184,000 3,876,000
------------ ------------ ------------ -----------
Total costs and expenses 15,436,000 13,357,000 43,091,000 40,095,000
------------ ------------ ------------ -----------
Income before income taxes 2,359,000 1,701,000 6,006,000 4,210,000
Provision for income taxes 410,000 254,000 955,000 630,000
------------ ------------ ------------ -----------
Net income 1,949,000 1,447,000 5,051,000 3,580,000
Preferred stock dividends 238,000 232,000 706,000 698,000
------------ ------------ ------------ -----------
Income applicable to common stock $ 1,711,000 $ 1,215,000 $ 4,345,000 $ 2,882,000
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Net income per common share $ 0.15 $ 0.11 $ 0.38 $ 0.26
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Weigted average common and common
equivalent shares outstanding 11,558,000 11,267,000 11,463,000 11,112,000
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
See Note to Condensed Consolidated Financial Statements
4
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1996 1995
-------------- ------------
OPERATING ACTIVITIES:
Net income $ 5,051,000 $3,580,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,479,000 10,093,000
Amortization of deferred financing charges 325,000 60,000
Distributions in excess of (undistributed) equity
in income of investee (74,000) (241,000)
Gain on disposal of equipment -- (195,000)
Changes in operating assets and liabilities:
Accounts receivable, net (1,696,000) 553,000
Prepaid expenses (566,000) (278,000)
Other receivables 247,000 (77,000)
Other assets (31,000) (101,000)
Other liabilities 1,117,000 (31,000)
Accounts payable, accrued compensation and
other accrued liabilities 2,496,000 1,064,000
-------------- -----------
Net cash provided by operating activities 17,348,000 14,427,000
INVESTING ACTIVITIES:
Purchase of contracts and related assets of
Advanced Healthcare Diagnostic Service, Inc. -- (412,000)
Purchase of contracts and related assets of
Mobile M.R. Venture, Ltd. (455,000) --
Purchase of common stock of Royal Medical Health
Services, Inc., net of cash acquired (1,844,000) --
Purchase of common stock of Sun MRI Services, Inc.
net of cash acquired (269,000) --
Purchase of contracts and related assets of
West Coast Mobile Imaging (90,000) --
Equipment purchases (20,504,000) (7,308,000)
Decrease in deposits on equipment 1,297,000 514,000
Proceeds from disposal of equipment -- 1,997,000
-------------- -----------
Net cash used in investing activities (21,865,000) (5,209,000)
5
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
FINANCING ACTIVITIES:
Principal payments on long-term debt (9,567,000) (6,098,000)
Proceeds from long-term debt 15,618,000 7,718,000
Payment of preferred stock dividend (930,000) --
Proceeds from exercise of employee stock options 21,000 55,000
Increase in deferred financing charges (76,000) --
------------- ----------
Net cash provided by (used in) financing activities 5,066,000 (1,018,000)
------------- ----------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS 549,000 8,200,000
CASH AND SHORT-TERM INVESTMENTS,
BEGINNING OF PERIOD 11,128,000 2,478,000
------------- ----------
CASH AND SHORT-TERM INVESTMENTS, END
OF PERIOD $11,677,000 $10,678,000
------------- ----------
------------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 4,176,000 $ 4,193,000
Income taxes paid 307,000 341,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
During the 1996 second quarter, the Company purchased all of the common stock
of Royal Medical Health Services, Inc. for cash consideration of
approximately $1,914,000. In conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $ 8,601,000
Cash paid for common stock (1,914,000)
-----------
Liabilities assumed $ 6,687,000
-----------
-----------
As additional consideration for the above purchase, the Company issued
convertible preferred stock in the amount of $388,000 and common stock warrants
valued at $212,000. As a result of this transaction, the Company recorded
goodwill of approximately $3,945,000.
During the 1996 third quarter, the Company purchased all of the common stock of
Sun MRI Services, Inc. for cash consideration of approximately $391,000. In
connection with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 1,602,000
Cash paid for common stock (391,000)
-----------
Liabilities assumed $ 1,211,000
-----------
-----------
See Note to Condensed Consolidated Financial Statements
6
Alliance Imaging, Inc.
Note to Condensed Consolidated
Financial Statements
September 30, 1996
(Unaudited)
BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Alliance Imaging, Inc. (the Company) in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X of
the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1995.
The earnings per common share calculations for the nine month periods
ended September 30, 1996 and 1995 are based upon average common and common
equivalent shares outstanding during the periods, and reflect preferred
dividend requirements totaling $706,000 and $698,000, respectively. Common
equivalent shares include vested stock options and warrants with an exercise
price lower than current market value.
The provisions for income taxes for the nine month periods ended
September 30, 1996 and 1995 are less than the statutory federal rate due to
utilization of certain net operating loss carryforwards during the periods.
7
Alliance Imaging, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company's financial performance depends substantially upon the
scan volume of its magnetic resonance imaging (MRI) systems. Revenues are
generally derived from one to eight year contracts with health care
providers. Since a majority of the Company's expenses are fixed, increased
revenues as a result of higher scan volumes significantly improve the
Company's profitability. Conversely, lower scan volumes result in lower
profitability.
Among other things, the Company is subject to the risk that customers
will cease using the Company's MRI services upon expiration of contracts to
purchase or lease their own MRI systems. In the past, when this has
occurred, the Company has generally been able to obtain replacement
customers. However, it is not always possible to immediately obtain
replacement customers, and some replacement customers have been smaller
facilities and have had lower scan volumes.
The health care industry is highly regulated and very competitive.
The current health care environment is characterized by increasing cost
containment pressures which management believes have resulted in decreasing
revenues per scan. Although scan prices have begun to stabilize, the Company
expects pricing levels to continue to decline moderately in the immediate
future. However, in many cases higher scan volumes associated with new
customer contracts justify lower scan prices and such contracts do not
adversely impact the Company's revenues and profitability. Although the
Company has experienced increased scan volumes in 1995 and 1996, it has also
had periods of declining volumes in prior years, and there can be no
assurance that the recent positive trends will continue.
The Company has implemented numerous cost containment and efficiency
measures to reduce operating, payroll and selling, general and administrative
costs. It has also refocused and expanded its sales and marketing efforts
and embarked on a major MRI fleet upgrade program. Additionally, the Company
continues to evaluate the profitability of certain existing customer
relationships with a view toward eliminating unprofitable accounts and
redeploying or otherwise disposing of certain equipment.
The Company intends to continue its ongoing equipment trade-in and
upgrade program which has substantially improved the marketability and
productivity of its MRI and computed axial tomography (CT) systems. The
Company intends to either trade in older, less marketable MRI systems in
connection with new system purchases, or to upgrade them with new computers,
software and coils to enable its MRI fleet to remain competitive in the
marketplace.
Beginning in late 1993, the Company commenced a continuing review of
the carrying value of certain older equipment and other assets, as well as
its capital structure, in view of then current operating conditions. As a
result, the Company recorded non-cash asset impairment charges in 1993 and
1994, and began an ongoing equipment trade-in and upgrade program to improve
the marketability and productivity of the Company's MRI and CT systems. In
addition, the Company completed a comprehensive financial restructuring with
the holders of its senior notes and senior subordinated
8
debentures effective December 31, 1994. For further details concerning these
matters, please refer to the Company's 1995 Annual Report to Stockholders.
On April 26, 1996, the Company acquired all of the outstanding shares
of Royal Medical Health Services, Inc. (Royal) of Pittsburgh, Pennsylvania.
Like the Company, Royal is a provider of comprehensive MRI services. The
Company issued 3,876 shares of preferred stock valued at $388,000, common
stock warrants valued at $212,000 and paid $1,914,000 in cash as
consideration for the acquisition of Royal. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations of
Royal have been included in the Company's consolidated financial statements
from the date of acquisition.
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
Revenues for the first nine months of 1996 were $49,097,000, an
increase of $4,792,000, or 10.8%, over 1995. Excluding the revenues of
$2,756,000 from operations which were sold in the second half of 1995, the
increase in revenues was $7,548,000, or 18.2%, with Royal accounting for
$2,884,000, or 6.9%, of the increase. This increase reflects a scan-based
MRI revenue increase of $6,006,000, or 16.0%, ($2,774,000, or 7.4%, as a
result of the Royal acquisition), resulting from a 20.9% increase in scan
volume partially offset by a 4.1% decrease in the average revenue realized
per MRI scan. Royal accounted for 4.8% of the scan volume increase and 0.5%
of the offsetting price per scan decrease. Management attributes the
non-Royal volume increase to the Company's continuing fleet upgrade program,
which has enabled the Company to obtain new long-term contracts from both
existing and new customers and to the effect of some smaller acquisitions.
Management believes the decrease in average revenues realized per scan is the
result of: continuing competitive pressure in the MRI service industry and
cost containment efforts by health care payers; obtaining contracts with
customers that have high scan volumes which justify lower scan prices; and
many customers achieving discount price levels by virtue of attaining higher
scan volumes. Revenue under fixed fee contracts increased $693,000, or
46.2%, resulting from an increased number of MRI systems under such
arrangements.
The Company's fleet included 87 MRI systems at September 30, 1996
compared to 74 MRI systems at September 30, 1995. The average number of MRI
systems operated by the Company was 84 during the first nine months of 1996,
compared to 73 during the first nine months of 1995.
Operating expenses, excluding depreciation, totaled $23,549,000 in the
first nine months of 1996, an increase of $2,111,000, or 9.8%, from the first
nine months of 1995. Excluding expenses of $1,008,000 related to operations
which were sold in the second half of 1995, the increase in operating
expenses was $3,119,000, or 15.3%, with Royal contributing $1,431,000, or
7.0%, of the increase. Payroll and related employee expenses increased
$1,424,000, or 17.3%, which was in line with the revenue increase. Equipment
rental expense increased $1,003,000, or 84.6% ($369,000 or 31.1%, was
attributable to Royal). The increase resulted from a higher number of rented
MRI systems in operation and the Company's leasing of 20 new tractors in
1996.
Depreciation expense during the first nine months of 1996 totaled
$9,170,000, an increase of $80,000, or 0.9%. Excluding depreciation expense
of $638,000 related to operations which were sold in
9
the second half of 1995, depreciation expense increased $718,000, or 7.9%,
from the 1995 level principally due to a higher amount of depreciable assets
associated with equipment additions and the Royal acquisition. Amortization
expense in the first nine months of 1996 increased $306,000, or 30.5%, over
the 1995 period as a result of the Royal acquisition and three other smaller
acquisitions, one in the first quarter of 1996 and two in the third quarter
of 1996.
Selling, general and administrative expenses totaled $4,879,000 in the
first nine months of 1996, an increase of $191,000, or 4.1%, from the first
nine months of 1995. Excluding expenses of $369,000 related to operations
sold in the second half of 1995, selling, general and administrative expenses
increased $560,000, or 13.0%. Payroll and related expenses increased
$503,000, primarily as a result of increased staffing levels and employee
compensation.
Interest expense of $4,184,000 in the first nine months of 1996 was
$308,000, or 7.9%, higher than the same period in 1995, primarily as a result
of higher average outstanding debt balances during the first nine months of
1996 as compared to the first nine months of 1995. This increase was
principally due to debt assumed in connection with the Royal acquisition and
additional borrowings related to equipment additions.
An income tax provision of $955,000 was recorded in the first nine
months of 1996. The Company's pre-tax income in 1996 is substantially offset
by net operating loss carryforwards; however, certain federal alternative
minimum taxes and state tax liabilities apply to this income, giving rise to
the tax provision recorded. In the first nine months of 1995, an income tax
provision of $630,000 was recorded, also related to certain federal
alternative minimum taxes and state tax liabilities. The Company's 1996
effective tax rate of approximately 16% of pre-tax income was comparable with
the 1995 rate.
The Company's net income was $5,051,000 in the first nine months of
1996 compared to net income of $3,580,000 in the first nine months of 1995,
an increase of $1,471,000, or 41.1%, primarily attributable to an increase in
revenues achieved without a proportionate increase in operating and selling,
general and administrative expenses. Earnings per common share totaled $.38
in the first nine months of 1996, compared to earnings per common share of
$.26 for the same period in 1995, an increase of 46.2%. The earnings per
common share calculations reflect preferred dividend requirements of $706,000
in the first nine months of 1996 and $698,000 for the same period in 1995.
RESULTS OF OPERATIONS - COMPARISON OF QUARTER ENDED SEPTEMBER 30, 1996 TO
QUARTER ENDED SEPTEMBER 30, 1995
Revenues for the third quarter of 1996 were $17,795,000, an increase
of $2,737,000, or 18.2%, over 1995. Excluding the revenues of $1,241,000
from operations which were sold in the second half of 1995, the increase in
revenues was $3,978,000, or 28.8%, with Royal accounting for $1,677,000, or
12.1%, of the increase. This increase reflects a scan-based MRI revenue
increase of $3,257,000, or 25.9% ($1,611,000, or 12.8%, as a result of the
Royal acquisition), resulting from a 31.3% increase in scan volume partially
offset by a 4.1% decrease in the average revenue realized per MRI scan.
Royal accounted for 14.2% of the scan volume increase and 0.7% of the
offsetting price per scan decrease. Management attributes the non-Royal
volume increase to the Company's continuing fleet upgrade
10
program, which has enabled the Company to obtain new long-term contracts from
both existing and new customers. Management believes the decrease in average
revenues realized per scan is the result of: continuing competitive pressure
in the MRI service industry and cost containment efforts by health care
payers; obtaining contracts with customers that have high scan volumes which
justify lower scan prices; and many customers achieving discount price levels
by virtue of attaining higher scan volumes. Revenue under fixed fee
contracts increased $365,000, or 74.8%, resulting from an increased number of
MRI systems under such arrangements. Excluding items related to operations
sold in the second half of 1995, other revenue increased $359,000, primarily
as a result of the third quarter 1995 acquisition of a mobile CT business.
The average number of MRI systems operated by the Company was 88
during the third quarter of 1996, compared to 74 during the third quarter of
1995.
Operating expenses, excluding depreciation, totaled $8,530,000 in the
third quarter of 1996, an increase of $1,409,000, or 19.8%, from third
quarter 1995. Excluding expenses of $351,000 related to operations which were
sold in the second half of 1995, the increase in operating expenses was
$1,760,000, or 26.0%, with Royal contributing $907,000, or 13.4%, of the
increase. Payroll and related employee expenses increased $756,000, or
27.8%, which was in line with the revenue increase. Equipment rental expense
increased $594,000, or 182.2% ($244,000, or 74.8% was attributable to Royal.)
The increase resulted from a higher number of rented MRI systems in
operation and the Company's leasing of 20 new tractors in 1996.
Depreciation expense during the third quarter of 1996 totaled
$3,122,000, an increase of $48,000, or 1.6%. Excluding depreciation expense
of $186,000 related to operations which were sold in the second half of 1995,
depreciation expense increased $234,000, or 7.6%, from the 1995 level due to
a higher amount of depreciable assets associated with equipment additions and
the Royal acquisition. Amortization expense in the 1996 third quarter
increased $224,000, or 65.9%, over the 1995 period as a result of the Royal
acquisition and three other smaller acquisitions, one in the first quarter of
1996 and two in the third quarter of 1996.
Selling, general and administrative expenses totaled $1,719,000 in the
third quarter of 1996, an increase of $170,000, or 11.0%, from the third
quarter of 1995. Excluding expenses of $139,000 related to operations sold
in the second half of 1995, selling, general and administrative expenses
increased $309,000, or 21.9%. Payroll and related employee expenses
increased $204,000, primarily as a result of increased staffing levels and
employee compensation.
Interest expense of $1,501,000 in the third quarter of 1996 was
$228,000, or 17.9%, higher than the same period in 1995 primarily as a result
of the debt assumed related to the Royal acquisition and amortization of the
value assigned to common stock warrants issued in connection with certain
debt amendments in the second quarter of 1996.
An income tax provision of $410,000 was recorded in the third quarter
of 1996. The Company's pre-tax income in 1996 is substantially offset by net
operating loss carryforwards; however, certain federal alternative minimum
taxes and state tax liabilities apply to this income, giving rise to the tax
provision recorded. In the third quarter of 1995, an income tax provision of
$254,000 was recorded, also related to certain federal alternative minimum
taxes and state tax liabilities. The Company's 1996 third
11
quarter effective tax rate of approximately 17.4% of pre-tax income increased
over the 1995 rate of 15% as a result of the non-deductibility of certain
goodwill associated with the Company's recent acquisitions.
The Company's net income was $1,949,000 in the third quarter of 1996
compared to net income of $1,447,000 in the third quarter of 1995, an
increase of $502,000, or 34.7%, primarily attributable to an increase in
revenues achieved without a proportionate increase in operating and selling,
general and administrative expenses. Earnings per common share totaled $.15
in the second quarter of 1996, compared to earnings per common share of $.11
for the same period in 1995, an increase of 36.4%. The earnings per common
share calculations reflect preferred dividend requirements of $238,000 in the
third quarter of 1996 and $232,000 in the third quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, cash and short-term investments were
$11,677,000 compared to $11,128,000 at December 31, 1995, and the aggregate
of the Company's long-term debt and senior subordinated debentures was
$74,756,000 compared to $65,932,000 at December 31, 1995. The Company
obtained a $3,000,000 revolving line of credit secured by accounts receivable
in December 1995. This line, which has not been utilized, is intended to act
as a temporary supplement to fund working capital needs.
The Company generated $17,347,000 in net cash from operating
activities during the first nine months of 1996, compared to $14,458,000
during 1995's first nine months, an increase of $2,889,000, or 20.0%. This
cash flow was sufficient to meet the Company's debt service obligations and
capital expenditures not financed. During the first nine months of 1996, the
Company financed $15,618,000 of capital expenditures and repaid $9,567,000 of
long-term debt. In addition, the Company assumed $5,532,000 of long-term
debt in connection with the Royal acquisition and $1,135,000 of long-term
debt in connection with the acquisition of Sun MRI Services, Inc. (see
Capital Expenditures section). The Company believes its continuing cash flow
from operations as well as its cash balances and other credit sources will be
adequate for anticipated operating, debt service, preferred dividend and
capital expenditure requirements.
Debt service requirements on the Company's senior notes, with a
balance of $25,400,000 at September 30, 1996, include payments of interest at
7.5%, plus aggregate principal payments of $400,000 in 1996 (gradually
increasing to $6,200,000 in 2003). The Company made an additional $1,000,000
principal payment in April 1996 in connection with the lender's agreement to
increase capital expenditure limitations (see below). The senior
subordinated debentures with a balance of $16,070,000 at September 30, 1996,
require quarterly payments of $187,500 through 2003 (increasing to
approximately $1,900,000 in 2004 and 2005) which, for financial statement
purposes, are recorded as principal reductions; no interest expense will be
recorded during the contractual term of the debentures, in accordance with
generally accepted accounting principles.
In early November, 1996, all of the Company's senior notes were sold
by the existing holders to new owners. The Company and the new owners
entered into an amendment of the terms of the senior notes, including to
provide for monthly rather than quarterly interest payments. In addition,
the Company prepaid $5,300,000 of the principal amount of the notes at a
substantial discount, leaving
12
$20,100,000 in principal amount of the notes outstanding. As a result, the
Company will report an extraordinary gain in the fourth quarter of 1996 of
approximately $1,240,000, or $.11 per common share, from this early
extinguishment of debt. In connection with the sale of the notes, the new
holders and the Company agreed to the removal or modification of various
restrictive covenants contained in the note purchase agreement governing the
notes.
The Company's Series A preferred stock, with a balance of $16,197,000
(including accumulated dividends of $698,000) at September 30, 1996, bears a
dividend at 6% of its original liquidation value ($15,500,000) annually.
However, dividends may be paid in cash only if certain defined operating cash
flow levels are achieved or to the extent of proceeds from the sale of new
common equity. The Company's 1995 cash flow substantially exceeded the level
required to pay the 1995 Series A preferred stock dividend in cash and such
dividend was paid in April 1996 in the amount of $930,000. Although the
Company expects to be able to pay the Series A preferred stock dividends
attributable to 1996 and subsequent years in cash, there can be no assurance
that future cash flow levels will be sufficient to permit the payment of such
future dividends in cash. If annual cash dividends are not or cannot be
paid, dividends will be payable in Series B preferred stock, which has no
dividend requirement and is convertible into common stock at specified
prices. Consequently, substantial amounts of common stock equivalents may be
issued to the holders of the Series A preferred stock in the future, which
would cause significant dilution to present common stockholders. Both series
of preferred stock have mandatory redemption requirements (in the case of
Series B, if not previously converted to common stock) applicable after the
senior notes and senior subordinated debentures are fully repaid.
In connection with the Royal acquisition, the Company issued Series C
preferred stock which has a balance of $396,000 (including accumulated
dividends of $8,000) at September 30, 1996. The Series C preferred stock
bears a dividend, payable in cash only, of 5% of its original liquidation
value ($388,000) annually; it is redeemable at the Company's option, but does
not have mandatory redemption requirements. Holders of Series C preferred
stock may convert their stock into common stock at a specified price.
Management believes that the conversion of all of the Series C preferred
stock would not cause significant dilution to present common stockholders.
The senior notes, senior subordinated debentures and certain other
credit agreements contain various covenants related to financial ratios and
other matters. The Company was in compliance with these covenants at
September 30,1996.
CAPITAL EXPENDITURES
The Company purchased nine new high-field MRI systems and upgraded 13
other MRI systems at a total approximate cost of $20,500,000 during the first
nine months of 1996. The Company currently plans to purchase eight
additional high-field MRI systems in 1996 and to upgrade seven additional
systems. The Company's senior secured and subordinated lenders agreed in
April 1996 to increase the Company's allowable capital expenditures to a
total of $34 million in 1996 and 1997, an increase of $14 million from
previous levels. Consequently, the Company may purchase or upgrade several
more systems in 1996 as opportunities to place new equipment into service
arise when future contracts are signed and existing contracts are renewed.
13
In addition, the Company expects to dispose of substantially all of
its remaining less technologically advanced systems in 1996 in exchange for
new MRI systems. The Company intends to use a combination of existing cash
reserves, cash flow from operations and long-term secured equipment financing
to finance its capital expenditures, although there can be no assurance that
such financing will be available to the Company. The Company intends to
continue focusing on acquiring state-of-the-art equipment while disposing of
older systems.
In connection with the Royal acquisition, the Company acquired six MRI
systems. In August, the Company acquired all of the outstanding shares of
Sun MRI Services, Inc., a northern California based MRI service provider. In
connection with this transaction, the Company obtained one MRI system and six
hospital contracts. These transactions were primarily funded from existing
cash reserves and debt assumed. In late September, 1996, the Company
acquired certain assets and associated contracts from West Coast Mobile
Imaging, a southern California based CT service provider. Although the
acquisition was comparatively small, it added sixteen new CT customers and
was funded from existing cash reserves. Additional investments of this
nature may be made in the future (subject to certain conditions contained in
the Company's long-term financing arrangements) from a combination of cash
reserves, cash flow from operations, common or preferred equity and long-term
secured or unsecured financing, if available.
If the Company adds MRI systems at a more rapid rate than is currently
planned, or if it acquires additional business entities, or if the net cash
generated by operations declines from current or anticipated levels, the
Company could be required to raise additional capital. However, there can be
no assurance that the Company would be able to raise such capital, or do so
on terms acceptable to the Company, or that consents from present lenders, if
required, could be obtained.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Note Description
----------- ---- -----------
3.1 (1) Restated Certificate of Incorporation of Alliance
Imaging.
3.1.1 (1) Certificate of Amendment of Restated Certificate of
Incorporation of Alliance Imaging, Inc.
3.1.2 (1) Certificate of Correction of Certificate of Amendment
of Restated Certificate of Incorporation of Alliance
Imaging, Inc.
3.1.3 (8) Certificate of Amendment of Restated Certificate of
Incorporation of Alliance Imaging, Inc.
3.2 (1) By-Laws of Alliance Imaging, Inc., as amended.
14
4.1 (1) Specimen of Common Stock Certificate.
4.2 (11) Amended and Restated Purchase Agreement dated as of
December 31, 1994 among the Registrant and the holders
of the Registrant's Senior Subordinated Debentures
due 2005.
4.2.1 (9) Amendment No. 1 to Amended and Restated Purchase
Agreement dated as of December 31, 1994 among the
Registrant and the holders of the Registrant's Senior
Subordinated Debentures due 2005.
4.2.2 (20) Amendment No. 2 to Amended and Restated Purchase
Agreement dated as of April 15, 1996 among the
Registrant and the holders of the Registrant's
Senior Subordinated Debentures due 2005.
4.3 (1) Note Purchase Agreement dated as of April 14, 1989
governing sale of Senior Notes by Alliance
Imaging, Inc.
4.4 (1) First Amendment to Note Purchase Agreement dated as of
September 20, 1990 among Alliance Imaging, Inc., CIGNA
Property and Casualty Insurance Company, Connecticut
General Life Insurance Company, Insurance Company of
America and Life Insurance Company of North America.
4.4.1 (1) Amendment No. 2 to Note Purchase Agreement dated as of
September 3, 1991.
4.4.2 (2) Amendment No. 3 to Note Purchase Agreement dated as of
December 1, 1991.
4.4.3 (3) Amendment No. 4 to Note Purchase Agreement dated as of
December 31, 1992.
4.4.4 (4) Amendment No. 5 to Note Purchase Agreement dated as of
September 30, 1993.
4.4.5 (6) Amendment No. 6 to Note Purchase Agreement dated as of
January 1, 1994.
4.4.9 (12) Amendment No. 7 to Note Purchase Agreement dated as of
December 31, 1994.
4.4.10 (9) Amendment No. 8 to Note Purchase Agreement dated as of
December 31, 1994.
4.4.11 (20) Amendment No. 9 to Note Purchase Agreement dated as of
April 15, 1996.
15
4.4.12 (21) Amendment No. 10 to Note Purchase Agreement dated as of
November 6, 1996.
4.5 (1) Amended and Restated Shareholders Agreement dated as of
April 17, 1989.
4.6 (13) Security Agreement dated as of December 31, 1994 among
the Registrant, the holders of the Senior Notes and the
Collateral Agent for the Senior Noteholders.
4.7 (14) Guaranty dated as of December 31, 1994 of the
Registrant's obligations to the Senior Noteholders
and the Senior Subordinated Debentureholders executed
by the subsidiaries of the Registrant identified
therein.
4.8 (15) Registration Rights Agreement dated as of December 31,
1994 among the Registrant, the Senior Noteholders and
the Senior Subordinated Debentureholders.
4.9 (16) Certificate of Designation concerning the Registrant's
Series A 6.0% Cumulative Preferred Stock.
4.10 (17) Certificate of Designation concerning the Registrant's
Series B Convertible Preferred Stock.
4.11 (20) Certificate of Designation concerning the Registrant's
Series C 5% Cumulative Convertible Redeemable Preferred
Stock.
9.1 (1) Amended and Restated Voting Trust Agreement between
Donaldson, Lufkin & Jenrette Capital Corporation and
Meridian Trust Company dated December 29, 1988.
10.4 (3) 1991 Stock Option Plan of Alliance Imaging, Inc.
adopted on May 10, 1991, amended on May 23, 1991,
amended on March 17, 1992, and amended on February 23,
1993.
10.5 (1) Form of Incentive Stock Option Agreement pursuant to
1991 Stock Option Plan of Alliance Imaging, Inc.
10.5.1 (1) Form of Non-Qualified Stock Option Agreement pursuant
to 1991 Stock Option Plan of Alliance Imaging, Inc.
10.5.2 (7) Form of Incentive Stock Option Agreement pursuant to
1991 Stock Option Plan of Alliance Imaging, Inc.,
utilized for certain option grants beginning in 1994.
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10.5.3 (9) Form of letter to optionees dated February 21, 1995
amending terms of stock options granted March 10, 1994.
10.11 (1) Association Agreement by and between Alliance Imaging,
Inc. and Alliance Medical, Ltd., dated September 30,
1989.
10.16 (1) Form of Indemnification Agreement between Alliance
Imaging, Inc. and its directors and/or officers.
10.18 (2) Lease Agreement dated September 13, 1991, by and
between Alliance Imaging, Inc. and Crestview Partners.
10.20 (5) Georgia Magnetic Imaging Center, Ltd. Limited
Partnership Agreement dated as of March 22, 1985.
10.20.1 (5) Amendment to Georgia Magnetic Imaging Center, Ltd.
Limited Partnership Agreement dated as of July 1, 1993.
10.24 (8) Employment Agreement dated as of September 9, 1993,
between Alliance Imaging, Inc. and Richard N. Zehner.
10.25 (8) Employment Agreement dated as of September 9, 1993,
between Alliance Imaging, Inc. and Vincent S. Pino.
10.26 (8) Employment Agreement dated as of September 9, 1993,
between Alliance Imaging, Inc. and Terry A. Andrues.
10.27 (8) Employment Agreement dated as of September 9, 1993,
between Alliance Imaging, Inc. and Jay A. Mericle.
10.28 (8) Employment Agreement dated as of September 9, 1993,
between Alliance Imaging, Inc. and Terrence M. White.
10.29 (8) Employment Agreement dated as of September 6, 1994,
between Alliance Imaging, Inc. and Neil M. Cullinan.
10.30 (8) Employment Agreement dated as of September 6, 1994,
between Alliance Imaging, Inc. and Cheryl A. Ford.
10.31 (10) Standstill Agreement dated as of December 31, 1994
between the Registrant and Connecticut General Life
Insurance Company, CIGNA Property and Casualty
Insurance Company, Insurance Company of North
America and Life Insurance Company of North America.
10.32 (10) Standstill Agreement dated as of December 31, 1994
between the Registrant and Northwestern Mutual Life
Insurance Company.
17
10.33 (10) Standstill Agreement dated as of December 31, 1994
between the Registrant and The Travelers Indemnity
Company, The Travelers Insurance Company and The
Travelers Life and Annuity Company.
10.34 (10) Standstill Agreement dated as of December 31, 1994
between the Registrant and The Lincoln National Life
Insurance Company.
10.35 (10) Standstill Agreement dated as of December 31, 1994
between the Registrant and The Equitable Life Assurance
Society of the United States.
10.36 (18) Employment Agreement dated July 7, 1995 between
Alliance Imaging, Inc. and Michael W. Grismer.
10.37 (19) Long-Term Executive Incentive Plan dated as of March
28, 1995, adopted in final form November 28, 1995.
10.38 (19) Loan and Security Agreement with Comerica Bank-
California, dated as of December 21, 1995.
10.39 (20) Royal Medical Health Services, Inc. Merger Agreement
dated as of April 16, 1996.
10.40 (20) A & M Trucking, Inc. Acquisition Agreement dated as of
April 16, 1996.
10.41 (20) Form of Warrant Agreement concerning 100,000 common
shares with an exercise price of $3.9375 per share
dated as of April 15, 1996.
10.42 (20) Form of Warrant Agreement concerning 100,000 common
shares with an exercise price of $5.00 per share dated
as of April 15, 1996.
10.43 (21) Form of Warrant Agreement concerning 125,000 common
shares with an exercise price of $5.00 per share dated
as of November 6, 1996.
______________________________
(1) Incorporated by reference herein to the indicated exhibits filed in
response to Item 16, "Exhibits" of the Company's Registration Statement
on Form S-1, No. 33-40805, initially filed on May 24, 1991.
(2) Incorporated by reference herein to the indicated exhibits filed in
response to Item 21, "Exhibits" of the Company's Registration Statement
on Form S-4, No. 33-46052, initially filed on February 28, 1992.
(3) Incorporated by reference herein to the indicated exhibits filed in
response to Item 14(a)(3), "Exhibits" of the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.
18
(4) Incorporated by reference herein to the indicated exhibits filed in
response to Item 6(a), "Exhibits" of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
(5) Incorporated by reference herein to the indicated exhibits filed in
response to Item 6(a), "Exhibits" of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
(6) Incorporated by reference herein to the indicated exhibits filed in
response to Item 14(a)(3), "Exhibits" of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993.
(7) Incorporated by reference herein to the indicated exhibit filed in
response to item 6(a), "Exhibits" of the Company's Quarterly report on
Form 10-Q for the quarter ended March 31, 1994.
(8) Incorporated by reference herein to the indicated exhibit filed in
response to Item 6(a), "Exhibits" of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994.
(9) Incorporated by reference herein to the indicated exhibit filed in
response to Item 14(a)(3), "Exhibits" of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(10) Incorporated by reference herein to Exhibit 10 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
(11) Incorporated by reference herein to Exhibit 4.4 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
(12) Incorporated by reference herein to Exhibit 4.1 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
(13) Incorporated by reference herein to Exhibit 4.2 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
(14) Incorporated by reference herein to Exhibit 4.3 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
(15) Incorporated by reference herein to Exhibit 4.5 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
(16) Incorporated by reference herein to Exhibit 4.6 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
(17) Incorporated by reference herein to Exhibit 4.7 filed in response to
Item 7, "Exhibits" of the Company's Form 8-K Current Report dated
January 25, 1995.
19
(18) Incorporated by reference herein to the indicated Exhibit filed in
response to Item 6(a), "Exhibits" of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995.
(19) Incorporated by reference herein to the indicated Exhibit in response to
Item 14(a)(3), "Exhibits" of the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
(20) Incorporated by reference herein to the indicated Exhibit filed in
response to Item 6(a), "Exhibits" of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.
(21) Filed herewith.
(b) REPORTS ON FORM 8-K IN THE THIRD QUARTER OF 1996:
None filed for the quarter ended September 30, 1996.
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.
ALLIANCE IMAGING, INC.
November 8, 1996 By: /s/ Richard N. Zehner
----------------------
Richard N. Zehner
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on November 8, 1996.
Signature Title
--------- -----
/s/ Richard N. Zehner Chairman of the Board of Directors,
--------------------- President and Chief Executive Officer
Richard N. Zehner (Principal Executive Officer)
/s/ Terrence M. White Senior Vice President, Chief
--------------------- Financial Officer and Secretary
Terrence M. White (Principal Financial Officer)
20