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, 1998 Commission File Number 33-37418
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)
Issuer's telephone number: (310) 479-0399
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ____
Number of shares outstanding of the issuer's common stock as of June 12, 1998
was 11,310,110 shares [excluding treasury shares].
Transitional Small Business Disclosure Format (check one);
Yes No X
<PAGE>
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, 1998, and the results of its operations and changes
in its cash flows for the three month periods ended March 31, 1998 and 1997,
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, 1998.
[UNAUDITED]
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Assets:
Current Assets:
Cash $ 46,179
Marketable Securities Available-for-Sale 1,622,438
Accounts Receivable - Net 2,951,680
Unbilled Receivables 98,841
Other Receivables - Current 1,340,562
Due from Related Party - PHS 731,615
Other Current Assets 196,803
Total Current Assets 6,988,118
Property and Equipment - Net 7,799,439
Other Assets:
Accounts Receivable - Net 327,964
Goodwill - Net 1,943,325
Other Intangible Assets - Net 91,667
Other Assets 37,446
Total Other Assets 2,400,402
Total Assets $17,187,959
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, 1998.
[UNAUDITED]
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Liabilities and Shareholders' Deficit:
Current Liabilities:
Cash Overdraft $ 283,878
Accounts Payable 766,871
Accrued Expenses 1,940,585
Accrued Professional Fees 314,040
Notes and Capital Leases Payable 4,908,342
Deferred Revenue 100,000
Total Current Liabilities 8,313,716
Long-Term Liabilities:
Notes and Capital Leases Payable 8,917,861
Deferred Revenue 791,667
Accrued Professional Fees 27,157
Total Long-Term Liabilities 9,736,685
Total Liabilities 18,050,401
Minority Interest --
Commitments and Contingencies --
Stockholders' Deficit:
Convertible 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
Convertible 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 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 102,309
Additional Paid-in Capital - Preferred Stock - Series G 82,441
Stock Purchase Warrants 1,175,317
Subscriptions Receivable (10,994)
Accumulated Deficit (6,811,370)
Accumulated Other Comprehensive Income 190,875
Treasury Stock - 153,846 Shares of Common Stock, At Cost (1,538)
Total Shareholders' Deficit (862,442)
Total Liabilities and Shareholders' Deficit $17,187,959
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 AND COMPREHENSIVE INCOME
[UNAUDITED]
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Three months ended
March 31,
1 9 9 8 1 9 9 7
Revenue:
Net Patient Service Revenue $2,521,441 $ 4,733,510
Operating Expenses:
Cost of Services 2,080,980 3,442,834
General and Administrative 512,753 985,214
Depreciation and Amortization 471,738 842,247
Total Operating Expenses 3,065,471 5,270,295
Operating Loss (544,030) (536,785)
Other Revenue and [Expenses]:
Gain on Sale of Subsidiaries and Divisions 987,274 8,354,752
Interest Income 40,846 130,670
Interest Income - Related Party 29,202 --
Interest Expense (359,901) (686,512)
Total Other Revenue 697,421 7,798,910
Income Before Minority Interest in Income of
Subsidiaries, Cumulative Effect of Change in
Accounting Principle and Extraordinary Item 153,391 7,262,125
Minority Interest in Income of Subsidiaries -- (13,012)
Income Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle 153,391 7,249,113
Extraordinary Item - Gain from Early Extinguishment
of Debt, Net of Income Taxes of $-0- 133,832 --
Income Before Cumulative Effect of Change in
Accounting Principle 287,223 7,249,113
Cumulative Effect of Change in Accounting Principle (601,921) --
Net [Loss] Income (314,698) 7,249,113
Other Comprehensive Income:
Unrealized Holding Gains on Marketable Securities,
Net of Income Taxes of $-0- 190,875 --
Total Comprehensive [Loss] Income $ (123,823) $ 7,249,113
See Notes to Consolidated Financial Statements.
5
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
[UNAUDITED]
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Three months ended
March 31,
1 9 9 8 1 9 9 7
Basic EPS Computation:
Net [Loss] Income $ (314,698) $ 7,249,113
Preferred Stock Dividends 56,025 56,025
Net [Loss] Income Available to Common
Shareholders $ (370,723) $ 7,193,088
Basic EPS:
Income Before Change in Accounting Principle and
Extraordinary Item $ .01 $ .69
Extraordinary Item .01 --
Change in Accounting Principle - Write-off of Costs
of Start-up Activities (.05) --
Net [Loss] Income $ (.03) $ .68
Diluted EPS Computation:
Net [Loss] Income Available to Common Shareholders $ (370,723) $ 7,193,088
Income Impact of Assumed Conversions of Preferred
Stock Dividends -- 56,025
[Loss] Income Available to Common Shareholders and
Assumed Conversions $ (370,723) $ 7,249,113
Diluted EPS:
Income Before Change in Accounting Principle and
Extraordinary Item $ .01 $ .56
Extraordinary Item .01 --
Change in Accounting Principle - Write-off of Costs
of Start-up Activities (.05) --
Net [Loss] Income $ (.03) $ .56
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' DEFICIT
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<TABLE>
Preferred Stock
Common Stock Series F Series G Treasury Stock
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 11,463,956 $114,639 2,482,000 $24,820 2,000,000 20,000 (153,846) $(1,538)
Comprehensive Income:
Net Income for the Three
Months Ended March 31, 1998 -- -- -- -- -- -- -- --
Other Comprehensive Income, Net
of Tax:
Unrealized Holding Gain Arising
during the Period
Comprehensive [Loss]
Balance - March 31, 1998
[Unaudited] 11,463,956 $ 114,639 2,482,000 $24,820 2,000,000 20,000 (153,846) $(1,538)
See Notes to Consolidated Financial Statements.
</TABLE>
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
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<TABLE>
Paid-in Paid-in
Paid-in Capital- Capital - Accumulated
Capital Series F Series G Accum- Other
Common Preferred Preferred Purchase Subscriptions lated Comprehensive
Stock Stock Stock Warrants Receivable Deficit Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 $4,251,059 $102,309 $82,441 $1,175,317 $(10,994)$(6,496,672)$ -- $(738,619)
Comprehensive Income:
Net Income for the Three Months Ended
March 31, 1998 -- -- -- -- -- (314,698) -- (314,698)
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gain Arising during the Period 190,875 190,875
-------
Comprehensive [Loss] (123,823)
Balance - March 31, 1998 [Unaudited] $4,251,059 $102,309 $82,441 $1,175,317 $(10,994)$(6,811,370)$ -- $(738,619)
========== ======== ======= ========== ======== =========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Three months ended
March 31,
1 9 9 8 1 9 9 7
Net Cash - Operating Activities $ (134,654) $(1,007,906)
Investing Activities:
Purchase of Property and Equipment (89,428) (229,644)
Proceeds from Dispositions of Operating Entities -- 7,019,475
Receipts on Loans to Related Parties 1,175,324 --
Payments for Deposits and Other Assets -- (75,632)
Net Cash - Investing Activities 1,085,896 6,714,199
Financing Activities:
Cash Overdraft (184,349) (97)
Principal Payments on Notes and Leases (726,854) (4,258,934)
Proceeds from Joint Venture Partners -- 175,000
Payments to Related Parties -- (1,621,491)
Net Cash - Financing Activities (911,203) (5,705,522)
Net Increase in Cash and Cash Equivalents 40,039 771
Cash and Cash Equivalents - Beginning of Periods 6,140 12,658
Cash and Cash Equivalents - End of Periods $ 46,179 $ 13,429
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 367,191 $ 833,240
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company entered into capital leases of approximately $-0- and $139,582
during the three months ended March 31, 1998 and 1997, respectively.
The Company sold its share of Scripps Chula Vista MRI, L.P. to Diagnostic
Health Services, Inc. ["DHS"] for 127,250 shares of DHS stock. As of the
transaction date, the shares were valued at $1,431,563 and recorded as
marketable securities held for sale. In the transaction, the Company wrote-off
approximately $1,565,000 in net property and equipment, approximately $865,000
in notes and capital leases payable, approximately $400,000 in minority
interest, approximately $160,000 in accrued expenses, approximately $290,000 in
net accounts receivable and approximately $20,000 in net other intangible
assets.
During the three months ended March 31, 1998, the Company received equipment
with a fair market value of approximately $130,000 from PHS. The Company
transferred equipment with a net book value of approximately $950,000 and
related liabilities of approximately $892,000 to PHS. The net transactions
reduced PHS's liability to DIS by approximately $72,000.
The Company sold substantially all of the net assets of four of its
hospital-based MRI facilities and its Ultrasound Division to DHS effective March
1, 1997. The sale resulted in a gain of approximately $8.3 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 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.
8
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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, 1997 as filed with the Securities and Exchange Commission.
During the three months ended March 31, 1998, the Company adopted Statement of
Position ["SOP"] No. 98-5, "Reporting on the Costs of Start-up Activities." As a
result of the decision, the Company reduced historical net organizational costs
and capitalized fees by approximately $602,000. The effect of this change was to
decrease income before net income for the three months ended March 31, 1998 by
$.05 per share.
[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 310-b of Regulation S-B 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] which are necessary in
order to make the financial statements not misleading 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, 1997.
[3] Intangible Assets
The Company's goodwill of $1,943,325 as of March 31, 1998 is shown net of
accumulated amortization of $416,580. Amortization expense for the three months
ended March 31, 1998 and 1997 was approximately $53,000 and $62,000,
respectively.
Other Intangible Assets consist of covenants not to compete. During the three
months ended March 31, 1998, the Company wrote-off approximately $602,000 in net
organizational costs and capitalized loan fees when it adopted AcSEC's SOP No.
98-5, "Reporting on the Costs of Start-up Activities." The Company's covenants
not to compete of $91,667 as of March 31, 1998 are shown net of accumulated
amortization of $458,333. Amortization expense for the three months ended March
31, 1998 and 1997 was approximately $43,000 and $71,000, respectively.
Approximately $19,000 of net capitalized loan fees were written-off in
conjunction with the sale to DHS.
[4] Due from Related Party
On April 18, 1997, DIS loaned Primedex Health Systems, Inc. ["PHS"]
approximately $5,500,000 with interest at 10% due and payable on or before March
31, 1998. As of March 31, 1998, PHS still owed DIS approximately $730,000 for
the loan. DIS further extended the loan on a month-to-month basis providing PHS
continues to pay interest on the outstanding balance due.
During the three months ended March 31, 1998, PHS assumed DIS's West L.A.
capital lease obligation of approximately $892,000 [excluding sales tax] for the
MRI equipment at the closed center. The net book value of the assets was
approximately $905,000. In addition, DIS acquired a phased array system for SCV
from PHS for approximately $130,000, while PHS acquired other miscellaneous
medical equipment from DIS for approximately $45,000.
9
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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
In March 1998, effective January 1, 1998, the Company sold its share of Scripps
Chula Vista MRI, L.P. ["SCV"] to Diagnostic Health Services, Inc. ["DHS"] for
127,250 shares of DHS stock. As of the transaction date, the shares were valued
at $1,431,563 and recorded as marketable securities held for sale.
[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 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 March 31, 1998,
through various transactions with related and unrelated parties, PHS acquired an
additional 5,855,477 shares of DIS common stock bringing its total ownership to
8,602,970 shares, or approximately 75%. In subsequent purchases through June 12,
1998, PHS acquired an additional 245,000 shares in transactions with unrelated
parties increasing its total ownership of DIS to 8,847,970 shares, or
approximately 77%.
[7] Subsequent Events
In May 1998, the Company exercised its option to receive the $1,500,000 in
post-closing payments related to the sale of DIS's MRI facilities to DHS in the
form of common stock of DHS. The Company received 200,000 shares of DHS stock
and sold the shares for $1,849,936 on May 8, 1998. The transaction will result
in a gain of approximately $534,000.
On May 15, 1998, the Company sold the 127,250 DHS shares it received from the
sale of SCV for approximately $1,230,000. The transaction will result in a loss
of approximately $200,000.
[8] [Loss] Income Per Share
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows:
1 9 9 8 1 9 9 7
Average Common Shares Outstanding 11,310,110 10,554,073
Common Shares Issuable Pursuant to:
Series F Convertible Preferred Stock -- 1,000,000
Series G Convertible Preferred Stock -- 1,000,000
Stock Options -- 112,518
Purchase Warrants -- 317,300
Average Common Shares Outstanding Assuming
Dilution 11,310,110 12,983,891
Stock options and purchase warrants outstanding at March 31, 1998 to purchase
625,562 and 1,521,739, respectively, shares of common stock were not included in
the computation of earnings per common share assuming dilution because the
options exercise prices were greater than the average market price of the common
shares, however, the options could be dilutive in the future.
. . . . . . . . . . .
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
["TVIC"]. 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. 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 was the general partner and 75% owner of VROC until
the remaining 25% interest was purchased by DIS for $260,000 during the year
ended December 31, 1997. 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. 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 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"]. In February 1995, DIS purchased the outstanding limited partnership
units of Santa Monica Imaging Center ["SMIC"] and became its general partner.
The remaining interest in SMIC was purchased for $300,000 in 1997. 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 beginning in
mid-1998.
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, 1998, through various transactions with related and unrelated
parties, PHS acquired an additional 5,855,477 shares of DIS common stock
bringing its total ownership to 8,602,970 shares, or approximately 75%. In
subsequent purchases through June 12, 1998, PHS acquired an additional 245,000
shares of DIS common stock from unrelated parties increasing its total ownership
to 8,847,970 shares, or approximately 77%.
In May 1996, Integrated Cardiovascular Systems, Inc. ["ICVS"] was sold to an
unaffiliated third party. 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.
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 January 1,
1998, the Company sold its share of SCV to Diagnostic Health Services, Inc.
["DHS"] for 127,250 shares of DHS stock. As of the transaction date, the shares
were valued at $1,431,563 and recorded as marketable securities held for sale
[See Note 7].
Effective March 1, 1997, the Company sold the assets and related liabilities of
four of its hospital-based MRI facilities [Tarzana, SGV, Chino and SMIC] and its
Ultrasound Division to DHS for $14,972,720 in cash including $1,000,000 for a
ten-year covenant not-to-compete [classified as "Deferred Revenue" on the
financial statements]. In addition, a discounted receivable of approximately
$1,190,000 was recorded for three post-closing payments of $500,000 each to be
made by DHS to DIS on the first, second and third anniversaries of the closing
date. There was also an option to receive these post-closing payments in the
form of DHS common stock 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"] [See Note 7]. 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 which
was closed in 1997.
The assets and related liabilities of WLA were assumed by PHS.
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.
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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Forward-Looking Information
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Company will have adequate financial resources to
fund the development and operation of its business, and there will be no
material adverse change in the Company's operations or business. The foregoing
assumptions are based on judgment with respect to, among other things,
information available to the Company, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. There are a
number of other risks presented by the Company's business and operations which
could cause the Company's financial performance to vary markedly from prior
results or results contemplated by the forward-looking statements. Management
decisions, including budgeting, are subjective in many respects and periodic
revisions must be made to reflect actual conditions and business developments,
the impact of which may cause the Company to alter its capital investment and
other expenditures, which may also adversely affect the Company's results of
operations. In light of significant uncertainties inherent in forward-looking
information included in this Quarterly Report on Form 10-QSB, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the Company's objectives or plans will be achieved.
Discussion of Operations for the Quarter Ended March 31, 1998 vs. March 31, 1997
The following discussion relates to the continuing activities of Diagnostic
Imaging Services, Inc..
Results of Operations
For the three months ended March 31, 1998 and 1997, the Company had operating
losses of approximately $545,000 and $535,000, respectively.
For the three months ended March 31, 1998 and 1997, the Company had net revenue
of approximately $2,520,000 and $4,735,000, respectively. The decrease in net
revenue was primarily attributable to the sales of the Company's Ultrasound
Division and four of its hospital-based MRI sites to DHS effective March 1,
1997, the sale of SCV to DHS effective January 1, 1998 and the closure of
Parkside and West L.A. during 1997.
The combined net revenues for the "DHS sold" sites for the three months ended
March 31, 1997 was approximately $1,845,000. The combined net revenues for
Parkside and West L.A. for the three months ended March 31, 1998 and 1997 was
approximately $150,000 and $640,000, respectively. Parkside Women's Center
continues to operate in 1998. In addition, the Company wrote-down some of its
historical accounts receivable by approximately $225,000 during the three months
ended March 31, 1998. Net revenue for the three months ended March 31, 1998
increased for the remaining active sites by approximately $350,000 from the
prior year's three month period.
Total expenses for the three months ended March 31, 1998 and 1997 were
approximately $3,065,000 and $5,270,000, respectively. As with net revenue, the
primary reason for the decrease in operating expenses was due to the sales to
DHS and the closures of Parkside and West L.A.. The combined operating expenses
for the "DHS sold" sites for the three months ended March 31, 1997 was
approximately $1,200,000. The combined operating expenses for the "closed" sites
for the three months ended March 31, 1998 and 1997 was approximately $190,000
and $610,000, respectively. General and Administrative expenses decreased
approximately $470,000 in 1998 primarily due to reductions in salaries and
outside accounting and legal services. Depreciation and amortization decreased
approximately $370,000 in 1998 primarily due to the write-off of organizational
costs and capitalized fees, the closure of Parkside and West L.A. and the sales
to DHS.
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, 1998 vs. March 31, 1997
Results of Operations [Continued]
For the three months ended March 31, 1998 and 1997, the Company recognized gains
from the sales of assets and centers of approximately $985,000 and $8,355,000,
respectively. During 1998, the Company sold SCV to DHS generating a gain of
approximately $985,000. During 1997, the Company sold four of its hospital-based
MRI facilities and its Ultrasound Division to DHS generating a gain of
approximately $8,260,000 and transferred the assets and related liabilities of
Montclair Mobile to PHS generating a gain of approximately $95,000.
For the three months ended March 31, 1998 and 1997, interest expense was
approximately $360,000 and $685,000, respectively. Interest expense of DIS was
primarily attributable to equipment financing and lines of credit charges. DIS's
line of credit with DVI was paid in full in late 1997. For the three months
ended March 31, 1998 and 1997, interest income was approximately $70,000 and
$130,000, respectively. In 1998, approximately $29,000 of interest income was
generated from PHS loans, approximately $39,000 of interest was generated from
Other Receivables and approximately $2,000 was generated from the Company's bank
accounts. During 1997, approximately $130,000 of interest income was generated
from the sale to DHS.
For the three months ended March 31, 1998, the Company wrote-off net
organizational costs and capitalized fees of approximately $600,000 when it
adopted AcSEC's SOP No. 98-5, "Reporting on the Costs of Start-up Activities."
For the three months ended March 31, 1998, the Company recognized gains from the
early extinguishment of debt of approximately $135,000.
For the three months ended March 31, 1998, the Company had a net loss of
approximately $315,000 compared to net income of approximately $7,250,000 for
the three months ended March 31, 1997.
Liquidity and Capital Resources
Cash increased for the three months ended March 31, 1998 and 1997 by
approximately $40,000 and $770, respectively.
Cash generated from investing activities for the three months ended March 31,
1998 and 1997 was approximately $1,085,000 and $6,715,000, respectively. During
the three months ended March 31, 1998, the Company was repaid by PHS
approximately $1,175,000 for prior loans and the Company purchased property and
equipment for approximately $90,000. During the three months ended March 31,
1997, the Company received approximately $7,020,000 from the sale of its
Ultrasound Division to DHS, purchased property and equipment for approximately
$230,000 and made payments for deposits and other assets of approximately
$75,000.
Cash utilized for financing activities for the three months ended March 31, 1998
and 1997 was approximately $910,000 and $5,705,000, respectively. For the three
months ended March 31, 1998, the Company reduced its cash overdraft
approximately $185,000 and made principal payments on notes and capital leases
of approximately $725,000. For the three months ended March 31, 1997, the
Company made principal payments on notes and capital leases of approximately
$4,260,000, received proceeds from joint venture partners of $175,000 and made
payments to related parties of approximately $1,620,000. The reduction in
payments for notes and capital leases payable corresponds to the decrease in the
outstanding balances for each period. As of December 31, 1996, the Company's
outstanding obligations for notes and capital leases payable was approximately
$30,150,000. As of March 31, 1998, the Company's outstanding obligations for
notes and capital leases payable was approximately $13,825,000.
14
<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, 1998 vs. March 31, 1997
Liquidity and Capital Resources [Continued]
At March 31, 1998, the Company had a net working capital deficit of $1,516,473,
an increase of $1,480,601 from December 31, 1997. A key reason for the increase
was due to the sale of SCV and the receipt of marketable securities of
approximately $1,430,000.
In June 1994, the Company entered into a $2,500,000 [increased to $4,000,000 in
June 1995] 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. During 1997, the Company paid and
closed the line of credit. The Company also has a $1,000,000 credit facility
available with PHS.
As of March 31, 1998, $-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 $6,440,000, $4,060,000, $3,820,000,
$2,160,000 and $150,000, respectively. Interest expense, included in the above
payments, will be approximately $1,530,000, $825,000. $460,000.
$115,000 and $20,000, respectively.
15
<PAGE>
PART II
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings, except that:
On June 4, 1997, the Company 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. The
complaint alleges that the Company 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 the Company's imaging
centers and its ultrasound business to Diagnostic Health Services, Inc., that
the Company 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 Company's Common
Stock exercisable at $.01 per share which plaintiff received in connection with
Company's acquisition of its Santa Monica facility to either $1,000,000 cash or
stock with a market value of $1,000,000 at the election of the Company. The
Company denies each and every allegation and intends to vigorously defend
against the legal action.
A partial settlement was reached in August 1997. Pursuant to the settlement, Dr.
Dalrymple assumed the ownership of Parkside Radiology and assumed responsibility
for expenses of the facility in the future. Additionally, the Company sold
certain of its equipment and leasehold improvements to Dr. Dalrymple for
approximately $400,000. Plaintiff's remaining claims, as well as the Company's
cross-claims against Dr. Dalrymple alleging, among other things, that Dr.
Dalrymple pursued a plan to depress Parkside's business, and therefore its
value, thus enabling him to acquire the facility he previously sold to the
Company at a depressed price, are still in dispute. Discovery is ongoing and
trial is scheduled for November 16, 1998. It is too soon to predict the outcome
of this matter. The Company intends to vigorously defend against plaintiff's
claims and to pursue its cross-claims in the action.
On or about June 7, 1998, the Company received a demand for arbitration from
Sterling Diagnostic Imaging, successor to the x-ray film business of E.I. DuPont
de Nemours. Claimant seeks recovery of $5,000,000 for an alleged breach of an
agreement to purchase film from the claimant. The Company has just received the
demand but believes it has reasonable defenses to the claim and intends to
vigorously defend the matter.
Item 5. Other Information
In February 1998, effective January 1, 1998, the Company sold its partnership
interest in Scripps Chula Vista MRI, LP to Diagnostic Health Services, Inc.
["DHS"] for shares of DHS common stock. On May 15, 1998, the Company sold the
shares and received approximately $1,230,000.
In April 1998, the Company elected to receive the $1,5000,000 in post closing
payments related to the previous sale of certain MRI facilities to DHS in the
form of DHS common stock which the Company sold on May 8, 1998 and received
approximately $1,850,000.
The Company is currently a party to other litigation, none of which is deemed by
management to be material in nature.
16
<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.
June 18, 1998 By: /s/ Norman Hames, President
Norman Hames, President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to said statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 46,179
<SECURITIES> 1,622,438
<RECEIVABLES> 3,050,521
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,988,118
<PP&E> 7,799,439
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,187,959
<CURRENT-LIABILITIES> 8,313,716
<BONDS> 0
0
44,820
<COMMON> 114,639
<OTHER-SE> (1,021,901)
<TOTAL-LIABILITY-AND-EQUITY> 17,187,959
<SALES> 2,521,441
<TOTAL-REVENUES> 2,521,441
<CGS> 2,080,980
<TOTAL-COSTS> 3,065,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 359,901
<INCOME-PRETAX> 153,391
<INCOME-TAX> 0
<INCOME-CONTINUING> 153,391
<DISCONTINUED> 0
<EXTRAORDINARY> 133,832
<CHANGES> (601,921)
<NET-INCOME> (314,698)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
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