UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended: March 31, 1997 Commission File Number: 33-37418
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DIAGNOSTIC IMAGING SERVICES, INC.
(Exact name of registrant as specified in charter)
Delaware 33-0443404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Cotner Avenue
Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 479-0399
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and 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 No X
Number of shares outstanding of the issuer's common stock as of September 18,
1997 was 11,310,110 shares (excluding treasury shares).
Transitional Small Business Disclosure Format. Yes X No
Page 1 of 16 pages
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DIAGNOSTIC IMAGING SERVICES, INC.
PART 1 - FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Registrant believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the Registrant's
latest Annual Report on Form 10-KSB.
In the opinion of the Registrant, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of the
Registrant as of March 31, 1997, and the results of its operations and changes
in its cash flows for the three month periods ended March 31, 1997 and 1996,
have been made. The results of operations for such interim periods are not
necessarily indicative of the results to be expected for the entire year.
2
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
(UNAUDITED)
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Cash $ 13,429
Accounts Receivable - Net 4,690,838
Due from DHS 8,887,341
Other Current Assets 297,814
Net Assets Held for Divestiture 155,000
-----------
Total Current Assets 14,044,422
Property, Plant and Equipment - Net 10,811,716
-----------
Other Assets:
Accounts Receivable - Net 300,424
Goodwill - Net 1,488,258
Other Intangibles - Net 902,943
Due from DHS - Long-Term 848,792
Other Assets 277,855
-----------
Total Other Assets 3,818,272
Total Assets $28,674,410
See Notes to Consolidated Financial Statements.
3
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
(UNAUDITED)
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<S> <C>
Liabilities and Shareholders' Equity:
Current Liabilities:
Cash Overdraft $ 990,539
Accounts Payable 2,197,766
Accrued Expenses 2,131,068
Accrued Professional Fees 1,321,182
Due to Related Parties 449,179
Deferred Revenue - Non-Compete Agreement 100,000
Notes Payable and Capital Leases 5,208,510
-----------
Total Current Liabilities 12,398,244
Long-Term Liabilities:
Notes Payable and Capital Leases 13,363,456
Deferred Revenue - Non-Compete Agreement 891,667
Accrued Professional Fees 202,724
-----------
Total Long-Term Liabilities 14,457,847
Total Liabilities 26,856,091
Minority Interest 188,012
Commitments and Contingencies --
Shareholders' Equity:
Preferred Stock - Series F, $.01 Par Value, 5,000,000
Shares Authorized, 2,482,000
Shares Issued and Outstanding, Stated Liquidation
Preference of $2,482,000 24,820
Preferred Stock - Series G, $.01 Par Value, 5,000,000
Shares Authorized, 2,000,000 Shares Issued and
Outstanding, Stated Liquidation Preference of $2,000,000 20,000
Common Stock - $.01 Par Value, 20,000,000 Shares Authorized;
11,463,956 Shares Issued; and 11,310,110 Shares Outstanding 114,639
Additional Paid-in Capital - Common Stock 4,251,059
Additional Paid-in Capital - Preferred Stock - Series F 226,409
Additional Paid-in Capital - Preferred Stock - Series G 182,441
Stock Purchase Warrants 1,175,317
Subscriptions Receivable (10,994)
Accumulated Deficit (4,351,846)
Treasury Stock - 153,846 Shares of Common Stock - At Cost (1,538)
-----------
Total Shareholders' Equity 1,630,307
Total Liabilities and Shareholders' Equity $28,674,410
See Notes to Consolidated Financial Statements.
4
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended
March 31,
1 9 9 7 1 9 9 6
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<S> <C> <C>
Revenue:
Net Patient Service Revenue $4,733,510 $ 5,904,255
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Expenses:
Cost of Services 3,442,834 4,756,619
General and Administrative 985,214 1,136,245
Depreciation and Amortization 842,247 1,031,818
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Total Expenses 5,270,295 6,924,682
---------- -----------
Operating (Loss) (536,785) (1,020,427)
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Other Revenue and (Expense):
Gain on Sale or Divestiture 8,354,752 177,214
Interest Income 130,670 --
Interest Expense (686,512) (968,150)
---------- -----------
Total Other Revenue and (Expense) 7,798,910 (790,936)
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Income (Loss) Before Tax and Minority Interest in
(Income) Loss of Subsidiaries 7,262,125 (1,811,363)
Minority Interest in (Income) Loss of Subsidiaries (13,012) 64,208
---------- -----------
Income (Loss) Before Income Tax 7,249,113 (1,747,155)
Income Tax Provision -- --
---------- -----------
Net Income (Loss) $7,249,113 $(1,747,155)
========== ===========
Net Income (Loss) Per Share $ .64 $ (.20)
========== ===========
Weighted Common Shares Outstanding 11,310,110 8,745,783
========== ===========
See Notes to Consolidated Financial Statements.
5
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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Preferred Stock
Common Stock Series F Series G Treasury Stock
Shares Amount Shares Amount Shares Amount Shares Amount
Balance -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 11,463,956 14,639 2,482,000 $24,820 2,000,000 $20,000 (153,846) $(1,538)
Net Income for the
three months ended
March 31, 1997 -- -- -- -- -- -- -- --
-------- ------- ------ ------ ------- ------ ------- ------
Balance - March 31,
1997 (Unaudited) 11,463,956 14,639 2,482,000 $24,820 2,000,000 $20,000 (153,846)$(1,538)
See Notes to Consolidated Financial Statements.
6
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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Paid-in Paid-in
Paid-in Capital - Capital -
Capital - Series F Series G
Common Preferred Preferred Purchase Subscriptions Accumulated
Stock Stock Stock Warrants Receivable Deficit Total
Balance -
December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $4,251,059 $226,409 $182,441 $1,175,317 $(10,994) $(11,600,959) $(5,618,806)
Net Income
for the three
months ended
March 31,
1997 -- -- -- -- -- 7,249,113 7,249,113
--------- ------- ------- --------- -------- ----------- ----------
Balance -
March 31, 1997
(Unaudited) $4,251,059 $226,409 $182,441 $1,175,317 $(10,994) $(4,351,846) $1,630,307
See Notes to Consolidated Financial Statements.
7
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
Three months ended
March 31,
1 9 9 7 1 9 9 6
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<S> <C> <C>
Net Cash - Operating Activities $(1,007,906) $ (308,752)
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Investing Activities:
Purchase of Property, Plant and Equipment (229,644) (13,816)
Proceeds from Dispositions of Operating Entities 7,019,475 --
Payments for Deposits and Other Assets (75,632) (31,300)
---------- -----------
Net Cash - Investing Activities 6,714,199 (45,116)
---------- -----------
Financing Activities:
Cash Overdraft (97) 1,092,442
Principal Payments on Notes and Leases (4,258,934) (4,834,366)
Proceeds from the Issuance of Common Stock -- 3,000,000
Proceeds from Joint Venture Partners 175,000 --
Loans from Related Parties -- 1,100,000
Payments to Related Parties (1,621,491) (16,503)
---------- -----------
Net Cash - Financing Activities (5,705,522) 341,573
---------- -----------
Net Increase [Decrease] in Cash 771 (12,295)
Cash - Beginning of Periods 12,658 17,993
---------- -----------
Cash - End of Periods $ 13,429 $ 5,698
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 833,240 $ 994,923
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company entered into capital leases of approximately $139,582 during the
period ended March 31, 1997.
The Company sold substantially all of the net assets of four of its
hospital-based MRI facilities and its Ultrasound Division to Diagnostic Health
Services, Inc. ("DHS") effective March 1, 1997. The sale resulted in a gain of
approximately $8.26 million. As of March 31, 1997, approximately $7 million in
cash was received from DHS; an additional receivable was set up in March 1997
for the remaining sale proceeds of approximately $8.45 million which were
received in April 1997. The sale reduced net property, plant and equipment
approximately $9.3 million, notes and capital leases payable approximately $7.5
million and net goodwill and other intangible assets approximately $4.6 million.
See Notes to Consolidated Financial Statements.
7
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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(1) Summary of Significant Accounting Policies
Significant accounting policies of Diagnostic Imaging Services, Inc. and its
subsidiaries are set forth in the Company's Form 10-KSB for the year ended
December 31, 1996 as filed with the Securities and Exchange Commission.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited and
have been prepared in accordance with generally accepted accounting principles
and the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X and ,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles for complete financial
statements; however, in the opinion of the management of the Company, all
adjustments consisting of normal recurring adjustments necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods ended March 31, 1997 and 1996 have been made. The results of
operations for any interim period are not necessarily indicative of the results
for the full year. These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
contained in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 1996.
(3) Intangible Assets
The Company's goodwill of $1,488,258 as of March 31, 1997 is shown net of
accumulated amortization of $257,272. Amortization expense for the three months
ended March 31, 1997 and 1996 was approximately $62,000 and $106,000,
respectively. Approximately $4.1 million of net goodwill was written-off in
conjunction with the sale to DHS (see Note 5).
Other intangible assets consist primarily of covenants not to compete, loan fees
and organization costs. The Company's covenants not to compete of $201,667 as of
March 31, 1997 are shown net of accumulated amortization of $348,333.
Amortization expense for the three months ended March 31, 1997 and 1996 was
approximately $71,000 and $105,000, respectively. Approximately $500,000 of net
covenants were written-off in conjunction with the sale to DHS (see Note 5).
Organization costs and loan fees of $701,276 are shown net of accumulated
amortization of $266,814. Amortization expense for the three months ended March
31, 1997 and 1996 was approximately $43,000 and $39,000, respectively. Loan fees
of approximately $6,000 were written off in conjunction with the sale to DHS
(see Note 5).
(4) Due to Related Parties
At March 31, 1997, DIS owed approximately $360,000 to Primedex Health Systems,
Inc. ("PHS"). In March 1997, DIS repaid PHS approximately $1.6 million with the
proceeds from the sale of its Ultrasound division to DHS (see Note 5). The
repayment was primarily for short-term working capital loans and accrued
management fees. The remaining payments reduced DIS's outstanding revolving loan
obligation with PHS.
As of March 31, 1997, DIS owed an officer of the Company approximately $89,000
for prior net loans made by him to the Company.
8
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), Sheet #2
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(5) Business Combinations, Acquisitions, Sales and Divestitures
Effective January 1, 1997, the assets and related liabilities of Montclair
Mobile MRI were assumed by Primedex Health Systems, Inc. The transfer resulted
in a gain of approximately $97,000 allowing DIS to write-off a reserve
established in 1996 for estimated disposal costs related to the mobile unit.
On January 1, 1997, the Company and Scripps Health, San Diego completed their
project for the development and operation of an outpatient radiological facility
providing MRI services and began seeing its first patients. The Company and
ScrippsHealth are equal partners in the Scripps Chula Vista Imaging Center, LLP
("SCV") with the Company serving as managing partner.
Effective March 1, 1997, the Company sold the assets of its ultrasound division
to Diagnostic Health Services, Inc. ("DHS") for approximately $8,040,000 less
assumed debt of approximately $1,520,000; the net cash proceeds of approximately
$6,520,000 were received in March 1997. In addition, DHS paid the Company
$500,000 in March 1997 for a ten-year covenant not-to-compete.
Also effective March 1, 1997, DHS purchased the stock of Diagnostic Imaging
Services, Inc. (California), including three hospital-based MRI centers and
Santa Monica Imaging Center (a partnership), for $13,500,000 less assumed debt
of approximately $6,045,000; the net cash proceeds of approximately $7,455,000
were received in April 1997 with 12% interest of approximately $130,000 accrued
from the March 1, 1997 effective sale date. In addition, DHS paid the Company an
additional $500,000 in April 1997 for a ten-year covenant not-to-compete. A
short-term receivable was set-up by DIS for the cash proceeds that were received
in April 1997. Both covenants not-to-compete are classified as "Deferred
Revenue" on the Company's balance sheet.
In addition to the proceeds from the MRI sites sold above, there are post
closing payments of $500,000 to be paid by DHS at the end of each year on the
first, second and third anniversaries of the closing date. A discounted
receivable of approximately $1,190,000 was set-up on the Company's balance sheet
for these "post-closing payments" of which approximately $343,000 are classified
as current assets. There is also an option to receive the "post-closing
payments" in the form of common stock of DHS valued at the mean average of the
reported closing price of such common stock as reported on the NASDAQ National
Market for the five consecutive trading days ending on the third day immediately
prior to the closing date ("the Agreed Value").
The combined sales to DHS resulted in a net gain of approximately $8,260,000
recorded in March 1997.
As a result of a continuing deteriorating business climate and other business
reasons at the Company's Santa Monica ("Parkside") facility, the Company ceased
substantially all of its operations at the facility on August 29, 1997. The
Company was paid approximately $465,000 for the assets at the site and the
building lease liability was assumed by an unrelated third party. A loss of
approximately $3,425,000 was recognized in December 1996 and approximately
$155,000 remains in assets held for divestiture at March 31, 1997. As a result
of the closing, the assets and related liabilities of WLA will be transferred to
PHS's RadNet Management, Inc.
9
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), Sheet #3
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(6) Sale of Stock and Securities
On March 25, 1996, DIS issued 2,747,493 shares of its common stock (with a
five-year warrant to purchase an additional 1,521,739 shares of the Company's
common stock at $1.60 per share) to Primedex Health Systems, Inc. for $3,000,000
and the establishment of a five-year revolving $1,000,000 line of credit for
DIS. PHS is a publicly-traded New York corporation organized in 1985 and is
principally engaged in the healthcare services industry in California. As of
March 31, 1997, through various transactions with related and unrelated parties,
PHS acquired an additional 4,031,314 shares of DIS common stock bringing its
total ownership to 6,778,807 shares, or approximately 59.1%. In subsequent
purchases through September 12, 1997, PHS acquired an additional 1,123,163
common shares in transactions with unrelated parties increasing its total
ownership of DIS to 7,901,970 shares, or approximately 68.9%.
. . . . . . . . . . . . .
10
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Background
Diagnostic Imaging Services, Inc. ("DIS" or the "Company") was incorporated in
California as an S- Corporation on June 27, 1986. In 1992, the Company's
consolidated operations consisted of non-invasive diagnostic imaging services,
primarily with the use of ultrasound technology ("Ultrasound Division"). During
1992 and 1993, DIS established one mobile MRI business and was the general
partner of four limited partnerships that provided diagnostic imaging services:
San Gabriel Valley Magnetic Resonance Imaging Center ("SGV"), Tarzana Regional
Medical Center Magnetic Resonance Imaging Center ("Tarzana"), Inland Community
Magnetic Resonance Imaging Center ("Inland") and Temecula Valley Imaging Center
("Temecula"). DIS also provided management services for these entities.
In June 1993, DIS became the general partner and 70% owner of Mission Bay Mobile
MRI Facility, L.P. ("MBM"). In March 1996, MBM's assets and liabilities were
assumed by an unaffiliated third party; the transfer resulted in a gain of
approximately $296,000. In December 1993, Norman Hames, President and Chief
Financial Officer of DIS, assigned his shares in a privately held company,
Diagnostic Imaging Services, Inc. ("Diagnostic") to a newly established
corporation, DIS Imaging, Inc., of which he was the sole shareholder. In January
1994, DIS Imaging, Inc. purchased the shares held by the then majority
shareholder of Diagnostic and all of his interests in certain partnerships which
Diagnostic managed.
During the months of January and February 1994, DIS purchased the remaining
limited partnership units of Tarzana, SGV and Inland. Additionally, in February
1994, DIS purchased the assets of two freestanding multi-modality imaging
centers: Thousand Oaks Medical Diagnostic Imaging ("MDI") and Parkside Radiology
("Santa Monica" or "Parkside"). In April 1994, DIS opened Valley Regional
Oncology Center, Ltd., L.P. ("VROC"), a cancer care therapy center located in
Temecula, California. DIS is the general partner and 75% owner of VROC. On
September 2, 1994, DIS merged its operations with IPS Health Care, Inc. pursuant
to an Agreement and Plan of Reorganization and an Agreement for the Exchange of
Stock and Assets (see Company's Form 10-KSB). The Company's name was then
changed to Diagnostic Imaging Services, Inc.. On September 22, 1994, DIS
purchased the assets of North County MRI and North County Mediscan ("North
County" collectively). The nuclear medicine business at North County Mediscan
was sold for $230,000 in June 1996.
In January 1995, DIS assumed ownership of West Los Angeles MRI ("WLA"). In the
first quarter of 1995, Inland was relocated from Montclair to Chino, California
("Chino"). During this time, the center was closed for approximately two months.
In February 1995, DIS purchased the outstanding limited partnership units of
Santa Monica Imaging Center ("SMIC") and became its general partner. In April
1997, DIS purchased the remaining partnership units in SMIC for $300,000. In
August 1995, DIS purchased the assets of an X-Ray, mammography, and basic
ultrasound center in Murietta, California ("Murietta").
On March 25, 1996, DIS issued 2,747,493 shares of its common stock (with a
five-year warrant to purchase an additional 1,521,739 shares of common stock at
$1.60 per share) to Primedex Health Systems, Inc. ("PHS") for $3,000,000 and the
establishment of a five-year revolving $1,000,000 line of credit for DIS. PHS is
a publicly-traded New York corporation organized in 1985 and is principally
engaged in the healthcare services industry in California. DIS also entered into
two five-year management service agreements with PHS. The first agreement
relates to DIS's overall corporate operations and provides that PHS will provide
for all office maintenance for the DIS facilities, administer its personnel
program, bookkeeping and payroll services as well as certain of its accounting
services. In addition, PHS provides advice to DIS with regard to its
accreditation program and negotiates on behalf of DIS for equipment, supplies,
service and insurance. DIS agreed to pay $45,000 per month for these services.
Additionally, DIS entered into a second agreement which will be phased in on a
center by center basis which provides for PHS to supply transcription services,
patient scheduling, billing and collection services. All costs of equipment and
training are the responsibility of PHS. DIS will pay PHS an amount equal to 10%
of its collections from each covered center for such services.
11
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Background (Continued)
As of March 31, 1997, through various transactions with related and unrelated
parties, PHS acquired an additional 4,031,314 shares of DIS common stock
bringing its total ownership to 6,778,807 shares, or approximately 59.1%.
In May 1996, Integrated Cardiovascular Systems, Inc. ("ICVS") was sold to an
unaffiliated third party for $798,000 resulting in a gain of approximately
$313,000. In addition, the Company also consolidated SMIC's non-MRI business
with Parkside during the month. In August 1996, DIS acquired the assets and
liabilities of HealthCare Imaging Center ("HCI") in Riverside, California for
$200,000 resulting in goodwill of $10,000. In September 1996, DIS opened the
Camarillo Imaging Center ("Camarillo"), a start-up operation utilizing equipment
transferred from other sites. In October 1996, DIS assumed the assets and
liabilities of Corona Imaging Center ("Corona").
Effective January 1, 1997, the assets and related liabilities of Montclair
Mobile MRI were assumed by Primedex Health Systems, Inc. The transfer resulted
in a gain of approximately $97,000 allowing DIS to write-off a reserve set-up in
1996 for estimated disposal costs related to the mobile unit.
On January 1, 1997, the Company and ScrippsHealth, San Diego completed their
project for the development and operation of an outpatient radiological facility
providing MRI services and began seeing its first patients. The Company and
ScrippsHealth will be equal partners in the Scripps Chula Vista Imaging Center,
LLP ("SCV") with the Company serving as managing partner.
Effective March 1, 1997, the Company sold the assets of its ultrasound division
to Diagnostic Health Services, Inc. ("DHS") for approximately $8,040,000 (less
assumed debt of approximately $1,520,000) plus $500,000 for a ten-year covenant
not-to-compete. In addition, DHS purchased the stock of Diagnostic Imaging
Services, Inc. (California), including three hospital-based MRI centers
(Tarzana, Chino and SGV) and Santa Monica Imaging Center (SMIC), for $13,500,000
(less assumed debt of approximately $6,045,000) plus an additional $500,000 for
a ten-year covenant not-to-compete. In addition to the proceeds from the MRI
sites sold above, there are post closing payments of $500,000 to be paid by DHS
at the end of each year on the first, second and third anniversaries of the
closing date. The combined sales to DHS resulted in a net gain of approximately
$8,260,000 recorded in March 1997. DHS also assumed the building lease liability
at the Company's WLA facility; the MRI at WLA was to be moved to Parkside.
As a result of a continuing deteriorating business climate and other business
reasons at the Company's Santa Monica ("Parkside") facility, the Company ceased
substantially all of its operations at the facility on August 29, 1997. The
Company was paid approximately $465,000 for the assets at the site and the
building lease liability was assumed by an unrelated third party. A loss of
approximately $3,425,000 was recognized in December 1996. As a result of the
closing, the assets and related liabilities of WLA will now be transferred to
PHS's RadNet Management, Inc. for use at its site in Stockton, California.
12
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Discussion of Operations for the Quarter Ended March 31, 1997 vs. March 31, 1996
The following discussion relates to the continuing activities of Diagnostic
Imaging Services, Inc..
Results of Operations
For the three months ended March 31, 1997 and 1996, the Company had net losses
from operations of $536,785 and $1,020,427, respectively.
Net revenue was $4,733,510 and $5,904,255 for the three months ended March 31,
1997 and 1996, respectively. The decrease in net revenue was primarily
attributable to the sale to DHS with the final revenues for these sites
recognized in February 1997.
Total expenses were $5,270,295 and $6,924,682 for the three months ended March
31, 1997 and 1996, respectively. The expense decrease was primarily due to a
reduction of approximately $1,500,000 in expenditures for salaries and medical
supplies.
For the three months ended March 31, 1997 and 1996, the Company had gains on
sale or divestiture of $8,485,422 and $177,214, respectively. The increase was
due to the gain of approximately $8,260,000 recognized from the sale of
substantially all of the assets of the Company's ultrasound division and four of
its hospital-based MRI sites.
For the three months ended March 31, 1997 and 1996, interest expense was
$686,512 and $968,150, respectively. Interest expense of DIS was primarily
attributable to equipment financing and lines of credit charges. In March 1996,
the Company paid down its second line of credit by $3,000,000 with the proceeds
from the issuance of its stock to PHS.
For the three months ended March 31, 1997, the Company had net income of
$7,249,113 compared to a net loss of $1,747,155 for the three months ended March
31, 1996.
Liquidity and Capital Resources
Cash increased for the three months ended March 31, 1996 by $771.
Cash decreased for the three months ended March 31, 1996 by $12,295.
Cash generated from investing activities for the three months ended March 31,
1997 was $6,714,199. Cash utilized for investing activities for the three months
ended March 31, 1996 was $45,116. In March 1997, DIS received approximately
$7,020,000 from the sale of its Ultrasound Division to DHS (see Note 5).
Cash utilized for financing activities for the three months ended March 31, 1997
was $5,705,522. Cash generated from financing activities for the three months
ended March 31, 1996 was $341,573. For the three months ended March 31, 1997 and
1996, approximately $-0- and $5,200,000 in proceeds, respectively, were borrowed
from related parties, realized in cash overdrafts or acquired through the
issuance of common stock. For the three months ended March 31, 1997 and 1996,
approximately $4,260,000 and $4,835,000, respectively, of payments were made on
notes payable, lines of credit and capital leases. In addition, for the three
months ended March 31, 1997 and 1996, approximately $1,620,000 and $17,000,
respectively, of payments were made toward related party liabilities.
13
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Quarter Ended March 31, 1997 vs. March 31, 1996
Liquidity and Capital Resources (Continued)
At March 31, 1997, the Company had net working capital of $1,646,178, an
increase of $15,916,435 from December 31, 1996. A key reason for the increase
was due to the sale of the Company's Ultrasound Division and MRI sites to DHS
(see Note 5). Net cash and current receivables of approximately $15,000,000 were
recognized as part of the transaction.
In June 1994, the Company entered into a $2,500,000 revolving term note ("A")
agreement with a financial institution, which, at the time, was also a
shareholder of the Company, to replace a previous line of credit agreement dated
January 1994. Revolving term note "A" is collateralized by all eligible accounts
receivable as defined in the agreement. In August 1994, the maximum level of
borrowings was increased to $3,500,000 and in June 1995, increased to
$4,000,000. During 1995 the amount outstanding has, from time to time, exceeded
maximum borrowings available under the agreement. Under revolving note "A", due
June 1997, the Company may borrow approximately 53% of the eligible accounts
receivable, to a maximum of $4,000,000. Borrowing under this line are repayable
with interest at an annual rate of the prime rate plus 3-1/2%, payable monthly.
At March 31, 1997, approximately $320,000 was outstanding under this line. The
Company also has a $1,000,000 credit facility available with PHS. As of March
31, 1997, approximately $360,000 was outstanding under this line.
The Company's future payments for debt and equipment under capital leases for
the next five years, assuming lines of credit are paid and not renewed, will be
approximately $7,325,000, $5,340,000, $4,290,000, $4,060,000 and $2,290,000,
respectively. Interest expense (assuming lines of credit are paid in full) for
the Company for the next five years, included in the above payments, will be
approximately $2,115,000, $1,225,000, $860,000, $470,000 and $65,000,
respectively.
14
<PAGE>
PART II
Item 1. Legal Proceedings
The Registrant is not a party to any material legal proceedings, except that
(a) On April 10, 1996, the Registrant was served with a complaint
entitled Midway Hospital Medical Center v. Diagnostic Imaging Services, Inc.
filed in the U.S. District Court, Central District of California bearing case
number 96-2414TJH brought by Midway Hospital Medical Center seeking payment of
$116,056 plus attorneys fees based upon the alleged failure of the Registrant to
discharge medical bills of a Registrant employee covered under the Registrant's
health insurance program. The Registrant then commenced legal action against
Registrant's outside administrator of its health insurance program alleging that
it failed to properly administer that program and that if there is any liability
to Midway, it is the liability of its administrator. The administrator denied
any liability and filed a counterclaim against the Registrant alleging that it
was owed $141,658, which the Registrant denied. The Registrant settled the
action with regard to the $116,056 claim of Midway Hospital Medical Center by
payment of approximately $60,000 and settled the claim of its former
administrator for $141,658 by payment of approximately $95,000.
(b) On June 4, 1997, the Registrant was served with a complaint
entitled Gerald E. Dalrymple, M.D. and Gerald E. Dalrymple, M.D., Inc., a
California professional corp. v. Primedex Health Systems, Inc., Diagnostic
Imaging Services, Inc. and Diagnostic Health Services, Inc. filed in the Los
Angeles Superior Court and bearing case number SC 047 526. The complaint alleges
that Registrant failed to properly pay plaintiff fees for performing
professional services to which he was entitled as well as damages for violation
of the implied covenant of good faith and fair dealing, fraud, conversion,
breach of fiduciary duty, interference with existing and prospective business
advantage, negligent and intentional infliction of emotional distress and
defamation and seeks damages for an unspecified amount in excess of $25,000. The
complaint also alleges that by virtue of the investment by Primedex Health
Systems, Inc. in Registrant and the sale of four of Registrant's imaging centers
and its ultrasound business to Diagnostic Health Services, Inc. (see "Item 1" of
Registrants Form 10-KSB for its fiscal year ended December 31, 1996) that
Registrant has thereby effected either a reorganization, consolidation, merger
or transfer of all or substantially all of its assets to another entity thereby
permitting plaintiff to convert a warrant for 319,488 shares of Registrant's
Common Stock exercisable at $.01 per share which plaintiff received in
connection with Registrant's acquisition of its Santa Monica facility to either
$1,000,000 cash or stock with a market value of $1,000,000 in the new entity, at
the election of the Registrant (the "Warrant Issue"). The entire litigation,
except for the Warrant Issue and certain claims of the Registrant have been
settled. Pursuant to the Settlement Dr. Dalrymple assumed ownership of
Registrant's Santa Monica facility (Parkside Radiology) and assumed
responsibility for expenses of the facility in the future. Additionally,
Registrant sold its equipment and leasehold improvements to Dr. Dalrymple for
approximately $465,000. The litigation with regard to the Warrant Issue and to
Registrant's claim against Dr. Dalrymple alleging, among other things, that Dr.
Dalrymple pursued a plan to depress the business at, and therefore valuation of,
Parkside Radiology, thus enabling him to acquire the facility he previously sold
to Registrant at a depressed price, continues. Registrant intends to vigorously
defend and to pursue the remaining elements of the action.
(c) On January 14, 1997, an action entitled Kennedy-Wilson v. Norman
Hames and Diagnostic Imaging Services, Inc. was filed in the Los Angeles
Superior Court and bears case number SC 0455617. The action is for breach of a
lease and requests damages in excess of $50,000. Registrant intends to
vigorously defend the action.
15
<PAGE>
Item 5. Other Information
On March 21, 1997, Registrant entered into an agreement with Diagnostic
Health Services, Inc. ("DHS") whereby Registrant sold the assets subject to the
related liabilities of its ultrasound business (13 mobile ultrasound units
together with 15 ultrasound laboratories) for Eight Million five Hundred
Thousand Dollars, comprised of approximately Seven Million Dollars cash with the
balance consisting of the assumption of liabilities. Net annual revenues to the
Registrant from those operations have been approximately Four Million Dollars.
On April 17, 1997, Registrant concluded the sale of its wholly-owned
subsidiary, which owns and operates four magnetic resonance imaging centers
located on or adjacent to hospital sites in the Los Angeles area, for Sixteen
Million Dollars (including assumption of approximately Six Million Dollars of
debt to DHS). The four centers formerly provided approximately 6.5 Million
Dollars of net annual revenue to the Registrant.
For further information see Registrant's Form 8-K for the event of
March 21, 1997 and its Form 8-K for the event of April 17, 1997.
On April 18, 1997, Registrant loaned $5,500,000 to Primedex Health
Systems, Inc. (owner of approximately 70% of Registrant's outstanding common
stock), payable monthly interest only at 10% per annum, with principal due and
payable on or before March 31, 1998.
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.
Diagnostic Imaging Services, Inc.
(Registrant)
September 19, 1997 By: /s/ Norman Hames
------------------
Norman Hames, President
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations filed
as part of the quarterly report on Form 10-Q and is qualified in its entirety
by reference to such quarterly report on Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-END> mar-31-1997
<CASH> 13,429
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<CURRENT-LIABILITIES> 12,398,244
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<COMMON> 114,639
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<TOTAL-COSTS> (5,270,295)
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