FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
or
Transition report pursuant to Section 13 or 15(d) of the
------ Securities Exchange Act of 1934
For the transition period from to
--------- ---------
Commission File No.: 0-19897
SMT HEALTH SERVICES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1672183
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10521 PERRY HIGHWAY, WEXFORD, PENNSYLVANIA 15090
(Address of principal executive offices)
412-933-3300
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At October 31, 1996, 3,460,661 shares of Common Stock, $0.01 par value, of the
registrant were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SMT Health Services Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
September 30, December 31,
1996 1995
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ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents - unrestricted $ 4,349,569 $ 2,341,519
Cash and cash equivalents - restricted (Note 4) 670,000 1,600,000
Accounts receivable - no allowance for doubtful
accounts 1,531,685 1,059,567
Notes receivable - current portion 51,082 47,760
Receivable from the sale of leases secured by equipment
- current portion (Note 4) 376,916 342,789
Other current assets 661,345 249,961
----------- -----------
Total current assets 7,640,597 5,641,596
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 208,720 174,556
Furniture and fixtures 60,874 59,712
Vehicles 166,425 125,103
Leasehold improvements 28,495 27,915
Leased medical equipment 33,830,009 22,167,551
----------- -----------
Total property and equipment 34,294,523 22,554,837
Less accumulated depreciation and amortization (6,373,022) (6,613,759)
----------- -----------
Property and equipment, net 27,921,501 15,941,078
----------- -----------
OTHER ASSETS:
Notes receivable - noncurrent 13,502 52,240
Receivable from the sale of leases secured by equipment
- noncurrent (Note 4) 591,480 878,590
Contract and license acquisition costs, net of
accumulated amortization of $868,000 and
$788,000, respectively 652,723 109,260
Deposits and other assets 568,698 506,041
Deferred income taxes, net of valuation allowance
of $103,000 at December 31, 1995 (Note 5) 821,000 219,000
----------- -----------
Total other assets 2,647,403 1,765,131
----------- -----------
TOTAL ASSETS $38,209,501 $23,347,805
=========== ===========
See Notes to Consolidated Financial Statements.
-2-
SMT Health Services Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited) (continued)
September 30, December 31,
1996 1995
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 357,897 $ 270,277
Accrued wages and related taxes 20,510 57,823
Current portion of long-term debt and capital
lease obligations 6,198,196 4,380,930
Other current liabilities 727,655 527,217
----------- ------------
Total current liabilities 7,304,258 5,236,247
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS -
less current portion 20,466,683 12,709,905
----------- ------------
Total liabilities 27,770,941 17,946,152
----------- ------------
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value; authorized
10,000,000 shares; issued and outstanding 3,357,000
and 2,654,400, respectively 33,570 26,544
Cumulative Convertible Preferred Stock; $0.01 par value;
authorized 994,600 shares; no shares issued and
Outstanding -- --
Additional paid-in capital (Note 5) 9,729,745 6,636,070
Retained earnings/accumulated deficit 675,245 (1,260,961)
----------- ------------
Total Stockholders' equity 10,438,560 5,401,653
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,209,501 $ 23,347,805
=========== ============
See Notes to Consolidated Financial Statements.
-3-
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)
Three Months Three Months
Ended Ended
September 30, 1996 September 30, 1995
------------------- ------------------
REVENUES:
Service revenue $4,754,324 $3,821,904
Interest income 43,267 39,546
---------- ----------
Total revenues 4,797,591 3,861,450
---------- ----------
COSTS AND EXPENSES:
Operating expenses - third parties 1,586,903 1,327,119
Depreciation and amortization 1,198,155 869,543
Selling, general and administrative 629,144 652,536
Interest - third parties 500,659 429,071
Other (Note 11) (300,000) --
---------- ----------
Total costs and expenses 3,614,861 3,278,269
---------- ----------
Income before income taxes 1,182,730 583,181
---------- ----------
Income taxes (Note 5) 267,000 152,000
---------- ----------
Net income $ 915,730 $ 431,181
========== ==========
Earnings per Common Share $.21 $.14
========== ==========
Weighted Average Shares outstanding (Note 2) 3,179,000 2,648,400
========== ==========
See Notes to Consolidated Financial Statements.
-4-
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)
Nine Months Nine Months
Ended Ended
September 30, 1996 September 30, 1995
------------------- -------------------
REVENUES:
Service revenue $13,478,930 $11,318,453
Interest income 127,537 86,451
----------- -----------
Total revenues 13,606,467 11,404,904
----------- -----------
COSTS AND EXPENSES:
Operating expenses - third parties 4,477,630 4,026,381
Operating expenses - lease expenses - related parties -- 154,849
Depreciation and amortization 3,307,152 2,725,950
Selling, general and administrative 2,002,377 1,815,330
Interest - third parties 1,447,102 1,231,884
Interest - related parties -- 86,538
Other (Note 11) (300,000) --
----------- -----------
Total costs and expenses 10,934,261 10,040,932
----------- -----------
Income from continuing operations before income taxes,
minority interests and gain on sale 2,672,206 1,363,972
Minority interests in earnings of subsidiaries (Note 7) -- 49,906
----------- -----------
Income from continuing operations before income taxes
and gain on sale 2,672,206 1,314,066
Gain on sale of partnership interests -- 48,219
----------- -----------
Income from continuing operations before income taxes 2,672,206 1,362,285
Income taxes (Note 5) 736,000 360,000
----------- -----------
Net income from continuing operations 1,936,206 1,002,285
----------- -----------
Discontinued operations:
Loss on disposal of discontinued operations, net of
tax benefit of $102,000 in 1995 -- (198,000)
Extraordinary item, debt forgiveness, net of income
tax expense of $102,000 -- 198,000
----------- -----------
Net Income $ 1,936,206 $ 1,002,285
=========== ===========
Earnings per Common Share:
Continuing operations $.50 $.36
Discontinued operations -- --
----------- -----------
Earnings Per Common Share $.50 $.36
=========== ===========
Weighted Average Shares outstanding (Note 2) 2,879,000 2,568,400
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
Nine Months Nine Months
Ended Ended
September 30, 1996 September 30, 1995
------------------ ------------------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Net income $1,936,206 $1,002,285
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,307,152 2,725,950
Minority interests in subsidiaries -- 49,906
Negative amortization on capital lease obligations -- 5,521
Deferred income taxes 623,000 255,000
Gain on sale of partnership interests -- (48,219)
Other -- 10,467
Changes in assets and liabilities of continuing operations:
Accounts and notes receivable (362,247) (245,861)
Other current assets (485,839) 23,176
Accounts payable and other 288,058 166,552
Accrued wages and related taxes (37,313) 52,864
--------- ---------
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES 5,269,017 3,997,641
--------- ---------
NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES -- (64,264)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,269,017 3,933,377
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,936,255) (220,404)
Payment for purchase of acquired entity (642,840) --
Net change in cash restricted for equipment financing purposes 930,000 --
Net cash received for sale of partnership interests -- 122,854
Net cash received for sale of discontinued entities -- 110,000
Other (99,938) (52,409)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,749,033) (39,959)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under loan agreements and capital leases:
Continuing operations:
Related parties -- (329,627)
Third parties (3,387,635) (2,326,303)
Discontinued operations -- (27,807)
Issuance of Common Stock from exercise of stock options and warrants 1,875,701 --
Other -- (1,649)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (1,511,934) (2,685,386)
--------- ---------
See Notes to Consolidated Financial Statements.
-6-
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) (continued)
Nine Months Nine Months
Ended Ended
September 30, 1996 September 30, 1995
------------------ ------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS - (unrestricted) 2,008,050 1,208,032
CASH AND CASH EQUIVALENTS - (unrestricted) -
Beginning of period 2,341,519 717,004
------------------ ------------------
CASH AND CASH EQUIVALENTS - (unrestricted) -
End of period $4,349,569 $1,925,036
================== ==================
See Notes to Consolidated Financial Statements.
-7-
SMT Health Services Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For The Nine Month Period Ended September 30, 1996
(Unaudited)
Retained
Common Stock Preferred Stock Additional Earnings/ Total
----------------------------- --------------------- Paid-In (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
------------ --------------- ------- ------------ ------------- ------------ -----------
BALANCES - December 31, 1995 2,654,400 $26,544 -- $ -- $6,636,070 ($1,260,961) $5,401,653
Exercise of Stock Options and
Warrants (Note 10) 702,600 7,026 -- -- 1,868,675 -- 1,875,701
Tax Adjustment Regarding Stock
Option and Warrant Exercises
(Note 5) -- -- -- -- 1,225,000 -- 1,225,000
Net Income -- -- -- -- -- 1,936,206 1,936,206
------------ --------------- ------- ------------ ------------- ----------- -----------
BALANCES - September 30, 1996 3,357,000 $33,570 -- $ -- $9,729,745 $ 675,245 $10,438,560
============ =============== ======= ============ ============= =========== ===========
See Notes to Consolidated Financial Statements.
-8-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - BASIS OF PRESENTATION
SMT Health Services Inc. and its wholly owned subsidiaries (the "Company") are
engaged primarily in providing medical diagnostic imaging services to
hospitals, physicians and patients. The Company, through its subsidiaries,
currently operates seventeen mobile Magnetic Resonance Imaging (MRI) Units
("MRI Units") in Pennsylvania, West Virginia, North Carolina, South Carolina,
Virginia, Kentucky and Ohio.
The Company's Common Stock and Warrants currently trade on the National
Association of Securities Dealers, Inc. Automated Quotations Systems (NASDAQ)
National Market System under the symbols "SHED" and "SHEDW", respectively.
The unaudited consolidated financial statements as of and for the three and
nine month periods ended September 30, 1996 and 1995 include the accounts of
the Company and its majority and wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements included herein have been
prepared by management in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures which are normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted in accordance with SEC informational requirements.
The financial statements reflect normal recurring accounting adjustments
which, in the opinion of management, are necessary for a fair presentation of
the financial position and results of operations for the interim period. The
results of operations for the three and nine month periods ended September 30,
1996 are not necessarily indicative of the results for the entire current
fiscal year ending December 31, 1996. The consolidated financial statements
included herein should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Form 10-K/A (Amendment
No. 1) for the year ended December 31, 1995 which is on file at the Securities
and Exchange Commission.
Certain amounts in the September 30, 1995 Statements of Earnings and Cash
Flows have been reclassified to conform with the September 30, 1996
presentation.
-9-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 2 - NET EARNINGS PER COMMON AND COMMON SHARE EQUIVALENT
The net earnings per common and common share equivalent are calculated using
the weighted average common and common share equivalents outstanding during
the year, except where anti-dilutive. Common share equivalents include shares
issuable upon the exercise of stock options, rights and warrants less the
number of shares assumed purchased with the proceeds available from the
assumed exercise of the options, rights and warrants.
The Treasury Stock Method of reflecting use of proceeds from options and
warrants may not adequately reflect potential dilution if options and warrants
to acquire a substantial number of Common Shares (greater than 20% of the
number of Common Shares outstanding for the period for which the computation
is being made) are outstanding. In such instances, the Modified Treasury
Stock Method must be utilized.
The Company's options and warrants to acquire Common Shares exceed 20% and
accordingly, the Treasury Stock Method has been modified in determining the
dilutive effect of the options and warrants on earnings per share data.
Fully diluted earnings per common share are anti-dilutive and, accordingly,
are not presented.
NOTE 3 - CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company is engaged primarily in providing mobile MRI services to small-to-
medium-sized hospitals in Pennsylvania, West Virginia, North Carolina, South
Carolina, Virginia, Kentucky and Ohio.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain Significant Estimates: The Company operates mobile MRI Units which
are capital intensive and subject to changes in technology. The Company
primarily leases such equipment over a 48 to 60 month period and depreciates
the equipment over the respective lease period to an estimated residual value
which typically approximates 20% of the original cost of the
-10-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 3 - CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES (Continued)
equipment. The useful lives and residual values estimated by management are
considered significant estimates. Management does not currently anticipate
significant technological advances which could significantly affect its
estimates.
The Company is not dependent on any one customer or geographic region as a
source of its revenues. However, the Company utilizes the services of Hospital
Shared Services to process approximately 30% of its billings and collections.
NOTE 4 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
September 30, December 31,
1996 1995
------------- ------------
Capital lease and loan obligations $26,664,879 $17,090,835
Less current portion 6,198,196 4,380,930
----------- ------------
$20,466,683 $12,709,905
=========== ============
The total cost and accumulated amortization of property securing capital lease
and loan obligations at September 30, 1996 were approximately $33,833,000 and
$6,132,000, respectively. Interest rates under the capital leases and loan
obligations range from 8.5% to 13.5%.
The long-term debt and capital lease obligations balance includes
approximately $970,000 of capital lease obligations due to third parties
related to the equipment at the Auburn Regional Center for Cancer Care and
Airport Regional Imaging Center, which the Company had treated as discontinued
operations and sold in October 1994 and June 1995, respectively. Accordingly,
the Company has recorded an offsetting receivable for the lease receivables
due from the purchasers of the centers. Such lease receivables are secured by
the equipment and accounts receivable of the centers.
-11-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 4 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)
In November 1992, the Company issued a letter-of-credit in the amount of
$198,500 pursuant to a lease transaction related to the Airport Regional
Imaging Center. In exchange for restructuring the terms of the debt of this
Center, the Company increased the outstanding letter-of-credit to an aggregate
$400,000.
In November 1994, the Company issued a letter-of-credit in the amount of
$270,000 related to the purchase and financing of a new Mobile Unit. The
lessor holding this letter-of-credit allowed the letter-of-credit to terminate
on October 31, 1996.
In relation to a refinancing of Mobile Units in February and March 1995, the
Company issued two letters-of-credit in the aggregate amount of $930,000. In
February 1996, the lessor holding one of the letters-of-credit totaling
$330,000 allowed the letter-of-credit to expire.
On July 31, 1996, the Company refinanced two MRI units which had previously
been refinanced in March 1995 to more favorable lease terms. The new leases
totaled approximately $2.3 million (net of a $150,000 down payment) in the
aggregate and are being financed over a thirty-six month period at an interest
rate of 9.25%. The refinancing resulted in annual cash flow savings to the
Company of approximately $200,000. As a result of this refinancing, the
$600,000 letter-of-credit which had been issued in March 1995 was terminated.
The Company must maintain a cash balance on deposit with the bank which issued
the letters-of-credit equal to the outstanding letters-of-credit. At
September 30, 1996, the cash balance required to be on deposit totaled
$670,000.
In February 1995, the Company purchased an eighteen-month-old Siemens 1.0
Tesla Impact Mobile Unit for approximately $1.2 million. The Company financed
the purchase of this unit under a 48 month dollar-out lease requiring monthly
payments of approximately $31,000.
In June 1995, the Company upgraded one of its .5 Tesla General Electric Signas
to a 1.0 Tesla Signa for approximately $1.9 million. The Company financed the
purchase of this unit with a 60 month dollar-out capital lease requiring
monthly payments of approximately $41,000.
In September 1995, the Company purchased a new unit for approximately $1.9
million. The Company financed the purchase of this new unit with a 60 month
loan requiring monthly payments of approximately $40,000.
-12-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 4 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)
The Company upgraded one of its .5 Tesla Signas to a 1.0 Tesla Horizon unit.
The new unit was financed at a net total cost of approximately $2.0 million
and was delivered in late February 1996. The Company financed the purchase of
this new unit with a 60 month dollar-out lease requiring monthly payments of
approximately $44,000.
The Company contracted with several new hospital clients and purchased a new
Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The
cost of this new unit approximated $1.9 million which was financed with a 60
month loan requiring monthly payments of approximately $41,000.
In April 1996, the Company upgraded one of the units purchased from another
mobile provider (Note 9) to a Siemens 1.0 Tesla Impact unit. The new unit was
financed at a net total cost of approximately $1.9 million. The Company
financed this new unit with a 60 month dollar-out lease requiring monthly
payments of approximately $43,000.
In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens 1.0
Tesla Impact unit. The new unit was financed at a net total cost of
approximately $2.0 million with a 60 month dollar-out lease requiring monthly
payments of approximately $43,000.
The Company in May 1996 signed an agreement with Siemens Medical Systems to
upgrade the second unit purchased from another mobile provider (Note 9) and to
purchase a new unit during the fourth quarter of 1996. Delivery of the
upgraded unit occurred in July 1996 and the new unit was delivered and began
operation on October 1, 1996. The upgrade's net cost approximated $1.9
million and the Company financed approximately $1.7 million with a 60 month
finance agreement requiring monthly payments of approximately $36,000. The
Company's new unit cost approximately $1.9 million and the Company financed
approximately $1.7 million requiring a monthly payment of approximately
$37,000.
The Company purchased and took delivery of two new GE 1.0 Tesla Horizon units
in September 1996. These units were purchased at a cost of approximately $1.8
million each and the Company financed approximately $1.6 million and $1.5
million with 60 month finance agreements requiring monthly payments of
approximately $34,000 and $32,000, respectively.
-13-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 4 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)
The Company completed a previously negotiated upgrade of a .5 Tesla system to
a 1.0 Tesla Horizon on November 2, 1996. The new unit was financed at a net
cost of approximately $1.5 million with a 60 month finance agreement requiring
monthly payments of approximately $32,000.
On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto
Community Health Network (the "Network") for approximately $390,000 and signed
new service contracts with six South Carolina hospitals which are members of
the Network. The Company began servicing the new hospitals immediately with
the MRI unit purchased from the Network and plans to trade-in and upgrade the
purchased unit to a new 1.0 Tesla Horizon in mid-December 1996. This new unit
represents the Company's eighteenth mobile MRI unit and is the seventh new
unit acquired this year.
NOTE 5 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109). Deferred income taxes are
provided to account for temporary differences between financial statement
accounting and income tax reporting and relate principally to differences in
reporting for diagnostic medical equipment, depreciation, accrued expenses and
net operating loss carryforwards.
As a result of the exercise of stock options pursuant to the Company's 1991
Employer Stock Option Plan, 1991 Director Stock Option Plan and warrants
granted to a former director and outside consultant, the Company is entitled
to a tax deduction of approximately $3.6 million. The deduction relates to
the difference between the option exercise prices and the fair market value of
the Common Stock at the time of such exercises. In accordance with SFAS 109,
the Company recorded a deferred tax asset of approximately $1.2 million
related to this deduction and in accordance with Accounting Principles Board
Opinion #25 (APB #25) a corresponding credit was made to additional paid-in
capital. Management believes no deferred tax asset valuation allowance is
necessary as of September 30, 1996.
-14-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 5 - INCOME TAXES (Continued)
Income tax expense for the three and nine month periods ended September 30,
1996 reflects a $200,000 deferred tax benefit resulting from an adjustment to
the Company's Federal net operating loss carryforward.
At September 30, 1996, the Company had net operating loss carryforwards of
approximately $8.0 million which are available to offset future Federal
taxable income through 2010.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
The total amount of interest payments during the nine months ended September
30, 1996 and 1995 were approximately $1,435,000 and $1,295,000, respectively.
In addition, income tax payments for the nine month periods ended September
30, 1996 and 1995 were approximately $215,000 and $31,000, respectively.
NOTE 7 - SALE OF PARTNERSHIP INTERESTS
On June 30, 1995, in conjunction with the sale of the Airport Center which had
been treated as a discontinued operation, the Company sold its majority
ownership and general partner rights in four cardiac care partnerships for a
total sale price of $300,000 comprised of $200,000 in cash and a $100,000,
thirty-month note. The Company recognized a pre-tax gain on this sale of
$48,219. The partnerships, which constituted approximately seven percent of
the Company's revenues, had total assets of approximately $1.4 million,
comprised primarily of diagnostic equipment and accounts receivable, and total
liabilities of approximately $1.2 million comprised primarily of capital lease
obligations associated with the diagnostic equipment.
NOTE 8 - LITIGATION
The Company had been named as a defendant, along with the hospital which
contracts for the Company's MRI services, in a claim filed by a woman who
alleged to have incurred partial paralysis as a result of being mishandled
during an MRI procedure. The claim had been filed for $6.0 million in
damages. The claim was settled by the Company's insurance company in November
1996 with no admission of liability by the Company and no financial effect to
the Company.
-15-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 9 - ACQUISITION
On March 21, 1996, the Company purchased certain assets of a mobile provider
which operated mobile units in the state of North Carolina (the "Seller").
The purchase price approximated $600,000 in cash [net of negotiated trade-in
value of approximately $500,000 (which approximated the purchase price of the
units acquired) for two of the Seller's mobile MRI units] in exchange for MRI
Programs including Certificate of Need licenses or exemptions and certain
customer service contracts. The Company traded-in and upgraded one of the
purchased units to newer technology in April 1996 and traded-in and upgraded
the second unit during July 1996 (Note 4).
NOTE 10 - STOCK OPTIONS, UNIT PURCHASE OPTIONS AND WARRANTS
During the period May through September 1996, stock options covering 503,500
shares of Common Stock were exercised pursuant to the Company's 1991 Employee
Stock Option Plan and 1991 Director Stock Option Plan. The Company received
approximately $1,016,000 as a result of such stock option exercises. At
September 30, 1996, options to purchase 360,175 and 10,100 shares were
exercisable pursuant to the employee and director stock option plans,
respectively.
During the period July through October 1996, transferees of a Unit Purchase
Option initially granted to the Company's Initial Public Offering underwriter
exercised the Option to purchase 120,000 units (comprised of 1.05 shares of
Common Stock and one Warrant exercisable to 1.05 shares of Common Stock) at
$5.94. The Company received approximately $713,000 as a result of such
exercises and the Company issued 126,000 Common Shares and 120,000 Warrants.
In August 1996, a transferee exercised 24,000 Warrants received from the
aforementioned Unit Purchase Option exercise. As a result of the Warrant
exercise, 25,200 Common Shares were issued (1.05 Common Shares per Warrant
exercisable at $6.67 per share) and the Company received approximately
$168,000.
During July and October 1996, the Managing Director of Commonwealth
Associates, Inc. and Commonwealth Associates Inc. each exercised 50,000
Warrants, respectively, at an exercise price of $4.47 in a cashless
transaction whereby both tendered shares of Common Stock as payment of the
purchase price in connection with the exercise of the Warrants. Accordingly,
the Company issued 36,061 shares of Common Stock and retired into Treasury
Stock 63,939 shares of Common Stock pursuant to this exercise.
-16-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SEPTEMBER 30, 1996
NOTE 10 - STOCK OPTIONS, UNIT PURCHASE OPTIONS AND WARRANTS
(Continued)
During September 1996, a former outside director and consultant to the Company
exercised 114,500 Warrants granted for services rendered at an exercise price
of $4.02. Accordingly, the Company issued 114,500 shares of Common Stock and
received approximately $460,000.
NOTE 11 - STATE SALES TAX REFUND
During September 1996, the Company received formal notification of a state
sales tax refund of approximately $300,000, net of expenses. The refund is
the result of sales tax paid to a certain state over a period of time which
the Company determined (by obtaining a private letter ruling from the state)
was actually exempt from such tax. Payment of the refund is expected in
November 1996.
NOTE 12 - RELATED PARTY TRANSACTIONS
During late September 1996, the Company financed the purchase of a new MRI
unit (Note 4) with DVI Financial Services Inc., a wholly-owned subsidiary of
DVI, Inc. A shareholder of and a consultant to DVI Inc. serves as a member of
the Company's Board of Directors. The new MRI unit cost approximately $1.8
million and the Company financed approximately $1.5 million at 9.5% over a 60
month period requiring monthly loan payments of approximately $32,000.
-17-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion that follows should be read in conjunction with the
accompanying unaudited Consolidated Financial Statements and Notes thereto of
SMT Health Services Inc. and Subsidiaries.
Results of Operations
The following table sets forth for the periods indicated the percentages which
the items in the Statement of Earnings bear to revenues and the dollar
increase (decrease) of such items as compared to the corresponding period in
the prior year.
- ---------------------------------------------------------------------------------------------------------
Percentage of Revenue Increase (Decrease) Prior Year
- ---------------------------------------------------------------------------------------------------------
Three Nine Months Three Nine Months
Months Ended Ended Months Ended Ended
- ---------------------------------------------------------------------------------------------------------
9/30/96 9/30/95 9/30/96 9/30/95 9/30/96 9/30/96
- ---------------------------------------------------------------------------------------------------------
Revenues 100% 100% 100% 100% $ 936,000 $2,201,000
- ---------------------------------------------------------------------------------------------------------
Cost & Expenses:
- ---------------------------------------------------------------------------------------------------------
Operating 33% 34% 33% 37% 260,000 296,000
- ---------------------------------------------------------------------------------------------------------
Depreciation & 25% 23% 24% 24% 328,000 581,000
Amortization
- ---------------------------------------------------------------------------------------------------------
S, G & A 13% 17% 15% 16% ( 23,000) 187,000
- ---------------------------------------------------------------------------------------------------------
Interest 10% 11% 11% 11% 71,000 129,000
- ---------------------------------------------------------------------------------------------------------
Other ( 6%) -- ( 2%) -- ( 300,000) ( 300,000)
- ---------------------------------------------------------------------------------------------------------
Total Costs and Expenses 75% 85% 81% 88% 336,000 893,000
- ---------------------------------------------------------------------------------------------------------
Income From Operations
Before Taxes, Minority 25% 15% 19% 12% 600,000 1,308,000
Interests and Gain on Sale
- ---------------------------------------------------------------------------------------------------------
Minority Interests -- -- -- -- -- ( 50,000)
- ---------------------------------------------------------------------------------------------------------
Income From Operations
Before Taxes and Gain On 25% 15% 19% 12% 600,000 1,358,000
Sale
- ---------------------------------------------------------------------------------------------------------
Gain on Sale of
Partnership Interests -- -- -- -- -- ( 48,000)
- ---------------------------------------------------------------------------------------------------------
Income Before Income Taxes 25% 15% 19% 12% 600,000 1,310,000
- ---------------------------------------------------------------------------------------------------------
Income Taxes 6% 4% 5% 3% 115,000 376,000
- ---------------------------------------------------------------------------------------------------------
Net Income 19% 11% 14% 9% $ 485,000 $ 934,000
- ---------------------------------------------------------------------------------------------------------
-18-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
Three Months Ended September 30, 1996 Compared To The
Three Months Ended September 30, 1995
Revenues for the third quarter of 1996 increased $936,000, or 24%, to
$4,798,000 compared to $3,862,000 for the third quarter of 1995. This
increase in revenue was primarily attributed to the fact that the Company
purchased one new unit in September 1995, one new unit in February 1996, two
new units in March 1996 and upgraded two units to newer technology during
1996. Further revenue increases are due to increased utilization of the
Company's mobile MRI units. Revenues derived from hospitals which the Company
serviced in both comparable periods increased 9% during the third quarter of
1996 compared to the third quarter of 1995 primarily as a result of increased
MRI procedures. The Company purchased two new units during September 1996
which did not have a material effect on the third quarter 1996 operations and
which are anticipated to have a favorable impact in future periods.
Operating expenses increased $260,000, or 20%, to $1,587,000 during the third
quarter of 1996 compared to $1,327,000 during the third quarter of 1995. The
increase is primarily due to approximately $370,000 of operating expenses
associated with the Company's new units purchased in September 1995 and the
first quarter of 1996, partially offset by a decrease of approximately
$110,000 in operating expenses of units in operation for both comparable
periods. This 9% decrease in expenses of units in operation for both
comparable periods is principally the result of $62,000 savings on lower
maintenance and cryogen contracts, $34,000 savings on state sales tax on
certain units and $33,000 savings on general repairs and maintenance costs,
partially offset by higher payroll costs for operational personnel.
Depreciation and amortization expense increased $328,000, or 38%, in the third
quarter of 1996 to $1,198,000 from $870,000 during the third quarter of 1995.
This increase was primarily due to depreciation expense associated with the
Company's new units purchased in September 1995 and the first quarter of 1996
as well as the units upgraded during 1996.
Selling, general and administrative costs in the third quarter of 1996
decreased $23,000 to $629,000, or 13% of revenues, compared to $652,000, or
17% of revenues during the third quarter of 1995. The decrease is primarily
due to lower consulting and professional fees.
Interest expense for the third quarter of 1996 increased $71,000 to $500,000
compared to $429,000 for the third quarter of 1995 primarily as a result of
the new units purchased in September 1995, February 1996 and March 1996, as
well as the units upgraded during 1996.
-19-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
Three Months Ended September 30, 1996 Compared To The
Three Months Ended September 30, 1995 (continued)
Other expense for the three months ended September 30, 1996 reflects a
$300,000 net state sales tax refund. The refund is the result of sales tax
paid to a certain state over a period of time which the Company determined (by
obtaining a private letter ruling from the state) was actually exempt from
such tax. The Company received formal notice of the refund in September 1996
and payment is expected in November 1996.
The Company reported net income of $916,000, or $.21 per share, during the
third quarter of 1996 versus $431,000, or $.14 per share, during the third
quarter of 1995. Income tax expense for the third quarter of 1996 was
$267,000, an effective tax rate of approximately 24%, as compared to income
tax expense of $152,000, an effective tax rate of approximately 26%, for the
third quarter of 1995. Income tax expense for the third quarter of 1996
reflects a $200,000 deferred tax benefit resulting from an adjustment to the
Company's Federal net operating loss carryforward (see Note 5 of the Company's
unaudited consolidated financial statements included in Item 1, which
information is incorporated herein by reference). Excluding the $200,000 tax
adjustment, the Company's effective tax rate for the three months ended
September 30, 1996 approximated 39%.
Nine Months Ended September 30, 1996 Compared To The
Nine Months Ended September 30, 1995
Revenues for the nine months ended September 30, 1996 increased $2,201,000, or
19%, to $13,606,000 compared to $11,405,000 for the nine months ended
September 30, 1995. Excluding revenues of approximately $548,000 for the six
months ended June 30, 1995 related to the company's cardiac partnerships,
which were sold on June 30, 1995, mobile MRI revenues increased approximately
20%. This increase in revenue was primarily attributed to the aforementioned
new units purchased during late 1995 and the first quarter of 1996, the
upgrade of two units to newer technology during 1996, as well as increased
utilization of the Company's mobile MRI units. Revenues derived from
hospitals which the Company serviced in both comparable periods increased
approximately 10% during the nine months ended September 30, 1996 compared to
the nine months ended September 30, 1995 primarily as a result of increased
MRI procedures.
-20-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
Nine Months Ended September 30, 1996 Compared To The
Nine Months Ended September 30, 1995
(continued)
Operating expenses increased $296,000, or 7%, to $4,477,000 during the nine
months ended September 30, 1996 compared to $4,181,000 during the nine months
ended September 30, 1995. Excluding approximately $179,000 of operating
expenses associated with the cardiac partnerships which were sold on June 30,
1995, mobile MRI operating expenses increased $475,000 primarily due to
approximately $830,000 of operating expenses associated with the Company's new
units purchased in September 1995 and the first quarter of 1996, partially
offset by a decrease of approximately $355,000, or 9%, in operating expenses
of units in operation for both comparable periods. This 9% decrease is
primarily a result of $164,000 of savings on lower maintenance and cryogen
contracts, $124,000 saving on state sales tax on certain units, $66,000
savings on the rental of the tractors used to transport the MRI units and
$57,000 savings on general repairs and maintenance costs, partially offset by
higher payroll costs for operational personnel.
Depreciation and amortization expense increased $581,000, or 21%, during the
nine months ended September 30, 1996 to $3,307,000 from $2,726,000 during the
nine months ended September 30, 1995. This increase was primarily due to
depreciation expense associated with the Company's new units purchased during
late 1995 and the first quarter of 1996, as well as the two units upgraded
during 1996.
Selling, general and administrative costs during the nine months ended
September 30, 1996 increased $187,000 to $2,002,000, or 15% of revenues,
compared to $1,815,000, or 16% of revenues during the nine months ended
September 30, 1995. The increase is primarily due to increased compensation
costs related to the Company's management bonus plan.
Interest expense for the nine months ended September 30, 1996 increased
$129,000 to $1,447,000 compared to $1,318,000 for the nine months ended
September 30, 1995, primarily as a result of the new units purchased during
late 1995 and the first quarter of 1996, as well as the units upgraded during
1996.
Other expense for the nine months ended September 30, 1996 reflects a $300,000
net state sales tax refund. The refund is the result of sales tax paid to a
certain state over a period of time which the Company determined (by obtaining
a private letter ruling from the state) was actually exempt from such tax.
The Company received formal notice of the refund in September 1996 and payment
is expected in November 1996.
-21-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
Nine Months Ended September 30, 1996 Compared To The
Nine Months Ended September 30, 1995
(continued)
The Company reported net income of $1,936,000, or $.50 per share, for the nine
months ended September 30, 1996 versus $1,002,000, or $.36 per share, during
the nine months ended September 30, 1995. Income tax expense for the nine
months ended September 30, 1996 was $736,000, an effective tax rate of
approximately 28%, as compared to income tax expense of $360,000, an effective
tax rate of approximately 26%, for the nine months ended September 30, 1995.
Income tax expense for the nine months ended September 30, 1996 reflects a
$200,000 deferred tax benefit resulting from an adjustment to the Company's
Federal net operating loss carryforward (see Note 5 of the Company's unaudited
consolidated financial statements included in Item 1, which information is
incorporated herein by reference). Excluding the $200,000 tax adjustment, the
Company's effective tax rate for the nine months ended September 30, 1996
approximated 35%.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, the Company experienced a net
increase of $5,269,000 in cash from operations as compared to $3,933,000
during the nine months ended September 30, 1995. This increase is primarily
due to increased income.
The Company used cash in investing activities during the nine months ended
September 30, 1996 of $1,749,000, primarily related to down payments and
deposits on the purchase of new MRI units totaling approximately $1,936,000 as
well as the purchase of a mobile MRI company in March 1996 for approximately
$643,000 (see Note 9 of the Company's unaudited consolidated financial
statements included in Item 1, which information is incorporated herein by
reference) offset by a reduction of $930,000 in the amount of restricted cash
related to equipment financing.
The Company used cash in financing activities during the nine months ended
September 30, 1996 of approximately $1,512,000 primarily related to $3,388,000
of principal payments under loan agreements and capital leases partially
offset by approximately $1,876,000 received upon exercise of stock options and
warrants during the second and third quarters of 1996. The Company
experienced a net increase in unrestricted cash and cash equivalents of
approximately $2,008,000
-22-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
during the nine months ended September 30, 1996 and maintained an unrestricted
cash balance at September 30, 1996 of approximately $4,350,000. The Company
also maintained a restricted cash balance of $670,000 at September 30, 1996.
The Company's trade accounts receivable balance increased by $472,000 to
$1,532,000 at September 30, 1996 primarily due to higher service revenues
during the quarter ended September 30, 1996. In the experience of the
Company, average accounts receivable collections typically do not exceed 40
days, as there are no billings subject to traditional third-party payors, and
the accounts receivable balance turned over approximately ten times during the
nine months ended September 30, 1996. Approximately 30% of the Company's
billings and collections are processed through Hospital Shared Services
("HSS"), a representative of certain hospitals. As a fee for these services,
HSS retains approximately 2.5% of gross billings to these hospitals and the
Company records the service revenues and related receivables net of such fees.
At September 30, 1996, the Company had a working capital surplus of $336,000.
In addition, the Company's cash flow from operations totaled $5,269,000 for
the nine months ended September 30, 1996 and the Company continues a positive
cash flow. Further, $6,198,000 of the $7,304,000 of current liabilities
relate to the current portion of capital leases and long-term debt which will
be due over the next twelve months, as opposed to current assets of $7,641,000
which are highly liquid and turn over frequently. The Company has been able
to meet all past debt service obligations, currently is able to meet all such
obligations, and anticipates it will continue to meet such obligations. As in
the past, management anticipates that such obligations will be funded by the
revenues generated by the Mobile Units.
To date, the Company has financed its equipment acquisitions and working
capital requirements with loans and leases, from internal cash flow and
capital contributions. As of September 30, 1996, the Company was a party to
leases and loans covering all of its mobile MRI units. The aggregate
outstanding principal balance of all such leases and loans was approximately
$26,665,000 at September 30, 1996.
On June 30, 1995, the Company sold its majority ownership and general partner
rights in four cardiac care partnerships for a total sale price of $300,000
comprised of $200,000 in cash and a $100,000 thirty-month note. The Company
recognized a pre-tax gain on this sale of $48,219.
-23-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The partnerships, which constituted approximately seven percent of the
Company's revenues, had total assets of approximately $1.4 million, comprised
primarily of diagnostic equipment and accounts receivable, and total
liabilities of approximately $1.2 million comprised primarily of capital lease
obligations associated with the diagnostic equipment.
In February 1995, the Company purchased an eighteen-month-old Siemens 1.0
Tesla Impact Mobile Unit for approximately $1.2 million. The Company financed
the purchase of this unit under a 48 month dollar-out lease requiring monthly
payments of approximately $31,000.
In June 1995, the Company upgraded one of its .5 Tesla General Electric Signas
to a 1.0 Tesla Signa for approximately $1.9 million. The Company financed the
purchase of this unit with a 60 month dollar-out lease requiring monthly
payments of approximately $41,000.
In September 1995, the Company purchased a new unit for approximately $1.9
million. The Company financed the purchase of this new unit with a 60 month
loan requiring monthly payments of approximately $40,000.
The Company upgraded one of its .5 Tesla Signas to a 1.0 Tesla Horizon unit.
The new unit was financed at a net total cost of approximately $2.0 million
and was delivered in late February 1996. The Company financed the purchase of
this new unit with a 60 month dollar-out lease requiring monthly payments of
approximately $44,000.
The Company contracted with several new hospital clients and purchased a new
Siemens 1.0 Tesla Impact unit which began service in mid-February 1996. The
cost of this new unit approximated $1.9 million which was financed with a 60
month loan requiring monthly payments of approximately $41,000.
In April 1996, the Company upgraded one of the units purchased from another
mobile provider (see Note 9 of the Company's unaudited consolidated financial
statements included in Item 1, which information is incorporated herein by
reference) to a Siemens 1.0 Tesla Impact unit with a net total cost of
approximately $1.9 million. The Company financed this new unit with a 60
month dollar-out lease requiring monthly payments of approximately $43,000.
-24-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In June 1996, the Company upgraded one of its .5 Tesla Signas to a Siemens 1.0
Tesla Impact unit. The new unit was financed at a net total cost of
approximately $2.0 million and financed with a 60 month dollar-out lease
requiring monthly payments of approximately $43,000.
The Company in May 1996 signed an agreement with Siemens Medical Systems to
upgrade the second unit purchased from another mobile provider (see Note 9 of
the Company's unaudited consolidated financial statements included in Item 1,
which information is incorporated herein by reference) and to purchase a new
unit during the fourth quarter of 1996. Delivery of the upgraded unit
occurred in July 1996 and the new unit was delivered and began operation on or
about October 1, 1996. The upgrades' net cost approximated $1.9 million and
the Company financed approximately $1.7 million with a 60 month finance
agreement requiring monthly payments of approximately $36,000. The Company's
new unit cost approximately $1.9 million and the Company financed
approximately $1.7 million requiring a monthly payment of approximately
$37,000.
The Company purchased and took delivery of two new GE 1.0 Tesla Horizon units
in mid-to-late September 1996. These units were purchased at a cost of
approximately $1.8 million each and the Company financed approximately $1.6
million and $1.5 million with 60 month finance agreements requiring monthly
payments of approximately $34,000 and $32,000, respectively.
The Company completed a previously negotiated upgrade of a .5 Tesla system to
a 1.0 Tesla Horizon on November 2, 1996. The new unit was financed at a net
cost of approximately $1.5 million with a 60 month finance agreement requiring
monthly payments of approximately $32,000.
On November 1, 1996, the Company purchased a mobile MRI unit from Palmetto
Community Health Network (the "Network") for approximately $390,000 and signed
new service contracts with six South Carolina hospitals which are members of
the Network. The Company began servicing the new hospitals immediately with
the MRI unit purchased from the Network and plans to trade-in and upgrade the
purchased unit to a new 1.0 Tesla Horizon in mid-December 1996. This new unit
represents the Company's eighteenth mobile MRI unit and is the seventh new
unit acquired this year.
-25-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Prior to July 1, 1995, the Company subleased certain truck cabs from Shared
Mobile Enterprises ("SME"), which, in turn, leased such truck cabs from an
independent third-party leasing company. Effective July 1, 1995, SME released
the Company from its obligations under ten long-term subleases in exchange for
the issuance to SME of 120,000 unregistered Common Shares valued at $3 per
share, the weighted average closing price for the stock for the prior thirty
trading days. The Company received an opinion from an independent financial
advisor that the transaction was fair to the Company and its shareholders. At
the same time, with the concurrence of the third-party leasing company, the
Company assumed SME's obligations under its original lease and modified that
lease by (i) extending the lease term by one additional year and (ii) adding
one additional truck cab to the schedule of leased property with a
corresponding increase in base rental payments. The $360,000 value of the
shares represents the present value of the excess of the sublease payments
over the original lease payments. The Company has capitalized the $360,000
and is amortizing this prepaid rent over a period which approximates the lease
term. SME was one hundred percent beneficially owned by certain
officers/directors and a former director/consultant of the Company who own
approximately 18% of the Company's outstanding Common Shares.
The Company has outstanding a letter-of-credit totaling $400,000 related to
equipment financing at a freestanding diagnostic imaging center which it sold
in June 1995 and on which it remains obligated (see Note 4 of the Company's
unaudited consolidated financial statements included in Item 1, which
information is incorporated herein by reference).
In November 1994, the Company issued a letter-of-credit in the amount of
$270,000 related to the purchase and financing of a new Mobile Unit. The
lessor holding this letter-of-credit allowed the letter-of-credit to terminate
October 31, 1996.
In relation to a refinancing of four Mobile Units in February and March 1995,
the Company issued two letters-of-credit in the aggregate amount of $930,000.
In February 1996, the lessor holding one of the letters-of-credit totaling
$330,000 allowed the letter-of-credit to expire.
On July 31, 1996, the Company refinanced two MRI units which had previously
been refinanced in March 1995 to more favorable lease terms. The new leases
totaled approximately $2.3 million (net of a $150,000 down payment) in the
aggregate and are being financed over a thirty-six month
-26-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
period at an interest rate of 9.25%. The refinancing resulted in annual cash
flow savings to the Company of approximately $200,000. As a result of this
refinancing, the $600,000 letter-of-credit which had been issued in March 1995
was terminated.
On March 21, 1996, the Company purchased certain assets of a mobile provider
which operated mobile units in the state of North Carolina (the "Seller").
The purchase price approximated $600,000 in cash [net of negotiated trade-in
value of approximately $500,000 (which approximated the purchase price of the
units acquired) for two of the Seller's mobile MRI units] in exchange for MRI
Programs including Certificate of Need licenses or exemptions and certain
customer service contracts. The Company traded-in and upgraded one of the
purchased units to newer technology in April 1996 and traded-in and upgraded
the second unit in July 1996. The unit upgraded in July 1996 is currently
contracted to provide temporary interim service to hospitals for a period of
approximately one year.
During 1996, the Company has signed long-term contracts with approximately 18
new customers and has extended for an additional two to three years
approximately 26 existing customer contracts.
At September 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8.0 million which are available
to offset future Federal taxable income through 2010.
The Company had been named as a defendant, along with the hospital which
contracts for the Company's MRI services, in a claim filed by a woman who
alleged to have incurred partial paralysis as a result of being mishandled
during an MRI procedure. The claim had been filed for $6.0 million in
damages. The claim was settled by the Company's insurance company in November
1996 with no admission of liability and no financial effect to the Company.
Management believes that the healthcare industry continues to be in a period
of consolidation characterized by mergers, joint ventures, acquisitions, sales
of all or part of healthcare companies or their assets, and other partnering
and investment transactions of various structures and sizes involving
healthcare companies. The Company continues to evaluate new opportunities
that allow for the expansion of its business through the acquisition of
additional Mobile Units in geographic
-27-
SMT HEALTH SERVICES INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
proximity to its existing regional markets or in locations that can serve as a
basis for new market areas. The Company, like other healthcare companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore
potential transactions of various types with other healthcare companies.
However, no assurances can be given as to whether any such transactions may be
consummated or, if so, when.
-28-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
See Note 8 - Litigation regarding termination of a legal proceeding which
information is included in Item 1 which is incorporated herein by reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.01 Employment Agreement by and between
SMT Health Services Inc. and Jeff D.
Bergman dated July 1, 1996..................... Filed herewith.
10.02 Employment Agreement by and between
SMT Health Services Inc. and Daniel
Dickman dated July 1, 1996..................... Filed herewith.
10.03 Employment Agreement by and between
SMT Health Services Inc. and David
Spindler dated October 1, 1996................. Filed herewith.
10.04 Employment Agreement by and between
SMT Health Services Inc. and David A.
Zynn dated October 1, 1996..................... Filed herewith.
10.05 Master Equipment Lease dated August
28, 1996 by and between SMT Health
Services Inc. and DVI Financial Services
Inc............................................ Filed herewith.
10.06 Loan and Security Agreement dated
September 11, 1996 by and between
Siemens Credit Corporation and SMT
Health Services Inc............................ Filed herewith.
10.07 Finance Lease and Security Agreement
dated September 26, 1996 by and between
Laurel Capital Corporation and SMT
Health Services Inc............................ Filed herewith.
10.08 Finance Lease and Security Agreement
dated July 26, 1996 by and between
Laurel Capital Corporation and SMT
Health Services Inc. (Lease 2165).............. Filed herewith.
-29-
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (Continued)
10.09 Finance Lease and Security Agreement
dated July 26, 1991 by and between
Laurel Capital Corporation and SMT
Health Services Inc. (Lease 2166).............. Filed herewith.
11.01 Earnings Per Share Computation................. Filed herewith.
27.01 Financial Data Schedule........................ Filed herewith.
99.01 Press release dated August 2, 1996............. Filed herewith.
99.02 Press release dated September 17, 1996......... Filed herewith.
99.03 Press release dated September 25, 1996......... Filed herewith.
99.04 Press release dated October 3, 1996............ Filed herewith.
99.05 Press release dated October 22, 1996........... Filed herewith.
99.06 Press release dated November 4, 1996........... Filed herewith.
(b) Report on Form 8-K.
The Company has not filed any reports on Form 8-K during the quarter
ended September 30, 1996.
-30-
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
understanding thereunto duly authorized.
SMT Health Services Inc.
(Registrant)
Date: November 12, 1996 By: /s/ Jeff D. Bergman
------------------------------------
Jeff D. Bergman
Chairman and Chief Executive Officer
Date: November 12, 1996 By: /s/ David A. Zynn
------------------------------------
David A. Zynn
Chief Financial Officer, Treasurer
and Principal Accounting Officer
-31-
EXHIBIT INDEX
-------------
Sequential Page Number
Exhibit No. or Reference
- ----------- ------------
10.01 Employment Agreement by and between
SMT Health Services Inc. and Jeff D.
Bergman dated July 1, 1996 Filed herewith.
10.02 Employment Agreement by and between
SMT Health Services Inc. and Daniel
Dickman dated July 1, 1996 Filed herewith.
10.03 Employment Agreement by and between
SMT Health Services Inc. and David
Spindler dated October 1, 1996 Filed herewith.
10.04 Employment Agreement by and between
SMT Health Services Inc. and David A.
Zynn dated October 1, 1996 Filed herewith.
10.05 Master Equipment Lease dated August
28, 1996 by and between SMT Health
Services Inc. and DVI Financial Services
Inc. Filed herewith.
10.06 Loan and Security Agreement dated
September 11, 1996 by and between
Siemens Credit Corporation and SMT
Health Services Inc. Filed herewith.
10.07 Finance Lease and Security Agreement
dated September 26, 1996 by and between
Laurel Capital Corporation and SMT
Health Services Inc. Filed herewith.
10.08 Finance Lease and Security Agreement
dated July 26, 1996 by and between
Laurel Capital Corporation and SMT
Health Services Inc. (Lease 2165) Filed herewith.
EXHIBIT INDEX
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Sequential Page Number
Exhibit No. or Reference
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10.09 Finance Lease and Security Agreement
dated July 26, 1991 by and between
Laurel Capital Corporation and SMT
Health Services Inc. (Lease 2166) Filed herewith.
11.01 Earnings Per Share Computation Filed herewith.
27.01 Financial Data Schedule Filed herewith.
99.01 Press release dated August 2, 1996 Filed herewith.
99.02 Press release dated September 17, 1996 Filed herewith.
99.03 Press release dated September 25, 1996 Filed herewith.
99.04 Press release dated October 3, 1996 Filed herewith.
99.05 Press release dated October 22, 1996 Filed herewith.
99.06 Press release dated November 4, 1996 Filed herewith.