U.S. 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 quarterly period ended: June 30, 1997 Commission File Number: 33-37418
DIAGNOSTIC IMAGING SERVICES, INC.
(Exact name of small business issuer 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 October 31, 1997
was 11,310,110 shares (excluding treasury shares).
Transitional Small Business Disclosure Format. Yes No X
Page 1 of 18 pages
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC.
PART I - 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 June 30, 1997, and the results of its operations and changes in
its cash flows for the six month periods ended June 30, 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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<TABLE>
DIAGNOSTIC IMAGING SERVICES, INC. AND AFFILIATES
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997.
(UNAUDITED)
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Cash $ 7,089
Accounts Receivable - Net 3,984,290
Due from DHS 362,511
Due from Related Party 5,419,305
Other Current Assets 270,327
Net Assets Held for Divestiture 42,591
-----------
Total Current Assets 10,086,113
Property and Equipment - Net 11,052,740
-----------
Other Assets:
Accounts Receivable - Net 419,326
Goodwill - Net 1,661,384
Other Intangible Assets - Net 832,873
Due from DHS - Long-Term 865,496
Other Assets 364,069
-----------
Total Other Assets 4,143,148
Total Assets $25,282,001
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
DIAGNOSTIC IMAGING SERVICES, INC. AND AFFILIATES
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997.
(UNAUDITED)
- ------------------------------------------------------------------------------
<S> <C>
Liabilities and Shareholders' Equity:
Current Liabilities:
Cash Overdraft $ 598,982
Accounts Payable 773,413
Accrued Expenses 2,172,324
Accrued Professional Fees 440,322
Due to Related Parties 126,249
Deferred Revenue-Non-Compete Agreement 100,000
Notes Payable and Capital Leases 5,577,228
-----------
Total Current Liabilities 9,788,518
Long-Term Liabilities:
Notes Payable and Capital Leases 13,046,348
Deferred Revenue-Non-Compete Agreement 866,667
Accrued Professional Fees 34,113
-----------
Total Long-Term Liabilities 13,947,128
Total Liabilities 23,735,646
Minority Interest 229,935
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 $2,000,00020,000
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 (4,665,733)
Treasury Stock - 153,846 Shares of Common Stock - At Cost (1,538)
-----------
Total Shareholders' Equity 1,316,420
Total Liabilities and Shareholders' Equity $25,282,001
See Notes to Consolidated Financial Statements.
</TABLE>
4
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DIAGNOSTIC IMAGING SERVICES, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<TABLE>
Six months ended
June 30,
1 9 9 7 1 9 9 6
------- -------
Revenue:
<S> <C> <C>
Net Patient Service Revenue $8,044,608 $11,547,552
---------- -----------
Expenses:
Cost of Services 5,577,978 8,811,340
General and Administrative 1,405,687 1,907,828
Depreciation and Amortization 1,402,385 1,987,037
---------- -----------
Total Expenses 8,386,050 12,706,205
---------- -----------
Operating (Loss) (341,442) (1,158,653)
---------- -----------
Other Revenue (Expenses):
Gain on Sale or Divestiture 8,354,752 514,631
Miscellaneous (Expense) (70,449) --
Interest Income 256,525 --
Interest Expense (1,209,225) (1,825,084)
---------- -----------
Total Other Revenue (Expenses) 7,331,603 (1,310,453)
---------- -----------
Income (Loss) Before Income Taxes and Minority Interest
in (Income) Loss of Subsidiaries 6,990,161 (2,469,106)
Minority Interest in (Income) Loss of Subsidiaries (54,935) 64,208
---------- -----------
Income (Loss) Before Income Tax 6,935,226 (2,404,898)
Provision for Income Tax -- --
---------- -----------
Net Income (Loss) $6,935,226 $(2,404,898)
========== ===========
Net Income (Loss) Per Share $ .61 $ (.24)
========== ===========
Weighted Common Shares Outstanding 11,310,110 10,035,030
========== ===========
</TABLE>
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
- ------------------------------------------------------------------------------
<TABLE>
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 $114,639 2,482,000 $24,820 2,000,000 $20,000 (153,846) $(1,538)
Net Income for the
six months ended
June 30, 1997 -- -- -- -- -- -- -- --
---------- -------- --------- ------- --------- ------ -------- -------
Balance - June 30,
1997 (Unaudited) 11,463,956 $114,639 2,482,000 $24,820 2,000,000 $20,000 (153,846) $(1,538)
</TABLE>
6
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
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<TABLE>
Paid-in Capital- Capital-
Capital - Series F Series G
Common Preferred Preferred Purchase Subscriptions Accumulated
Stock Stock Stock Warrants Receivable Deficit Total
Balance -
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 $4,251,059 $226,409 $182,441 $1,175,317 $(10,994) $(11,600,959) $(5,618,806)
Net Income for the
six months ended
June 30, 1997 -- -- -- -- -- 6,935,226 6,935,226
--------- -------- -------- ---------- -------- ---------- ----------
Balance - June 30,
1997 (Unaudited) $4,251,059 $226,409 $182,441 $1,175,317 $(10,994) $(4,665,733) $1,316,420
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
Six months ended
June 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Cash - Operating Activities $(2,097,544) $(1,142,526)
----------- -----------
Investing Activities:
Purchase of Property and Equipment (334,339) (76,975)
Proceeds from Sales of Divisions and Assets 15,037,720 1,028,000
Payments for Intangible Assets -- (32,611)
Acquisitions and Increase in Joint Venture Interest (231,875) --
Payments for Deposits and Other Assets (189,641) (34,788)
Loans to Related Party (5,419,305) --
---------- -----------
Net Cash - Investing Activities 8,862,560 883,626
---------- -----------
Financing Activities:
Cash Overdraft (391,654) 621,407
Proceeds from Borrowings on Notes Payable -- 1,171,775
Principal Payments on Notes and Leases (4,609,510) (6,168,295)
Proceeds from the Issuance of Common Stock -- 3,000,000
Proceeds from Joint Venture Partners 175,000 --
Loans from Related Parties -- 1,638,285
Payments on Loans from Related Parties (1,944,421) (16,503)
---------- -----------
Net Cash - Financing Activities (6,770,585) 246,669
---------- -----------
Net Decrease in Cash (5,569) (12,231)
Cash - Beginning of Periods 12,658 17,993
---------- -----------
Cash - End of Periods $ 7,089 $ 5,762
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $1,514,637 $ 2,023,182
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company entered into capital leases of approximately $630,000 during the
six months ended June 30, 1997.
During the six months ended June 30, 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 reduced net property 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.
During the six months ended June 30, 1997, the Company recognized gains on
reductions in historically accrued professional fees of approximately $650,000.
See Notes to Consolidated Financial Statements.
7
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DIAGNOSTIC IMAGING SERVICES, INC. AND AFFILIATES
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
affiliates 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 June 30, 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 Registrant's annual report on Form 10-KSB for the fiscal year
ended December 31, 1996.
(3) Intangible Assets
The Company's goodwill of $1,661,384 as of June 30, 1997 is shown net of
accumulated amortization of $281,021. Amortization expense for the six months
ended June 30, 1997 and 1996 was approximately $86,000 and $220,000,
respectively. During the six months ended June 30, 1997, fifteen more units, or
approximately 19%, of Temecula Valley Imaging Center ("TVIC") were purchased
from North Coast Associates for $196,875. In addition, 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 $174,167 as of
June 30, 1997 are shown net of accumulated amortization of $375,833.
Amortization expense for the six months ended June 30, 1997 and 1996 was
approximately $98,000 and $201,000, 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 $658,706 are shown net of accumulated
amortization of $309,384. Amortization expense for the six months ended June 30,
1997 and 1996 was approximately $85,000 and $93,000, respectively. Loan fees of
approximately $6,000 were written off in conjunction with the sale to DHS (see
Note 5).
(4) Due to/from Related Parties
At June 30, 1997, DIS repaid Primedex Health Systems, Inc. ("PHS") approximately
$1.9 million with the proceeds from the sale to DHS (see Note 5). The repayment
was primarily for short-term working capital loans and accrued management fees.
In addition, DIS loaned PHS approximately $5,500,000 on April 18, 1997 with
principal due and payable on or before March 31, 1998 with 10% interest per
annum. As of June 30, 1997, PHS owed DIS approximately $5,420,000 on this loan.
In addition, TVIC and Valley Regional Oncology Center ("VROC") owed PHS
approximately $98,000 for operating expenses.
As of June 30, 1997, DIS owed an officer of the Company approximately $29,000
for prior loans made by him to the Company. During the year, the Company repaid
approximately $60,000 on this loan.
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.
In addition, 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. 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 $363,000 are classified
as current assets. During the six months ended June 30, 1997, interest income of
approximately $35,000 was recognized on the deferred receivable. 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.
In May 1997, the Company acquired the assets of Las Posas Medical Imaging for
$35,000 and assumed the building lease for the facility. The Company moved the
assets and business of its Camarillo facility to this location using Camarillo's
prior space for warehouse storage.
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 (of which
$65,000 was received during the six months ended June 30, 1997) 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 $43,000 remains in
assets held for divestiture at June 30, 1997. As a result of the closing, the
assets and related liabilities of WLA will be transferred to PHS's RadNet
Management, Inc. in the fourth quarter of 1997.
9
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), Sheet #3
- ------------------------------------------------------------------------------
(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. ("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. As
of June 30, 1997, through various transactions with related and unrelated
parties since March 1996, PHS acquired an additional 5,084,477 shares of DIS
common stock bringing its total ownership to 7,831,970 shares, or approximately
68.3%. In subsequent purchases through October 31, 1997, PHS acquired an
additional 168,000 common shares in transactions with unrelated parties
increasing its total ownership of DIS to 7,999,970 shares, or approximately
69.8%.
. . . . . . . . . . . . .
10
<PAGE>
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 Murrieta, California ("Murrieta"). Murrieta was closed in
late 1996.
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
<PAGE>
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 June 30, 1997, through various transactions with related and unrelated
parties, PHS acquired an additional 5,084,477 shares of DIS common stock
bringing its total ownership to 7,831,970 shares, or approximately 68.3%.
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 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) 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.
In May 1997, the Company acquired the assets and assumed liabilities of Las
Posas Medical Imaging for $35,000 and relocated its Camarillo facility and its
related business to this site.
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
<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 June 30, 1997 vs. June 30, 1996
The following discussion relates to the continuing activities of Diagnostic
Imaging Services, Inc.
Results of Operations
For the six months ended June 30, 1997 and 1996, the Company had operating
losses of approximately $340,000 and $1,160,000, respectively. The income
improvement was primarily attributable to decreases in operating expenditures
over and above those decreases related to the sale of certain sites to DHS (see
Note 5).
Net revenue was approximately $8,045,000 and $11,550,000 for the six months
ended June 30, 1997 and 1996, respectively. Total operating expenses were
approximately $8,400,000 and $12,700,000 for the six months ended June 30, 1997
and 1996, respectively. The majority of the decreases in revenue and related
operating expenses were due to the sale of four of the Company's MRI facilities
and its Ultrasound Division to DHS in 1997 (see Note 5) and the sales of ICVS,
North County's nuclear medicine business and MBM in 1996. Other expense
decreases were primarily attributable to benefits obtained from reductions in
historically accrued professional fees as well as reductions in staffing and
related salaries and benefits.
For the six months ended June 30, 1997 and 1996, interest expense was
approximately $1,200,000 and $1,825,000, respectively. Interest expense of DIS
is primarily attributable to equipment financing and lines of credit charges of
which outstanding principal balances decreased by approximately $10.5 million
from June 1996 to June 1997. During the six months ended June 30, 1997 and 1996,
interest income was approximately $255,000 and $-0-, respectively. Approximately
$130,000 of interest was paid by DHS and was related to the sale of DIS's four
hospital-based MRI facilities where the sale proceeds were not received until
April 1997 even though the effective sale date was March 1, 1997. Other interest
income relates to DHS's deferred receivable (see Note 5) and PHS loans (see Note
4).
During the six months ended June 30, 1997, the Company recognized gains from
sales or divestiture of approximately $8,355,000; approximately $8,260,000 of
the gain related to the sale to DHS (see Note 5) and approximately $97,000
related to the transfer of Montclair Mobile's assets and related liabilities to
PHS.
For the six months ended June 30, 1997, the Company had net income of
approximately $6,935,000 compared to a net loss of $(2,400,000) for the six
months ended June 30, 1996.
Liquidity and Capital Resources
Cash decreased for the six months ended June 30, 1997 and 1996 by $5,569 and
$12,231, respectively.
Cash generated from investing activities for the six months ended June 30, 1997
and 1996 was approximately $8,860,000 and $885,000, respectively. During the six
months ended June 30, 1997 and 1996, DIS received approximately $15,040,000 from
the sale to DHS (see Note 5) and approximately $1,030,000 from the sales of ICVS
and the nuclear medicine business at North County, respectively. During the six
months ended June 30, 1997, the Company loaned approximately $5,420,000 to PHS,
acquired fifteen more units of TVIC for $196,875, paid $35,000 for the
acquisition of Las Posas Medical Imaging and paid approximately $525,000 for
property, equipment and other assets. During the six months ended June 30, 1996,
the Company paid approximately $145,000 for property, equipment and other
assets.
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 June 30, 1997 vs. June 30, 1996
Liquidity and Capital Resources (Continued)
Cash utilized for financing activities for the six months ended June 30, 1997
was approximately $6,770,000. Cash generated from financing activities for the
six months ended June 30, 1996 was approximately $247,000. For the six months
ended June 30, 1997, approximately $1,944,000 in repayments were made to related
parties. During the six months ended June 30, 1996, the Company borrowed
approximately $1,640,000 from related parties and repaid only $16,503 on prior
related party loans. During the six months ended June 30, 1997 and 1996, the
Company made principal payments on notes and capital leases of approximately
$4,610,000 and $6,170,000, respectively. In addition, during the six months
ended June 30, 1996, the Company borrowed approximately $1,172,000 on notes
payable and received proceeds of $3,000,000 related to the issuance of common
stock.
At June 30, 1997, the Company had net working capital of $297,595, an increase
of $14,567,852 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/or current receivables of approximately $15,040,000 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. Under revolving note "A", originally due June 1997, the Company may
borrow approximately 53% of the eligible accounts receivable, to a maximum of
$4,000,000. Borrowings under this line are repayable with interest at an annual
rate of the prime rate plus 3-1/2%, payable monthly. At June 30, 1997,
approximately $1,700,000 was outstanding under this line. The line was extended
on a month-to-month basis and was paid-off and closed in September 1997 at the
Company's request. The Company also has a $1,000,000 credit facility available
with PHS. As of June 30, 1997, $-0- was outstanding under this line.
The Company's future payments for debt and equipment under capital leases for
the next five years will be approximately $7,575,000, $5,430,000, $4,340,000,
$4,090,000 and $1,410,000, respectively. Interest expense for the Company for
the next five years, included in the above payments, will be approximately
$2,000,000, $1,180,000, $800,000, $400,000 and $35,000, respectively.
Note Regarding Forward - Looking Statements
This Quarterly Report contains historical information as well as forward-looking
statements. Statements looking forward in time are included in this Quarterly
Report pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such statements involve known and unknown risks
and uncertainties that may cause the Company's actual results in future periods
to be materially different from any future performance suggested herein.
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 $90,000.
(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 $400,000. 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 69.8% 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.
16
<PAGE>
PART II - OTHER INFORMATION
None
17
<PAGE>
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. and Affiliates
(Registrant)
November 4, 1997 By: /s/ Norman Hames
------------------
Norman Hames, President, Principal
Executive Officer and Director
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
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This schedule contains summary financial information extracted from the
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is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-END> jun-30-1997
<CASH> 7,089
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<RECEIVABLES> 3,984,290
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,086,113
<PP&E> 11,052,740
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,282,001
<CURRENT-LIABILITIES> 9,788,518
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0
44,820
<COMMON> 114,639
<OTHER-SE> 1,156,961
<TOTAL-LIABILITY-AND-EQUITY> 25,282,001
<SALES> 8,044,608
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<INCOME-PRETAX> 6,935,226
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