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: MARCH 31, 1998
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COMMISSION FILE NUMBER: 0-16334
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ALLIANCE IMAGING, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0239910
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
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 April 30, 1998:
Common Stock, $.01 par value, 4,057,611
1
ALLIANCE IMAGING, INC.
FORM 10-Q
March 31, 1998
Index
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements:
Condensed Consolidated Balance Sheets - 3
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations 4
Three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 5
Three months ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II - OTHER INFORMATION 15
SIGNATURES 19
2
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997*
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 7,200,000 $ 10,798,000
Accounts receivable, net of allowance for doubtful accounts 22,236,000 12,628,000
Deferred income taxes 2,935,000 2,478,000
Prepaid expenses 2,646,000 1,285,000
Other receivables and other current assets 1,226,000 472,000
-------------- --------------
Total current assets 36,243,000 27,661,000
Equipment, at cost 251,814,000 169,468,000
Less--Accumulated depreciation (102,711,000) (57,255,000)
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149,103,000 112,213,000
Goodwill 114,695,000 36,149,000
Deferred financing costs 14,636,000 13,641,000
Deposits and other assets 8,955,000 3,991,000
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Total assets $323,632,000 $193,655,000
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-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,776,000 $ 6,677,000
Accrued compensation and related expenses 5,499,000 5,982,000
Other accrued liabilities 18,886,000 8,021,000
Current portion of long-term debt 9,312,000 6,351,000
-------------- --------------
Total current liabilities 37,473,000 27,031,000
Long-term debt, net of current portion 339,886,000 227,874,000
Other liabilities 6,175,000 86,000
Deferred income taxes 9,931,000 6,865,000
Redeemable preferred stock 14,997,000 14,487,000
Common stock 41,000 41,000
Additional paid-in deficit (59,725,000) (59,738,000)
Accumulated deficit (25,146,000) (22,991,000)
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Total liabilities and stockholders' equity $323,632,000 $193,655,000
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* Derived from audited financial statements
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1998 1997
---- ----
Revenues $ 31,241,000 $ 19,106,000
Costs and expenses:
Operating expenses, excluding depreciation 15,235,000 8,681,000
Depreciation expense 4,971,000 3,485,000
Selling, general and administrative expenses 3,036,000 1,897,000
Transaction related costs 815,000 -
Amortization expense, primarily goodwill 810,000 571,000
Interest expense, net of interest income 6,707,000 1,933,000
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Total costs and expenses 31,574,000 16,567,000
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Income (loss) before income taxes and extraordinary gain (loss) (333,000) 2,539,000
Provision for income taxes - 835,000
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Income (loss) before extraordinary gain (loss) (333,000) 1,704,000
Extraordinary gain (loss), net of taxes (1,312,000) 1,332,000
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Net income (loss) (1,645,000) 3,036,000
Less: Preferred stock dividends and financing fee accretion 510,000 -
Add: Excess of carrying amount of preferred stock
repurchased over consideration paid - 1,906,000
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Income (loss) applicable to common stock $ (2,155,000) $ 4,942,000
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Earnings per common share:
Income (loss) before extraordinary gain (loss) $ (0.21) $ 0.33
Extraordinary gain (loss), net of taxes (0.32) 0.12
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Net income (loss) per common share $ (0.53) $ 0.45
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Earnings per common share - assuming dilution:
Income (loss) before extraordinary gain (loss) $ (0.21) $ 0.30
Extraordinary gain (loss), net of taxes (0.32) 0.11
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Net income (loss) per common share
- assuming dilution $ (0.53) $ 0.41
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (1,645,000) $ 3,036,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary (gain) loss 1,312,000 (1,332,000)
Depreciation and amortization 5,781,000 4,056,000
Amortization of deferred financing costs 216,000 14,000
Distributions in excess of (undistributed) equity
in income of investee (73,000) 58,000
Changes in operating assets and liabilities:
Accounts receivable, net (605,000) 193,000
Prepaid expenses 81,000 22,000
Other receivables 107,000 313,000
Other assets (208,000) (9,000)
Accounts payable, accrued compensation and
other accrued liabilities (1,560,000) 250,000
Other liabilities (68,000) 983,000
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Net cash provided by operating activities 3,338,000 7,584,000
INVESTING ACTIVITIES:
Equipment purchases (12,454,000) (8,440,000)
(Increase) decrease in deposits on equipment (3,550,000) 239,000
Purchase of common stock of Mobile Technology Inc.,
net of cash acquired (94,147,000) -
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Net cash used in investing activities (110,151,000) (8,201,000)
FINANCING ACTIVITIES:
Payment of preferred stock dividends - (265,000)
Repurchase of senior subordinated debentures - (2,286,000)
Repurchase of Series A preferred stock - (2,523,000)
Principal payments on long-term debt (3,483,000) (4,613,000)
Proceeds from long-term debt - 7,601,000
Proceeds from term loan facility 90,000,000 -
Proceeds from revolving loan facility 16,394,000 -
Proceeds from senior bridge loan - 5,128,000
Decrease in deferred financing costs 291,000 -
Proceeds from exercise of employee stock options 13,000 13,000
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Net cash provided by financing activities 103,215,000 3,055,000
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Net (decrease) increase in cash and short-term investments (3,598,000) 2,438,000
Cash and short-term investments, beginning of period 10,798,000 10,867,000
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Cash and short-term investments, end of period $ 7,200,000 $13,305,000
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5
ALLIANCE IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,588,000 $ 2,050,000
Income taxes paid 32,000 70,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividend accrued and financing fee accretion $ 510,000 $ -
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.
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Alliance Imaging, Inc. ("the Company") in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
The Company generated a loss before income taxes during the quarter and
no benefit for income taxes was recorded for the three month period ended
March 31, 1998.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130")
which establishes standards for reporting and displaying comprehensive income
and its components in the financial statements. For the three months ended
March 31, 1998 and 1997, the Company did not have any components of
comprehensive income as defined in SFAS 130.
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED MARCH 31,
----------------------------------------
1998 1997
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Numerator:
Income (loss) before extraordinary gain (loss) $ (333,000) $ 1,704,000
Preferred stock dividends and financing fee accretion (510,000) -
Excess of carrying amount of preferred stock
repurchased over consideration paid - 1,906,000
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Numerator for basic and diluted earnings per share
--income available to common stockholders before
extraordinary gain (loss) $ (843,000) $ 3,610,000
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Denominator:
Denominator for basic earnings per share
--weighted average shares 4,055,000 10,923,000
Effect of dilutive securities:
Convertible preferred stock - 200,000
Employee stock options and common stock warrants - 862,000
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Denominator for diluted earnings per share
--adjusted weighted-average shares 4,055,000 11,985,000
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Basic earnings (loss) per share before extraordinary gain (loss) $ (0.21) $ 0.33
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Diluted earnings (loss) per share before extraordinary gain (loss) $ (0.21) $ 0.30
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7
Alliance Imaging, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 1998
(Unaudited)
2. ACQUISITIONS
On March 12, 1998, the Company acquired Mobile Technology Inc. ("MTI").
The purchase price consisted of $58,300,000 for all of the equity interests
in MTI, plus direct acquisition costs presently estimated at $2,000,000. In
connection with the acquisition, the Company also refinanced $37,400,000 of
MTI's outstanding debt and paid MTI direct transaction costs of $3,500,000.
To finance these expenditures, the Company increased its existing term loan
facility by $20,000,000 to provide total availability of $70,000,000,
established a new $50,000,000 term loan facility and borrowed an aggregate of
$90,000,000 thereunder, for which the Company incurred debt issuance costs
presently estimated at $2,800,000. The Company also borrowed $5,400,000
under its revolving loan facility and used $8,500,000 of cash on hand at MTI
to complete the financing requirements. The acquisition has been accounted
for as a purchase and, accordingly, the results of operations of MTI have
been included in the Company's consolidated financial statements from the
date of acquisition. The goodwill recorded as a result of this acquisition
was approximately $79,000,000, which is being amortized on a straight-line
basis over 20 years. The allocation of the MTI purchase price is tentative
pending completion of fair value determinations for the net assets acquired.
The allocation may change with the completion of these determinations.
Also on March 12, 1998, the Company announced it had signed a definitive
agreement to acquire the medical diagnostic imaging assets of American Shared
Hospital Services ("American Shared") for approximately $13,600,000 in cash
and assumption of approximately $26,100,000 of debt in a transaction that is
expected to be consummated by July 15, 1998. The proposed transaction is
subject to certain conditions including receipt of regulatory approvals and
approval by the shareholders of American Shared.
On March 31, 1998, the Company announced it had signed a definitive
agreement with U.S. Diagnostic, Inc., to acquire its subsidiary, Medical
Diagnostics, Inc. ("MDI"), a provider of diagnostic imaging services. The
transaction is valued at approximately $35,500,000 (including assumption of
approximately $5,700,000 of indebtedness) and the Company intends to finance
the cash portion of the transaction with bank financing. The transaction is
subject to customary conditions and necessary regulatory approvals and is
expected to close in May 1998.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
The Company is a leading nationwide provider of diagnostic imaging
services and the largest operator of state-of-the-art mobile diagnostic
imaging systems and related outsourced radiology services in the United
States. The Company primarily provides magnetic resonance imaging ("MRI")
systems and services to hospitals and other health care providers on a
mobile, shared user basis. The Company also provides dedicated, full-time
MRI systems and services as well as full-service management of imaging
operations for selected hospitals. The Company's services enable small to
mid-size hospitals to gain access to advanced diagnostic imaging technology
and related value-added services without making a substantial investment in
equipment and personnel. The Company operates a fleet of 193 MRI systems and
services 787 customers in 43 states as of March 31, 1998.
The Company's revenues are principally a function of the number of
systems in service, scan volumes and fees per scan. The Company generates
substantially all of its revenues under exclusive one to eight-year contracts
with hospitals and health care providers. The Company's contracts typically
offer tiered pricing with lower fees per scan on incremental scans, allowing
customers to benefit from increased scan volumes and the Company to benefit
from the operating leverage associated with increased scan volumes. The
Company expects modest continuing downward pressure on pricing levels as a
result of cost containment measures in the health care industry. However, in
many cases higher scan volumes justify lower prices on incremental scans.
The principal components of the Company's operating costs include
salaries paid to technologists and drivers, annual system maintenance costs,
insurance and transportation costs. Because a majority of these expenses are
fixed, increased revenues as a result of higher scan volumes significantly
improve the Company's profitability while lower scan volumes result in lower
profitability.
Since the beginning of 1995, the Company has substantially increased
revenues by adding new customers and increasing scan volumes at existing
customer sites. During the same period, the growth rate of the Company's
earnings before interest, taxes, depreciation and amortization ("EBITDA")
(excluding expenses associated with the Recapitalization Merger (as
hereinafter defined)), has exceeded the growth rate of revenues as a result
of spreading costs (which are primarily fixed) over a larger revenue base and
implementing cost reduction and containment measures.
The Company has historically focused on maximizing cash flow and return
on invested capital nationwide, deploying new and upgraded systems in high
volume markets and redeploying older, less advanced systems with lower
carrying values in lower volume markets. The Company's ongoing equipment
trade-in and upgrade program has substantially improved the marketability and
productivity of its MRI systems. Because the Company owns substantially all
of its MRI systems, it periodically evaluates its older, less marketable MRI
systems to determine if it is more beneficial to continue to use such systems
in lower volume markets which are
9
profitable but produce less revenue, or to trade in such equipment in
connection with new system purchases. The Company currently maintains one of
the most advanced fleets in the industry.
The Company also provides computed tomography ("CT") services and other
imaging services. Revenues from CT services and other imaging services
accounted for approximately 7% of the Company's revenues for the three months
ended March 31, 1998.
On November 21, 1997, the Company acquired Medical Consultants Imaging
Co. ("MCIC"), a Cleveland, Ohio based provider of mobile MRI services, CT
services and other outsourced health care services. The acquisition also
included MCIC's one-half interest in a limited liability company in Michigan.
The purchase price consisted of $12,323,000 cash plus the assumption of
approximately $5,517,000 in financing arrangements. MCIC operates 14 mobile
MRI systems and several other diagnostic imaging systems, primarily in Ohio,
Michigan, Indiana and Pennsylvania.
On December 18, 1997, after obtaining the approval of stockholders, the
Company completed a series of transactions contemplated by an Agreement and
Plan of Merger between Newport Investment LLC (the "Investor") and the
Company (the "Recapitalization Merger") whereby the Company: obtained
proceeds from debt financing aggregating $215,000,000; issued 150,000 shares
of non-voting redeemable Series F preferred stock to the Investor for
proceeds of $15,000,000; issued 3,632,222 shares of its common stock in
exchange for all of the outstanding stock of Newport Acquisition Corporation,
a subsidiary of the Investor, and received net proceeds of $39,954,000 from
cash placed into Newport Acquisition Corporation by the Investor; and
converted all shares of its common stock held by existing stockholders in
excess of 411,358 shares that were retained by electing existing stockholders
into the right to receive $11 in cash.
As a result of these transactions, the Company experienced an
approximate 90% ownership change. The Investor, which was formed and is
wholly owned by certain affiliates of Apollo Management, L.P., ("Apollo")
obtained ownership of approximately 83.6% of the Company's outstanding common
stock, and the Company became highly leveraged.
On March 12, 1998, the Company acquired Mobile Technology Inc. ("MTI"),
which management believes is the second largest provider of mobile MRI
services in the United States, in a transaction accounted for as a purchase.
The Company has included the operations of MTI in its consolidated financial
statements from the date of acquisition. This acquisition added 68 MRI
systems operating in 31 states, 3 CT systems, 9 lithotripsy systems, and 3
brachytherapy systems to the Company's equipment fleet. The purchase price
consisted of $58,300,000 for all of the equity interests in MTI plus direct
acquisition costs presently estimated at $2,000,000. In connection with the
acquisition, the Company also refinanced $37,400,000 of MTI's outstanding
debt and paid MTI direct transaction costs of $3,500,000. To finance these
expenditures, the Company increased its existing term loan facility by
$20,000,000 to provide total availability of $70,000,000, established a new
$50,000,000 term loan facility and borrowed an aggregate of $90,000,000
thereunder, for which the Company incurred debt issuance costs presently
estimated at $2,800,000. The Company also borrowed $5,400,000 under its
revolving loan facility and used $8,500,000 of cash on hand at MTI to
complete the financing requirements. The goodwill recorded as a result of
this acquisition was approximately $79,000,000, which is being amortized on a
straight-line basis over 20 years. The allocation of the MTI purchase price
is tentative
10
pending completion of fair value determinations for the net assets acquired.
The allocation may change with the completion of these determinations.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997 --
Revenues for the first three months of 1998 were $31,241,000, an increase of
$12,135,000, or 63.5%, over 1997. Revenue from MTI accounted for $3,969,000,
or 32.7% of the increase. The remaining increase reflects higher scan-based
MRI revenue, MRI revenue under fixed fee contracts and other revenue items
(including revenue for other modalities). MRI scan-based revenue increased
$5,556,000, as a result of a 39.0% increase in total scan volume partially
offset by a 5.5% decrease in the average revenue realized per MRI scan. The
average daily scan volume per MRI system increased 11.8% to 7.6 from 6.8 in
the first quarter of 1997. Management attributes the non-acquisition 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 continuing positive effect of marketing programs
implemented in early 1997. Management believes the decrease in average
revenue realized per scan is the result of many customers achieving discount
price levels in incremental scan volume; obtaining contracts with customers
that have high scan volumes which justify lower scan prices; and continuing
competitive pressure in the MRI service industry and cost containment efforts
by health care payors. Revenue under fixed fee contracts increased $297,000,
or 37.7% (excluding the MTI acquisition). Other revenue increased
$2,312,000, or 160.5% (excluding the MTI acquisition) mostly related to a
$1,273,000 increase in contract management service revenue as a result of the
Company commencing these service arrangements primarily in connection with
the Medical Consultants Imaging Co. ("MCIC") acquisition. The remainder of
the increase in other revenue was primarily due to an increase in CT, nuclear
medicine, and lithotripsy revenue.
The Company operated 193 MRI systems at March 31, 1998 compared to 87
MRI systems at March 31, 1997. The increase was primarily a result of the
MTI acquisition and to a lesser degree the MCIC acquisition.
Operating expenses, excluding depreciation, totaled $15,235,000 in the
first three months of 1998, an increase of $6,554,000, or 75.5%, ($2,411,000,
or 27.8%, as a result of the MTI acquisition) from the first quarter of 1997.
Payroll and related employee expenses increased $2,593,000, or 74.0%,
primarily as a result of an increase in operating staffing levels necessary
to support new units in operation and increased scans per unit. Preventative
maintenance and cryogen expense increased $691,000, or 29.0%, due to an
increase in the number of systems in service and the expiration of warranties
on an increased number of MRI systems. Equipment rental expense increased
$1,077,000, or 156.5%, resulting from a higher number of leased MRI systems
in operation and the Company's leasing of 25 new tractors after the first
quarter of 1997. Expenses associated with contract management services
increased $995,000 as a result of the Company commencing these service
arrangements primarily in connection with the MCIC acquisition.
Depreciation expense during the first quarter of 1998 totaled
$4,971,000, an increase of $1,486,000, or 42.6% from the 1997 level
principally due to a higher amount of depreciable assets associated with
equipment additions and upgrades and equipment acquired through
11
acquisitions. Amortization expense during the first three months of 1998
increased $239,000, or 41.9%, over the 1997 period as a result of the
acquisitions made after the first quarter of 1997.
Selling, general and administrative expenses totaled $3,036,000 in the
first quarter of 1998, an increase of $1,139,000, or 60.0%, from the same
period in 1997, with MTI accounting for $324,000, or 28.4% of the increase.
Payroll and related expenses increased $676,000, or 54.9%, primarily as a
result of increased employee compensation related to increased sales
commissions and increased staffing levels necessary to support the Company's
increased level of operations.
The transaction related costs represent a special non-recurring bonus
paid in connection with the MTI acquisition.
Interest expense of $6,707,000 in the first quarter of 1998 was
$4,774,000, or 247.0%, higher than 1997, as a result of higher average
outstanding debt balances during 1998 as compared to 1997. This increase was
primarily related to debt incurred in connection with the Recapitalization
Merger and the MTI acquisition.
The Company generated a loss before income taxes for the first quarter
and no income tax benefit was recorded.
The Company's loss before extraordinary loss was $(333,000) in the first
quarter of 1998 compared to income before extraordinary gain of $1,704,000 in
the first quarter of 1997, a decrease of $2,037,000, primarily attributable
to increased interest, depreciation, and amortization costs and the one-time
bonus payments made in connection with the MTI acquisition. The Company
reported an extraordinary loss of $(1,312,000) on early extinguishment of
debt in the first quarter of 1998. The Company reported an extraordinary
gain, net of income taxes, in the first quarter of 1997 of $1,332,000, on
early extinguishment of debt. The earnings per common share calculations
reflect preferred dividend requirements and financing fee accretion of
$510,000 in the first quarter of 1998 and none in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $3,338,000 and $7,584,000 from operating
activities during the first quarter of 1998 and 1997, respectively. Capital
expenditures, consisting primarily of new equipment purchases, totaled
$12,454,000 and $8,440,000 during the three months ended March 31, 1998 and
1997, respectively. Since January 1, 1998, the Company has purchased 8 new
MRI systems, including replacement systems. The Company expects to purchase
additional equipment under binding commitments in 1998 and finance such
purchases with the Company's revolving loan facility.
The Company's primary cash needs consist of capital expenditures and
debt service. The Company incurs capital expenditures for the purposes of
(i) providing routine upgrades of its MRI systems; (ii) replacing or making
major upgrades to older, less advanced systems with new state-of-the-art
systems; and (iii) purchasing new systems. The Company estimates that
routine annual upgrade expenditures average approximately $25,000 per system
or approximately $3,125,000 in the aggregate, based on the fleet size at
March 31, 1998. In addition to these
12
routine expenditures, the Company expects capital expenditures to be
approximately $55,000,000 in 1998, which primarily reflects the anticipated
purchase of 32 new MRI systems, including replacement systems. The Company's
decision to purchase a new system is typically predicated on obtaining new or
extending existing customer contracts, which serve as the basis of demand for
the new system.
As a result of the Recapitalization Merger, the Company issued
$185,000,000 of Notes (consisting of $140,000,000 Senior Subordinated Notes
due 2005, bearing interest at the rate of 9 5/8% per annum; and $45,000,000
Floating Interest Rate Subordinated Term Securities due 2005, bearing
interest at a rate per annum equal to LIBOR plus 4.19%) which are payable
semiannually, and require no principal repayments until maturity. The
Company also entered into a $125,000,000 Credit Agreement consisting of a
$50,000,000 Term Loan Facility ($50,000,000 of which was funded at March 31,
1998) and a $75,000,000 Revolving Loan Facility ($16,400,000 of which was
funded at March 31, 1998), and carried over approximately $12,700,000 of
other obligations. The Term Loan matures on the sixth anniversary of the
initial borrowing and requires annual principal repayments of one percent per
year during the first five years and the outstanding principal amount in the
sixth year. The Revolving Loan Facility matures on the fifth anniversary of
the initial borrowing and has mandatory commitment reductions of $37,500,000
on the fourth and fifth anniversaries of the initial borrowing. The Credit
Agreement contains restrictive covenants, which, among other things, limit
the incurrence of additional indebtedness, dividends, transactions with
affiliates, asset sales, acquisitions, mergers and consolidations, liens and
encumbrances, and prepayments of other indebtedness. In addition, the Credit
Agreement requires loans to be prepaid with 100% of the net proceeds of
non-ordinary-course asset sales or other dispositions of property, issuances
of debt obligations and certain preferred stock and certain insurance
proceeds, 75% of annual excess cash flow and 50% of the net proceeds from
common equity and certain preferred stock issuances, in each case subject to
limited exceptions. Voluntary prepayments are permitted in whole or in part.
Also as part of the Recapitalization Merger, the Company issued
$15,000,000 of Series F Preferred Stock. The Series F Preferred Stock pays
dividends at the rate of 13.5% per annum, payable quarterly in arrears, with
such dividends payable in kind for the first five years from the issue date
and thereafter in cash. The Series F Preferred Stock is mandatorily
redeemable for its liquidation preference plus accrued and unpaid dividends
on the 10th anniversary of the issue date. The Series F Preferred Stock is
redeemable at the option of the Company prior to the 10th anniversary at
premiums (expressed as a percentage of the accreted face value) declining
over ten years from 13.5% to 0%. The Company does not currently intend to
redeem the Series F Preferred Stock prior to the mandatory redemption date.
On November 21, 1997, the Company acquired Medical Consultants Imaging
Co. ("MCIC"), a Cleveland, Ohio based provider of mobile MRI services, CT
services and other outsourced health care services. The acquisition also
included MCIC's one-half interest in a limited liability company in Michigan.
The purchase price consisted of $12,323,000 cash plus the assumption of
approximately $5,517,000 in financing arrangements. MCIC operates 14 mobile
MRI systems and several other diagnostic imaging systems, primarily in Ohio,
Michigan, Indiana and Pennsylvania.
13
On March 12, 1998, the Company acquired Mobile Technology Inc. ("MTI"),
another nationwide provider of diagnostic imaging services. The Company
funded the MTI acquisition with $20,000,000 of existing Term Loan
availability under tranche A, $5,400,000 of revolver borrowings, a
$20,000,000 increase to the Term Loan Facility under tranche A, and a new
$50,000,000 Term Loan Facility under tranche B. The Credit Agreement was
amended to provide for the increased Term Facilities.
Also on March 12, 1998, the Company announced it had signed a definitive
agreement to acquire the medical diagnostic imaging assets of American Shared
Hospital Services ("American Shared") for approximately $13,600,000 in cash
and assumption of approximately $26,100,000 of debt in a transaction that is
expected to be consummated by July 15, 1998. The proposed transaction is
subject to certain conditions including receipt of regulatory approvals and
approval by the shareholders of American Shared.
On March 31, 1998, the Company announced it had signed a definitive
agreement with U.S. Diagnostic, Inc., to acquire its subsidiary, Medical
Diagnostics, Inc. ("MDI"), a provider of diagnostic imaging services. The
transaction is valued at approximately $35,500,000 (including assumption of
approximately $5,700,000 of indebtedness) and the Company intends to finance
the cash portion of the transaction with bank financing. The transaction is
subject to customary conditions and necessary regulatory approvals and is
expected to close in May 1998.
The Company believes that subsequent to the Recapitalization Merger and
acquisitions previously mentioned and the incurrence of indebtedness related
thereto, based on current levels of operations and anticipated growth, its
cash from operations, together with other available sources of liquidity,
including borrowings available under the Revolving Loan Facility, will be
sufficient over the next several years to fund anticipated capital
expenditures and make required payments of principal and interest on its
debt, including payments due on the Notes and obligations under the Credit
Agreement. In addition, the Company continually evaluates potential
acquisitions and expects to fund any such acquisitions from its available
sources of liquidity, including borrowings under the Revolving Loan Facility.
The Company's expansion and acquisition strategy may require substantial
capital, and no assurance can be given that the Company will be able to raise
any necessary additional funds through bank financing or the issuance of
equity or debt securities on terms acceptable to the Company, if at all.
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, particularly in the preceding
section entitled "Liquidity and Capital Resources" and elsewhere in this
quarterly report on Form 10-Q, are forward-looking statements. Statements in
this quarterly report on Form 10-Q which address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, including such things as results of operations and financial
condition, the consummation of acquisitions and financing transactions and
the effect of such transactions on the Company's business and the Company's
plans and objectives for future operations and expansion are examples of
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties, including those identified as "Risk Factors" in the
Company's Registration Statements on Forms S-2 (No. 333-33817) and S-4 (No.
333-33787). The foregoing should not be construed as an exhaustive list of
all factors which could
14
cause actual results to differ materially from those expressed in
forward-looking statements made by the Company. Actual results may
materially differ from anticipated results described in these statements.
YEAR 2000
The Company recently purchased new software for approximately $296,000
which is year 2000 compatible. As a result, the Company does not believe its
systems will be adversely affected. However, there is no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Note Description
----------- ---- -----------
2.1 (6) Agreement and Plan of Merger dated as of July 23, 1997
between the Company and Newport Investment, LLC (the
"Recapitalization Merger Agreement").
2.2 (7) Amendment No. 1 dated as of August 13, 1997 to the
Recapitalization Merger Agreement.
2.3 (7) Amendment No. 2 dated as of October 13, 1997 to the
Recapitalization Merger Agreement.
2.4 (7) Amendment No. 3 dated as of November 10, 1997 to the
Recapitalization Merger Agreement.
2.5 (7) Guaranty Letter dated July 22, 1997, from AIF III to
the Company.
3.1 (9) Form of Amended and Restated Certificate of
Incorporation of the Company.
3.2 (9) By Laws of the Company, as amended.
4.1 (9) Form of Indenture for the 9 5/8% Senior Subordinated
Notes due 2005 and the Senior Subordinated Floating
Rate Notes due 2005 (including the Forms of Notes as
Exhibits A and B thereto) between the Company and IBJ
Schroder Bank & Trust Company, as trustee.
4.2 (9) Form of Guarantee of the Notes.
15
10.1 (6) Stockholder Agreement dated as of July 23, 1997 among
Newport Investment, LLC and the stockholders of the
Company party thereto.
10.2 (4) Amended and Restated 1991 Stock Option Plan of the
Company, including forms of agreement used thereunder.
10.3 (12) Alliance Imaging, Inc. 1997 Stock Option Plan including
form of option agreement used thereunder.
10.4 (1) Form of Indemnification Agreement between the Company
and its directors and/or officers.
10.5 (2) Employment Agreement dated as of September 9, 1993
between the Company and Terry A. Andrues.
10.6 (2) Employment Agreement dated as of September 9, 1993
between the Company and Jay A. Mericle.
10.7 (5) Amended and Restated Employment Agreement dated as of
May 15, 1997 between the Company and Terrence M. White.
10.8 (2) Employment Agreement dated as of June 6, 1994 between
the Company and Neil M. Cullinan.
10.9 (2) Employment Agreement dated as of June 6, 1994 between
the Company and Cheryl A. Ford.
10.10 (3) Employment Agreement dated as of July 7, 1995 between
the Company and Michael W. Grismer.
10.11 (9) Employment Agreement dated as of July 23, 1997 between
the Company and Richard N. Zehner.
10.12 (9) Employment Agreement dated as of July 23, 1997 between
the Company and Vincent S. Pino.
10.13 (9) Agreement Not to Compete dated as of July 23, 1997
among Newport Investment, LLC, the Company, Richard N.
Zehner and Vincent S. Pino.
10.14 (12) Employment Agreement dated as of January 19, 1998
between the Company and Kenneth S. Ord.
10.15 (12) Agreement Not to Compete dated as of January 19, 1998
between the Company and Kenneth S. Ord.
16
10.16 (5) Amended and Restated Long-Term Executive Incentive Plan
dated as of July 22, 1997.
10.17 (11) Form of Amended and Restated Credit Agreement dated
March 12, 1998.
10.18 (8) Acquisition Agreement dated as of October 17, 1997
among Medical Consultants Imaging Corp., Bondcat Corp.,
Chip-Cat Corp., Medical Consultants Scanning Systems,
Inc., Alliance Imaging of Ohio, Inc., Alliance Imaging
of Michigan, Inc., and Alliance Imaging, Inc.
10.19 (10) Agreement and Plan of Merger dated as of January 13,
1998 relating to the acquisition of Mobile Technology Inc.
10.20 (12) Securities Purchase Agreement dated as of March 12,
1998 relating to the acquisition of American Shared
Hospital Services and CuraCare, Inc.
10.21 (12) Stock Purchase Agreement dated as of March 30, 1998
among the Company, US Diagnostic, Inc., and Medical
Diagnostics, Inc.
10.22 (11) Amendment to Employment Agreement dated as of July 23,
1997 between the Company and Richard N. Zehner.
10.23 (11) Amendment to Employment Agreement dated as of July 23,
1997 between the Company and Vincent S. Pino.
27.1 (12) Financial Data Schedule.
- ---------------------------
(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 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.
(3) 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
(4) 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.
(5) Incorporated by reference to indicated exhibits filed in response to Item
6, "Exhibits" of the Company's Quarterly report on Form, 10-Q for the
quarter ended June 30, 1997.
(6) Incorporated by reference herein to the indicated exhibits filed in
response to Item 5, "Exhibits" of the Company's Form 8-K Current Report
dated August 1, 1997.
(7) Incorporated by reference to the indicated exhibits filed in response to
Item 21, "Exhibits" of the Company's Registration Statement on Form S-4,
No. 333-33787, initially filed on August 15, 1997.
(8) Incorporated by reference to the indicated exhibits filed in response to
Item 6, "Exhibits" of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(9) Incorporated by reference to exhibits filed with the Company Registration
Statement on Form S-2, No. 333-33817.
(10) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated January 13, 1998.
(11) 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, 1997.
(12) Filed herewith.
(b) REPORTS ON FORM 8-K IN THE FIRST QUARTER OF 1998:
On January 14, 1998, the Registrant filed a report on Form 8-K announcing
that it had signed a definitive Agreement and Plan of Merger (the "Merger
Agreement") to acquire all of the outstanding common stock of Mobile
Technology Inc. for approximately $100 million (including the assumption of
indebtedness).
On March 23, 1998, the Registrant filed a report on Form 8-K announcing
that it had signed a definitive agreement to acquire the medical diagnostic
imaging assets of American Shared Hospital Services for approximately
$13,600,000 in cash and assumption of approximately $26,100,000 of debt.
The transaction is subject to certain conditions including the receipt of
regulatory approvals and approval by the shareholders of American Shared
Hospital Services.
On March 27, 1998, the Registrant filed a report on Form 8-K announcing
that on March 12, 1998 a wholly-owned subsidiary of the Registrant had
consummated the transactions contemplated by the Merger Agreement pursuant
to which the Registrant acquired all of the outstanding common stock of
Mobile Technology Inc.
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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.
May 14, 1998 By: /s/ Richard N. Zehner
-------------------------------------
Richard N. Zehner
Chairman 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 May 14, 1998.
Signature Title
--------- -----
/s/ Richard N. Zehner Chairman of the Board of Directors,
-------------------------------------- Chief Executive Officer
Richard N. Zehner (Principal Executive Officer)
/s/ Kenneth S. Ord Senior Vice President, Chief
-------------------------------------- Financial Officer
Kenneth S. Ord (Principal Financial Officer)
19