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 : JUNE 30, 1997
COMMISSION FILE NUMBER: 0-16334
ALLIANCE IMAGING, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0239910
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1065 NORTH PACIFICENTER DRIVE
SUITE 200
ANAHEIM, CALIFORNIA 92806
--------------------------
(Address of principal executive office)
(714) 688-7100
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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 July 31, 1997:
Common Stock, $.01 par value, 10,943,138
1
ALLIANCE IMAGING, INC.
FORM 10-Q
June 30, 1997
Index
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements:
Condensed Consolidated Balance Sheets 3
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income 4
Three and six months ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows 5
Six months ended June 30, 1997 and 1996
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 16
SIGNATURES 23
2
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996*
-------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments $ 13,817,000 $ 10,867,000
Accounts receivable, net of allowance for doubtful accounts 9,207,000 8,889,000
Prepaid expenses 1,014,000 710,000
Other receivables 39,000 345,000
------------- -------------
Total current assets 24,077,000 20,811,000
Equipment, at cost 138,729,000 121,354,000
Less--Accumulated depreciation (48,953,000) (43,735,000)
------------- -------------
89,776,000 77,619,000
Goodwill 27,256,000 27,990,000
Deposits and other assets 2,161,000 2,090,000
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Total assets $ 143,270,000 $ 128,510,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 2,773,000 $ 1,765,000
Accrued compensation and related expenses 2,855,000 3,465,000
Other accrued liabilities 8,688,000 6,341,000
Current portion of long-term debt 19,618,000 16,323,000
------------- -------------
Total current liabilities 33,934,000 27,894,000
Long-term debt, net of current portion 60,930,000 72,702,000
Other liabilities 2,207,000 2,029,000
Deferred income taxes 4,831,000 4,831,000
Redeemable preferred stock - 4,694,000
Non-redeemable preferred and common stockholders' equity:
Convertible preferred stock 18,388,000 388,000
Common stock 109,000 109,000
Additional paid-in capital 36,171,000 34,404,000
Accumulated deficit (13,300,000) (18,541,000)
------------- -------------
Total non-redeemable preferred and common stockholders' equity 41,368,000 16,360,000
------------- -------------
Total liabilities and stockholders' equity $ 143,270,000 $ 128,510,000
------------- -------------
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*Derived from audited financial statements
SEE NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues $ 20,805,000 $ 16,616,000 $ 39,911,000 $ 31,302,000
Costs and expenses:
Operating expenses, excluding depreciation 9,134,000 7,838,000 17,815,000 15,019,000
Depreciation expenses 3,659,000 3,182,000 7,144,000 6,048,000
Selling, general and administrative expenses 2,093,000 1,653,000 3,990,000 3,160,000
Amortization expense, primarily goodwill 594,000 401,000 1,165,000 745,000
Interest expense, net of interest income 1,624,000 1,498,000 3,557,000 2,683,000
------------ ------------ ------------ ------------
Total costs and expenses 17,104,000 14,572,000 33,671,000 27,655,000
------------ ------------ ------------ ------------
Income before income taxes and extraordinary gain 3,701,000 2,044,000 6,240,000 3,647,000
Provision for income taxes 1,290,000 306,000 2,125,000 545,000
------------ ------------ ------------ ------------
Income before extraordinary gain 2,411,000 1,738,000 4,115,000 3,102,000
Extraordinary gain, net of taxes - - 1,332,000 -
------------ ------------ ------------ ------------
Net income 2,411,000 1,738,000 5,447,000 3,102,000
Less: Preferred stock dividends - (236,000) - (468,000)
Add: Excess of carrying amount of preferred stock
repurchased over consideration paid - - 1,906,000 -
------------ ------------ ------------ ------------
Income applicable to common stock $ 2,411,000 $ 1,502,000 $ 7,353,000 $ 2,634,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common and common equivalent
shares outstanding 14,934,000 11,522,000 13,456,000 11,416,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share:
Income before items below $ 0.16 $ 0.13 $ 0.31 $ 0.23
Excess of carrying amount of preferred stock
repurchased over consideration paid - - 0.14 -
------------ ------------ ------------ ------------
Income before extraordinary gain 0.16 0.13 0.45 0.23
Extraordinary gain, net of taxes - - 0.10 -
------------ ------------ ------------ ------------
Income applicable to common stock $ 0.16 $ 0.13 $ 0.55 $ 0.23
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SEE NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net income $ 5,447,000 $ 3,102,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Extraordinary gain (1,332,000) -
Depreciation and amortization 8,309,000 6,793,000
Amortization of deferred financing charges 28,000 207,000
Distributions in excess of equity in income
of investee 91,000 2,000
Changes in operating assets and liabilities:
Accounts receivable, net (240,000) (1,216,000)
Prepaid expenses (304,000) (348,000)
Other receivables 306,000 (55,000)
Other assets (451,000) (7,000)
Accounts payable, accrued compensation and
other accrued liabilities 1,661,000 2,107,000
Other liabilities 178,000 281,000
------------ ------------
Net cash provided by operating activities 13,693,000 10,866,000
INVESTING ACTIVITIES:
Equipment purchases (19,036,000) (14,360,000)
Decrease in deposits on equipment 247,000 2,212,000
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 MRI contracts and related assets
of Pacific Medical Imaging, Inc. (756,000) -
------------ ------------
Net cash used in investing activities (19,545,000) (14,447,000)
------------ ------------
5
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
FINANCING ACTIVITIES:
Payment of preferred stock dividends (471,000) (930,000)
Repurchase of senior subordinated debentures (2,286,000) -
Repurchase of Series A preferred stock (2,523,000) -
Principal payments on long-term debt (9,190,000) (5,608,000)
Proceeds from long-term debt 18,123,000 10,227,000
Proceeds from senior bridge loan 5,128,000 -
Proceeds from exercise of employee stock options 21,000 20,000
Increase in deferred financing charges - (76,000)
------------ ------------
Net cash provided by financing activities 8,802,000 3,633,000
------------ ------------
Net increase in cash and short-term investments 2,950,000 52,000
Cash and short-term investments, beginning of period 10,867,000 11,128,000
------------ ------------
Cash and short-term investments, end of period $ 13,817,000 $ 11,180,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 3,727,000 $ 2,724,000
Income taxes paid 283,000 202,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of senior bridge loan into Series D 4%
convertible preferred stock $ 18,000,000 -
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
Alliance Imaging, Inc.
Note to Condensed Consolidated Financial Statements
June 30, 1997
(Unaudited)
BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Alliance Imaging, Inc. ("Alliance" or "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 six month
period ended June 30, 1997, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. 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, 1996.
The earnings per common share for the six month periods ended June 30,
1997 and 1996 are based upon weighted average common and common equivalent
shares outstanding during the period. For the six month period ended June
30, 1996, common equivalent shares include the dilutive effect of stock
options with an exercise price lower than current market value and reflect
preferred dividend requirements of $468,000. For the six month period ended
June 30, 1997, common equivalent shares include the dilutive effect of
warrants and vested stock options with exercise prices lower than current
market value, as well as the assumed conversion of the Series D convertible
preferred stock into common shares. Supplemental earnings per share for the
six months ended June 30, 1997 based on historical earnings per share
adjusted assuming the conversion of the senior bridge loan into Series D
convertible preferred stock had occurred on January 1, 1997 is $0.30 per
share. This calculation ignores amounts reported in the 1997 historical
results as gain arising from the repurchase of the senior subordinated
debentures and the earnings per share benefit arising from the excess of
carrying value of the preferred stock repurchased over the consideration
paid. Therefore, this supplemental earnings per share calculation is the
most comparable to the $0.31 per share "income before items below" reported
in the Company's first six months ended 1997 historical results of operations.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options, warrants and the Series D
convertible preferred stock will be excluded. The impact is expected to
result in an increase to primary earnings per share for the six months ended
June 30, 1997 and 1996 of $.05 and $.01, per share respectively.
The provisions for income taxes for the six month periods ended June 30,
1997 and 1996 are less than the statutory federal rate due to utilization of
certain net operating loss carryforwards during the periods.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
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 cost containment
pressures which management believes have resulted in decreasing revenues per
scan. Although scan prices appear to have stabilized, the Company expects
modest continuing downward pressure on pricing levels. 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, 1996, and in the first half of 1997, it has also had
periods of declining volumes in earlier 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 developed a new marketing plan to refocus and expand its
sales and marketing efforts, and has substantially upgraded its MRI systems
over the last few years. Additionally, the Company continues to evaluate the
profitability of certain existing customer relationships with a view toward
eliminating unprofitable accounts.
The Company's ongoing equipment trade-in and upgrade program has
substantially improved the marketability and productivity of its MRI and
computed axial tomography (CT) systems. The Company periodically evaluates
its older, less marketable MRI systems to determine if it is more beneficial
for them to continue in profitable, although reduced, revenue service, or to
trade in such equipment in connection with new system purchases. The Company
expects to operate some of its few remaining older systems for another one to
two years and to trade in the balance of such systems.
8
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
- --Revenues for the first six months of 1997 were $39,911,000, an increase of
$8,609,000, or 27.5%, over 1996. This increase reflects a scan-based MRI
revenue increase of $7,879,000, or 28.4%, ($2,309,000, or 8.3%, as a result
of MRI operations acquired subsequent to the first quarter of 1996),
resulting from a 30.4% increase in total scan volume partially offset by a
1.5% decrease in the average revenue realized per MRI scan. The average
number of scans per day for each MRI system increased 7.7% to 7.0 from 6.5
in 1996. Management attributes the volume increase to the Company's
continuing MRI systems upgrade program, which has enabled the Company to
obtain new, long-term contracts from both existing and new customers, and to
the effect of recently implemented marketing programs. 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 on incremental scan volume. CT
revenue increased $397,000, or 21.6%, as a result of internal growth and the
fourth quarter 1996 acquisition of a small CT business. Other revenue
increased $300,000 primarily as a result of the implementation in late 1996
of a program providing management services for a large portfolio of imaging
systems owned by others.
The Company operated 90 MRI systems at June 30, 1997 compared to 87 MRI
systems at June 30, 1996. The average number of MRI systems operated by the
Company was 87 during the first half of 1997, compared to 82 during the first
half of 1996.
Operating expenses, excluding depreciation, totaled $17,815,000 in the
first six months of 1997, an increase of $2,796,000, or 18.6%, from the first
six months of 1996. Payroll and related employee expenses increased
$1,250,000, or 18.5%, primarily as a result of an increase in operating
staffing levels necessary to support revenue growth. Repairs and maintenance
expense increased $364,000, or 50.5%, due to an increased number of systems
in service. Fuel and other vehicle expenses collectively increased $291,000,
or 46.9%, primarily due to increasing fuel prices and the addition of new
mobile MRI systems. Preventative maintenance and cryogen contract expense
increased $139,000, or 3.4%, due to the expiration of initial one-year
warranties on an increased number of MRI systems. Other operating expenses
(including insurance, equipment rental, supplies and professional services)
increased $752,000, or 30.6 %, as a result of the increased level of
operations.
Depreciation expense during the first six months of 1997 totaled
$7,144,000, an increase of $1,096,000, or 18.1%, from the 1996 level
principally due to a higher amount of depreciable assets associated with
equipment additions and upgrades. Amortization expense during the first six
months of 1997 increased $420,000, or 56.4%, over the 1996 period as a result
of goodwill amortization associated with recent business acquisitions.
Selling, general and administrative expenses totaled $3,990,000 in the
first six months of 1997, an increase of $830,000, or 26.3%, from the same
period in 1996. Professional services expenses increased $297,000, or 118.8%,
primarily due to costs associated with increased investor relations efforts and
merger and acquisition activity. Payroll and related expenses
9
increased $227,000, or 8.5%, primarily as a result of increased staffing
levels necessary to support the Company's increased level of operations.
Other expenses increased primarily as a result of expanded marketing programs
and costs associated with relocating the Company's corporate offices.
Interest expense of $3,557,000 in the first six months of 1997 was
$874,000, or 32.6%, higher than the same period in 1996, as a result of
higher average outstanding debt balances during 1997 as compared to 1996.
This increase was primarily related to the senior bridge loan (which was
converted into Series D convertible preferred stock on March 26, 1997), to
the financing of several new imaging systems during the first half of 1997,
and to debt assumed in connection with acquisitions made subsequent to the
first half of 1996.
An income tax provision of $2,125,000 was recorded in in the first six
months of 1997, which was higher than the tax provision recorded in the same
period in 1996 by $1,580,000, or 289.9%. The increase resulted from the
increase in income before taxes and an increase in the Company's effective
tax rate. The effective income tax rate increased to 34.1% in 1997 from 14.9%
in 1996 because the Company's taxable income in 1997 is expected to exceed
remaining available net operating loss carryforwards.
The Company's income before extraordinary gain was $4,115,000 in the
first six months of 1997 compared to net income of $3,102,000 in the first
six months of 1996, an increase of $1,013,000, or 32.7%, primarily
attributable to the increase in revenues achieved without a proportionate
increase in costs and expenses. Earnings per common share directly related
to operations totaled $0.31 in the first six months of 1997, compared to
earnings per common share of $0.23 for the same period in 1996, an increase
of 34.8%. The Company reported an extraordinary gain, net of income taxes,
in the first quarter of 1997 of $1,332,000, or $0.11 per common share, on
early extinguishment of debt in January 1997. In addition, the Company
recorded earnings of $1,906,000, or $0.16 per common share related to the
excess of the carrying amount of the Series A 6% cumulative preferred stock
repurchased over the consideration paid in January 1997. Earnings per common
share totaled $0.55 in the first six months of 1997. The earnings per common
share calculations reflect preferred dividend requirements of $468,000 in the
first six months of 1996 and none in 1997.
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996 -- Revenues
for the second quarter of 1997 were $20,805,000, an increase of $4,189,000,
or 25.2%, over 1996. This increase reflects a scan-based MRI revenue increase
of $3,909,000, or 26.6%, resulting from a 28.5% increase in total scan volume
partially offset by a 1.4% decrease in the average revenue realized per MRI
scan. The average number of scans per day for each MRI system increased 5.9%
to 7.2 from 6.8 in 1996. Management attributes the volume increase to: the
Company's continuing MRI systems upgrade program, which has enabled the
Company to obtain new, long-term contracts from both existing and new
customers; certain smaller business acquisitions; and to the effect of
recently implemented marketing programs. 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. CT revenue increased
10
$239,000, or 25.7%, as a result of internal growth and the fourth quarter
1996 acquisition of a small CT business.
The average number of MRI systems operated by the Company was 88 during
the second quarter of 1997, compared to 86 during the second quarter of 1996.
Operating expenses, excluding depreciation, totaled $9,134,000 in the
second quarter of 1997, an increase of $1,296,000, or 16.5%, from the second
quarter of 1996. Payroll and related employee expenses increased $638,000,
or 18.0%, primarily as a result of increased staffing levels necessary to
support the Company's increased level of operations. Repairs and maintenance
increased $186,000, or 48.8%, due to an increased number of systems in
service. Fuel and other vehicle expenses collectively increased $138,000, or
41.1%, primarily due to increasing fuel prices and the addition of new mobile
MRI systems. Preventative maintenance and cryogen contract expense increased
$139,000, or 3.4% due to the expiration of initial one-year warranties on an
increased number of MRI systems. Other operating expenses (including
insurance, equipment rental, supplies and professional services) increased
$272,000, or 14.2%, as a result of the increased level of operations.
Depreciation expense during the second quarter of 1997 totaled
$3,659,000, an increase of $477,000, or 15.0%, from the 1996 level
principally due to a higher amount of depreciable assets associated with
equipment additions and upgrades. Amortization expense during the second
three months of 1997 increased $193,000, or 48.1%, over the 1996 period as a
result of goodwill amortization associated with recent business acquisitions.
Selling, general and administrative expenses totaled $2,093,000 in the
second quarter of 1997, an increase of $440,000, or 26.6%, from the same
period in 1996. Professional services increased $193,000, or 130.4%,
primarily as a result of increased expenses associated with increased
investor relations efforts and merger and acquisition activity. Other
expenses increased primarily as a result of expanded marketing programs and
costs associated with relocating the Company's corporate offices.
Interest expense of $1,624,000 in the second quarter of 1997 was
$126,000, or 8.4%, higher than 1996, as a result of higher average
outstanding debt balances during 1997 as compared to 1996. This increase was
primarily related to debt assumed in connection with acquisitions made
subsequent to the second quarter of 1996, as well as to financed purchases of
new equipment.
An income tax provision of $1,290,000 was recorded in in the second
quarter of 1997, which was higher than the tax provision recorded in the
second quarter of 1996 by $984,000, or 321.6%. The increase resulted from
the increase in income before taxes and an increase in the Company's
effective tax rate. The effective income tax rate increased to 34.8% in the
second quarter of 1997 from 15.0% in 1996 because the Company's taxable
income in 1997 is expected to exceed remaining available net operating loss
carryforwards.
The Company's net income was $2,411,000 in the second quarter of 1997
compared to net income of $1,738,000 in the second quarter of 1996, an increase
of $673,000, or 38.7%,
11
primarily attributable to the increase in revenues achieved without a
proportionate increase in costs and expenses. Earnings per common share
totaled $0.16 in the second quarter of 1997, compared to $0.13 for the same
period in 1996, an increase of 23.1%. The earnings per common share
calculations reflect preferred dividend requirements of $236,000 in the second
quarter of 1996 and none in the second quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, cash and short-term investments were $13,817,000
compared to $10,867,000 at December 31, 1996, and the aggregate of the
Company's long-term debt was $60,930,000 compared to $72,702,000 at December
31, 1996. The Company maintains a $3,000,000 revolving line of credit
secured by accounts receivable. This line, which has not been utilized, is
intended to act as a temporary supplement to fund working capital needs.
The Company generated $13,693,000 in net cash from operating activities
during the first six months of 1997, compared to $10,866,000 for the same
period in 1996, an increase of $2,827,000, or 26.0%. This cash flow was
sufficient to meet the Company's debt service obligations and capital
expenditures not financed. During the first six months of 1997, the Company
financed $18,123,000 of capital expenditures and repaid $9,190,000 of
long-term debt. 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 and capital expenditure requirements.
On December 31, 1996, the Company entered into a Bridge Loan Agreement
(enabling the Company to borrow up to $18,000,000) and borrowed $12,872,000
under a senior bridge loan; an additional $5,128,000 was borrowed on January
2, 1997. The senior bridge loan was convertible into 18,000 shares of a new
Series D 4% convertible preferred stock. On December 31, 1996, the Company
used the proceeds of the senior bridge loan to repurchase $11,345,000
carrying value of its senior subordinated debentures (Debentures) and
$11,071,000 of its Series A 6% redeemable preferred stock at a discount (plus
related accrued interest and dividends). In connection with this
transaction, on January 2, 1997, the Company used the additional senior
bridge loan proceeds to repurchase the remaining balance of its Debentures
and Series A redeemable preferred stock at a discount (plus related accrued
interest and dividends). On March 26, 1997, the holder of the senior bridge
loan exercised its option to convert the senior bridge loan into 18,000
shares of Series D convertible preferred stock. At that time, senior notes
not to exceed $9,000,000 held by the same investor became convertible into a
new Series E convertible preferred stock on or after January 1, 1998. The
senior note agreement contains limitations on equipment additions, incurrence
of debt and other similar items.
In connection with the Company's debt refinancing effective December 31,
1996, the Company authorized 18,000 shares of a new Series D convertible
preferred stock and 9,000 shares of a new Series E convertible preferred stock.
The holders of the Series D and E convertible preferred stock, when issued, are
entitled to receive cumulative dividends at the rate of 4% per annum of the
stated liquidation value. Unpaid dividends accumulate and are payable quarterly
by the Company in cash. Shares of Series D convertible preferred stock are
convertible at the option of the holder at any time on or before December 31,
2006 into shares of common
12
stock at a conversion price of $6.00 per common share, subject to adjustment.
Shares of Series E convertible preferred stock are convertible at the option
of the holder at any time on or before December 31, 2006 into shares of
common stock at a conversion price of the greater of $6.00 per share of
common stock or the market price (as defined) per common share at date of
issuance of the Series E convertible preferred stock. Shares of Series D and
E convertible preferred stock are subject to redemption at the option of the
Company after December 31, 2006.
On April 26, 1996, the Company acquired all of the outstanding shares of
Royal Medical Health Services, Inc. ("Royal") of Pittsburgh, Pennsylvania,
and certain related assets. Like the Company, Royal is a provider of
comprehensive MRI services to hospitals. The Company issued 3,876 shares of a
new Series C convertible 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. The Series C convertible preferred stock bears a dividend of 5%
of its original liquidation value ($388,000) payable annually in cash and is
redeemable at the Company's option. Holders of Series C convertible preferred
stock may convert their stock into common stock at a price of $5.00 per
common share.
In the event of liquidation, dissolution or winding up of the Company,
the holders of Series C, D and E convertible preferred stock shall be
entitled to receive an amount equal to the stated liquidation value per share
(plus accumulated but unpaid dividends) prior to any distributions to common
stockholders. No sinking fund has been or will be established for the
retirement or redemption of shares Series C, D or E convertible preferred
stock.
RECAPITALIZATION MERGER -- On July 23, 1997, Alliance entered into an
Agreement and Plan of Merger (the "Recapitalization Merger Agreement") dated
as of that date, with Newport Investment LLC (the "Investor"), a Delaware
limited liability company and an affiliate of Apollo Management, L.P.
("Apollo"). Pursuant to the Recapitalization Merger Agreement, at the
effective time of the Recapitalization Merger (the "Recapitalization
Effective Time"), a new corporation formed by the Investor ("Newco") will be
merged into Alliance (the "Recapitalization Merger"), the separate corporate
existence of Newco will cease, and Alliance will continue as the surviving
corporation (the "Recapitalization Company"). Pursuant to the
Recapitalization Merger, each share of Alliance common stock, par value $.01
("Common Stock"), issued and outstanding immediately prior to the
Recapitalization Effective Time other than dissenting shares, either (1) will
be converted into the right to receive $11.00 in cash (the "Cash Merger
Price"), or (2) will be retained by such stockholder. Because the
Recapitalization Merger Agreement requires that 727,273 shares in the
aggregate of Common Stock be retained by Alliance's existing shareholders,
the right to either receive $11.00 in cash for each share or to retain that
share of Alliance common Stock is subject to proration, as set forth in the
Recapitalization Merger Agreement included as an exhibit to the Form 8-K
filed by Alliance on August 1, 1997.
In addition, in connection with the Recapitalization Merger, subject to
certain conditions, Alliance will acquire all the shares of common stock of a
new holding company formed by Apollo to acquire SMT Health Services Inc. (the
"Acquisition"). After the Recapitalization
13
Merger and the Acquisition, affiliates of Apollo will own approximately 90%
of the outstanding Common Stock of Alliance, and Alliance's existing
shareholders will own approximately 10% of the outstanding Common Stock of
Alliance.
In connection with the Recapitalization Merger Agreement, the Investor
entered into a Stockholder Agreement, dated as of July 23, 1997 (the
"Stockholder Agreement"), with certain beneficial owners of shares of
Alliance Common Stock (the "Stockholders") representing beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) of approximately 66% of Alliance's Common Stock. Pursuant to the
Stockholder Agreement, the Stockholders have agreed to vote all shares
beneficially owned by them in favor of the approval of the Recapitalization
Merger Agreement and the Recapitalization Merger. The Stockholders that hold
securities convertible into or exercisable for shares of Alliance Common
Stock have further agreed to convert or exercise all such securities prior to
the time of the special meeting of shareholders called in connection with the
Recapitalization Merger. In addition, each Stockholder has granted Investor
an option to acquire their shares of Common Stock, and a proxy to vote such
shares in favor of the Recapitalization Merger and the Recapitalization
Merger Agreement, among other things.
At the closing of the Recapitalization Merger and the Acquisition,
significant new sources of financing will be provided to Alliance for the
purchase of shares of Common Stock in the Recapitalization Merger, repayment
of indebtedness and for working capital purposes, among other uses. Details
concerning the impact of the Recapitalization Merger and the Acquisition, and
the related financing on the capitalization of Alliance will be provided in
the Registration Statement on Form S-4 relating to the Recapitalization
Merger and Acquisition, and the Registration Statement on Form S-2 relating
to a portion of the new financing, both of which are expected to be filed
shortly.
CAPITAL EXPENDITURES -- The Company purchased 12 new high-field MRI systems
and upgraded two other MRI systems at a total approximate cost of $19,000,000
during the first half of 1997. Approximately 95% of this amount was financed
by long-term secured loans. During the first half of 1997 the Company also
disposed of ten less technologically advanced mid-field MRI systems.
The Company currently plans to purchase twelve additional new high-field
and open MRI systems in 1997 and plans to upgrade certain existing systems by
year-end, subject to obtaining related MRI service contracts with customers
and obtaining financing for the equipment acquisitions. 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, and expects to
dispose of most of its remaining older systems during 1997.
In February 1996, the Company acquired four MRI systems and associated MRI
contracts from Mobile M.R. Venture, Ltd. 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. In late
14
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 16 new
CT customers. In May 1997, the Company acquired two MRI systems and related
customer contracts from Pacific Medical Imaging, Inc. These transactions
were primarily funded with approximately $3,600,000 from existing cash
reserves, debt assumed and issuance of equity securities. 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.
15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company held its annual meeting of stockholders on May 15, 1997.
The following six persons were elected as Directors of the Company to serve
until the next annual meeting of stockholders or until their respective
successors shall be duly elected and shall qualify:
NAME VOTES FOR VOTES WITHHELD
James E. Buncher 10,197,318 21,600
Vincent S. Pino 10,200,318 18,600
Robert B. Waley-Cohen 10,200,318 18,600
John C. Wallace 10,200,318 18,600
Richard N. Zehner 10,200,318 18,600
Douglas M. Hayes 10,200,318 18,600
The stockholders also approved a proposal to amend the Company's
Restated Certificate of Incorporation to increase the number of shares of
authorized common stock from 25,000,000 to 50,000,000, with 10,122,688 votes
cast in favor of the proposal, 85,355 votes cast against the proposal, 10,875
votes abstaining, and 708,553 shares unvoted.
The stockholders also approved a proposal to amend the Company's
Amended and Restated 1991 Stock Option Plan, with 7,320,535 votes cast in
favor of the proposal, 1,009,869 votes cast against the proposal, 16,575
votes abstaining, and 1,871,939 shares unvoted.
The stockholders further approved the appointment of Ernst & Young
LLP as the Company's independent auditors for the year ending December 31,
1997, with 10,190,168 votes cast in favor of such action, 3,850 votes cast
against such action, and 24,900 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. NOTE DESCRIPTION
2.1 (22) Stockholder Agreement among Newport Investment LLC
and the individuals listed on Schedule A attached
thereto, dated as of July 23, 1997.
2.2 (22) Agreement and Plan of Merger between Alliance
Imaging, Inc., and Newport Investment LLC, dated as
of July 23, 1997.
3.1 (21) Restated Certificate of Incorporation of Alliance
Imaging, Inc.
3.2 (1) By-Laws of Alliance Imaging, Inc., as amended.
16
4.1 (1) Specimen of Common Stock Certificate.
4.2 (9) 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 (8) 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.
4.2.2 (18) 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 June 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 June 30, 1993.
4.4.5 (6) Amendment No. 6 to Note Purchase Agreement dated as
of January 1, 1994.
4.4.9 (10) Amendment No. 7 to Note Purchase Agreement dated as
of December 31, 1994.
4.4.10 (8) Amendment No. 8 to Note Purchase Agreement dated as
of December 31, 1994.
4.4.11 (18) Amendment No. 9 to Note Purchase Agreement dated as
of April 15, 1996.
17
4.4.12 (19) Amendment No. 10 to Note Purchase Agreement dated as
of November 6, 1996.
4.4.13 (21) Amendment No. 11 to Note Purchase Agreement dated as
of March 25, 1997.
4.5 (1) Amended and Restated Shareholders Agreement dated as
of April 17, 1989.
4.6 (11) 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 (12) 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 (13) Registration Rights Agreement dated as of
December 31, 1994 among the Registrant, the Senior
Noteholders and the Senior Subordinated
Debentureholders.
4.9 (14) Certificate of Designation concerning the
Registrant's Series A 6.0% Cumulative Preferred
Stock.
4.10 (15) Certificate of Designation concerning the
Registrant's Series B Convertible Preferred Stock.
4.11 (18) Certificate of Designation concerning the
Registrant's Series C 5% Cumulative Convertible
Redeemable Preferred Stock.
4.12 (21) Amended Certificate of Designation concerning the
Registrant's Series D 4% Cumulative Convertible
Redeemable Preferred Stock.
4.13 (21) Amended Certificate of Designation concerning the
Registrant's Series E 4% Cumulative Convertible
Redeemable Convertible Preferred Stock.
4.14 (21) Certificate of Elimination concerning the
Registrant's Series A 6% Cumulative Preferred Stock
and Series B 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.
18
10.4 (20) Amended and Restated 1991 Stock Option Plan of
Alliance Imaging, Inc., including forms of agreement
used thereunder.
10.16 (1) Form of Indemnification Agreement between Alliance
Imaging, Inc. and its directors and/or officers.
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 (23) Amended and Restated Employment Agreement dated as
of May 15, 1997, between Alliance Imaging, Inc. and
Richard N. Zehner.
10.25 (23) Amended and Restated Employment Agreement dated as
of May 15, 1997, between Alliance Imaging, Inc. and
Vincent S. Pino.
10.26 (7) Employment Agreement dated as of September 9, 1993,
between Alliance Imaging, Inc. and Terry A. Andrues.
10.27 (7) Employment Agreement dated as of September 9, 1993,
between Alliance Imaging, Inc. and Jay A. Mericle.
10.28 (23) Amended and Restated Employment Agreement dated as of
May 15, 1997, between Alliance Imaging, Inc. and
Terrence M. White.
10.29 (7) Employment Agreement dated as of June 6, 1994,
between Alliance Imaging, Inc. and Neil M. Cullinan.
10.30 (7) Employment Agreement dated as of June 6, 1994,
between Alliance Imaging, Inc. and Cheryl A. Ford.
10.31 (21) Amended and Restated Standstill Agreement dated as of
December 31, 1996 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 (21) Amended and Restated Standstill Agreement, dated as
of December 31, 1996, between Richard N. Zehner and
Alliance Imaging, Inc.
19
10.33 (21) Amended and Restated Standstill Agreement, dated as
of December 31, 1996, between each of The
Northwestern Mutual Life Insurance Company, The
Travelers Indemnity Company, The Travelers Insurance
Company, The Travelers Life and Annuity Company, The
Lincoln National Life Insurance Company and Bedrock
Asset Trust I and Alliance Imaging, Inc.
10.34 (21) Amended and Restated Standstill Agreement, dated as
of December 31, 1996, between DLJ Capital Corporation
and Alliance Imaging, Inc.
10.36 (16) Employment Agreement dated July 7, 1995 between
Alliance Imaging, Inc. and Michael W. Grismer.
10.37 (23) Amended and Restated Long-Term Executive Incentive
Plan dated as of July 22, 1997.
10.38 (17) Loan and Security Agreement with Comerica
Bank-California, dated as of December 21, 1995.
10.39 (18) Royal Medical Health Services, Inc. Merger Agreement
dated as of April 16, 1996.
10.40 (18) A & M Trucking, Inc. Acquisition Agreement dated as
of April 16, 1996.
10.41 (18) 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 (18) Form of Warrant Agreement concerning 96,900 common
shares with an exercise price of $5.00 per share
dated as of April 26, 1996.
10.43 (19) Form of Warrant Agreement concerning 125,000 common
shares with an exercise price of $5.00 per share
dated as of November 6, 1996.
10.44 (21) Bridge Loan Agreement dated as of December 31, 1996
between Alliance Imaging, Inc. and General Electric
Company, acting through GE Medical Systems.
10.45 (21) Form of Senior Bridge Note in the aggregate principal
amount of $18,000,000, dated December 31, 1996.
20
10.46 (21) Assignment, dated December 31, 1996, by The
Northwestern Mutual Life Insurance Company, The
Travelers Indemnity Company, The Travelers Insurance
Company, The Travelers Life and Annuity Company, The
Lincoln National Life Insurance Company and Bedrock
Asset Trust I to Alliance Imaging, Inc.
10.47 (21) Stock Purchase Agreement dated as of March 25, 1997,
between Alliance Imaging, Inc. and General Electric
Company, acting through GE Medical Systems.
- ------------------
(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.
(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 June 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 June 30, 1994.
(8) 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, 1994.
(9) 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.
21
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) Incorporated by reference herein to Exhibit 10.36 filed in response to
Item 6(a), "Exhibits" of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995.
(17) 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.
(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 March 31, 1996.
(19) 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, 1996.
(20) Incorporated by reference herein to Exhibits filed with the Company's
Registration Statement on Form S-1, No. 33-40805, initially filed on May
24, 1991 and the Company's definitive Proxy Statement with respect to its
Annual Meeting of Stockholders held May 16, 1996.
(21) 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, 1996.
(22) Incorporated by reference herein to Exhibits 2.1 and 2.2 filed in
response to Item 7, "Exhibits" of the Company's Form 8-K Current Report
dated August 1, 1997.
22
(23) Filed herewith.
(b) REPORTS ON FORM 8-K IN THE SECOND QUARTER OF 1997:
None filed for the quarter ended June 30, 1997.
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.
August 8, 1997 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 August 8, 1997.
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)
23