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: June 30, 1998 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
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 September 18,
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 June 30, 1998, and the results of its operations and changes in
its cash flows for the six month periods ended June 30, 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 JUNE 30, 1998.
[UNAUDITED]
- ------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 103,964
Accounts Receivable - Net 2,970,896
Due from Related Party - PHS 2,771,176
Other Current Assets 210,333
-----------
Total Current Assets 6,056,369
Property, Plant and Equipment - Net 7,447,992
-----------
Other Assets:
Accounts Receivable - Net 393,652
Goodwill - Net 1,887,225
Other Intangible Assets - Net 64,167
Other Assets 45,002
-----------
Total Other Assets 2,390,046
Total Assets $15,894,407
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 JUNE 30, 1998.
[UNAUDITED]
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Liabilities and Shareholders' Deficit:
Current Liabilities:
Cash Overdraft $ 547,743
Accounts Payable 802,633
Accrued Expenses 1,662,605
Accrued Professional Fees 322,048
Notes and Capital Leases Payable 4,798,820
Deferred Revenue 100,000
-----------
Total Current Liabilities 8,233,849
Long-Term Liabilities:
Notes and Capital Leases Payable 8,489,493
Deferred Revenue 766,667
Accrued Professional Fees 21,621
-----------
Total Long-Term Liabilities 9,277,781
Total Liabilities 17,511,630
Minority Interest --
Commitments and Contingencies --
Shareholders' 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 4,240,065
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
Accumulated Deficit (7,375,276)
Treasury Stock - 153,846 Shares of Common Stock, At Cost (1,538)
-----------
Total Shareholders' Deficit (1,617,223)
Total Liabilities and Shareholders' Deficit $15,894,407
See Notes to Consolidated Financial Statements.
4
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Six months ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Revenue:
Net Patient Service Revenue $5,458,451 $ 8,044,608
---------- -----------
Operating Expenses:
Cost of Services 4,051,571 5,577,978
General and Administrative 1,233,112 1,405,687
Depreciation and Amortization 930,876 1,402,385
---------- -----------
Total Operating Expenses 6,215,559 8,386,050
---------- -----------
Operating Loss (757,108) (341,442)
---------- -----------
Other Revenue and [Expenses]:
Gain on Sale of Subsidiaries and Divisions 1,284,650 8,354,752
Miscellaneous Expense (354,062) (70,449)
Interest Income 55,147 167,149
Interest Income - Related Party 77,451 89,376
Interest Expense (716,593) (1,209,225)
---------- -----------
Total Other Revenue 346,593 7,331,603
---------- -----------
[Loss] Income Before Minority Interest in Income of
Subsidiaries, Income Taxes, Extraordinary Item and
Cumulative Effect of Change in Accounting Principle (410,515) 6,990,161
Minority Interest in Income of Subsidiaries -- (54,935)
---------- -----------
[Loss] Income Before Income Taxes, Extraordinary
Item and Cumulative Effect of Change in
Accounting Principle (410,515) 6,935,226
Provision for Income Tax -- 34,000
---------- -----------
[Loss] Income Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle (410,515) 6,901,226
Extraordinary Item - Gain from Early Extinguishment
of Debt[Net of Income Taxes of $-0-] 133,832 --
---------- -----------
[Loss] Income Before Cumulative Effect of Change in
Accounting Principle (276,683) 6,901,226
Cumulative Effect of Change in Accounting Principle
[Net of Income Taxes of $-0-] (601,921) --
---------- -----------
Net [Loss] Income $ (878,604) $ 6,901,226
========== ===========
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
[UNAUDITED]
- ------------------------------------------------------------------------------
Six months ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Basic EPS Computation:
Net [Loss] Income $ (878,604) $ 6,901,226
Preferred Stock Dividends 112,050 112,050
---------- -----------
Net [Loss] Income Available to Common Shareholders $ (990,654) $ 6,789,176
========== ===========
Basic EPS:
[Loss] Income Before Extraordinary Item and Change
in Accounting Principle Available to Common
Shareholders $ (.05) $ .60
Extraordinary Item .01 --
Change in Accounting Principle - Write-off of
Costs of Start-up Activities (.05) --
---------- -----------
Net [Loss] Income Available to Common Shareholders $ (.09) $ .60
========== ===========
Diluted EPS Computation:
Net [Loss] Income Available to Common Shareholders $ (990,654) $ 6,789,176
Income Impact of Assumed Conversions of Preferred
Stock Dividends -- 112,050
---------- -----------
[Loss] Income Available to Common Shareholders and
Assumed Conversions $ (990,654) $ 6,901,226
========== ===========
Diluted EPS:
[Loss] Income Before Extraordinary Item and Change
in Accounting Principle Available to Common
Shareholders $ (.05) $ .50
Extraordinary Item .01 --
Change in Accounting Principle - Write-off of
Costs of Start-up Activities (.05) --
---------- -----------
Net [Loss] Income Available to Common Shareholders $ (.09) $ .50
========== ===========
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)
Write-Off Subscription Receivable -- -- -- -- -- -- -- --
Net Income for the Six Months Ended
June 30, 1998 -- -- -- -- -- -- -- --
---------- -------- --------- ------- --------- --------- --------- -----------
Balance - June 30, 1998 [Unaudited] 11,463,956 $114,639 2,482,000 $24,820 2,000,000 $ 20,000 (153,846) $ (1,538)
========== ======== ========= ======= ========= ========== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
- ------------------------------------------------------------------------------
<TABLE>
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
<S> <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)
Write-Off Subscription Receivable (10,994) -- -- -- 10,994 -- --
Net Income for the Six Months Ended
June 30, 1998 -- -- -- -- -- (878,604) (878,604)
----------- ------------ --------- ----------- -------- ----------- -----------
Balance - June 30, 1998 [Unaudited] $ 4,240,065 $ 102,309 $ 82,441 $ 1,175,317 $ -- $(7,375,276) $(1,617,223)
=========== ============ ========= =========== ======== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Six months ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Net Cash - Operating Activities $ (705,793) $(2,097,544)
---------- -----------
Investing Activities:
Purchase of Property and Equipment (114,633) (334,339)
Proceeds from Sales of Divisions and Assets -- 15,037,720
Acquisitions and Increase in Joint Venture Interest -- (231,875)
Proceeds from Sale of Marketable Securities 3,082,628 --
Loans to Related Parties (2,039,561) (5,419,305)
Receipts on Loans to Related Parties 1,175,324 --
Payments for Deposits and Other Assets -- (189,641)
---------- -----------
Net Cash - Investing Activities 2,103,758 8,862,560
---------- -----------
Financing Activities:
Cash Overdraft 79,516 (391,654)
Principal Payments on Notes and Leases (1,379,657) (4,609,510)
Proceeds from Joint Venture Partners -- 175,000
Payments on Loans from Related Parties -- (1,944,421)
---------- -----------
Net Cash - Financing Activities (1,300,141) (6,770,585)
---------- -----------
Net Increase [Decrease] in Cash 97,824 (5,569)
Cash - Beginning of Periods 6,140 12,658
---------- -----------
Cash - End of Periods $ 103,964 $ 7,089
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 688,348 $ 1,514,637
Taxes $ -- $ --
See Notes to Consolidated Financial Statements.
8
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Supplemental Schedule of Noncash Investing and Financing Activities:
The Company entered into capital leases of approximately $-0- and $630,000
during the six months ended June 30, 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. In the transaction, the
Company wrote-off approximately $1,565,000 in net property and equipment,
approximately $865,000 in notes 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.
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. The sale
reduced net property, plant and equipment approximately $9.3 million, notes and
capital leases payable approximately $7.6 million and net goodwill and other
intangible assets approximately $4.6 million. A discounted note receivable was
set-up at the time of sale for approximately $1.2 million for post-closing
payments to be made by DHS to DIS on the first, second and third anniversaries
of the sale date. The Company exercised its option to received these
post-closing payments in the form of 200,000 shares of DHS common stock during
the six months ended June 30, 1998.
During the six months ended June 30, 1998, the Company received equipment with
a fair market value of approximately $130,000 from PHS, and the Company
transferred approximately $950,000 in net medical equipment to Primedex Health
Systems, Inc. with related notes payable of approximately $890,000. During the
six months ended June 30, 1998, the Company incurred approximately $415,000 in
debt restructuring charges refinancing its outstanding notes payable, reducing
interest rates and extending payment terms to six years.
See Notes to Consolidated Financial Statements.
9
<PAGE>
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 six months ended June 30, 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 $600,000. The effect of this change was to
decrease net income for the six months ended June 30, 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 $1,887,225 as of June 30, 1998 is shown net of
accumulated amortization of $472,679. Amortization expense for the six months
ended June 30, 1998 and 1997 was approximately $109,000 and $86,000,
respectively.
Other Intangible Assets consist of covenants not to compete. The Company's
covenants not to compete of $64,167 as of June 30, 1998 are shown net of
accumulated amortization of $485,833. Amortization expense for the six months
ended June 30, 1998 and 1997 was approximately $55,000 and $98,000,
respectively. During the six months ended June 30, 1998, the Company wrote-off
approximately $600,000 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." Amortization expense for the six months ended June 30, 1998 and
1997 was approximately $15,000 and $85,000, respectively. Approximately $19,000
of net capitalized loan fees were written-off in conjunction with the sale to
DHS.
[4] Due to/from Related Party
On April 18, 1997, DIS loaned Primedex Health Systems, Inc. ["PHS"]
approximately $5,500,000 with interest at 10% originally due and payable on or
before March 31, 1998. As of March 31, 1998, DIS extended existing and future
loans on a month-to-month basis providing PHS continues to pay interest on the
outstanding balances due. As of June 30, 1998, PHS owed DIS approximately
$2,770,000.
During the six months ended June 30, 1998, PHS assumed DIS's West L.A. capital
lease obligation of approximately $890,000 [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.
10
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- ------------------------------------------------------------------------------
[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. On May 15,
1998, the Company sold the DHS stock for approximately $1,230,000. The net sale
of SCV resulted in a gain of approximately $790,000.
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 subsequently sold the shares for $1,849,936 on May 8, 1998.
The transaction resulted in a gain of approximately $500,000.
[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 June 30, 1998,
through various transactions with related and unrelated parties, PHS acquired an
additional 7,020,851 shares of DIS common stock bringing its total ownership to
9,768,344 shares, or approximately 86% [excluding treasury shares].
[7] [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 11,310,110
Common Shares Issuable Pursuant to:
Series F Convertible Preferred Stock -- 1,000,000
Series G Convertible Preferred Stock -- 1,000,000
Stock Options -- 71,256
Purchase Warrants -- 316,992
---------- ----------
Average Common Shares Outstanding Assuming Dilution 11,310,110 13,698,358
Stock options and purchase warrants outstanding at June 30, 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
option's exercise prices were greater than the average market price of the
common shares; however, the options could be dilutive in the future.
. . . . . . . . . . .
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
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 near
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 March 1997. In
August 1995, DIS purchased the assets of an X-Ray, mammography, and basic
ultrasound center in Murietta, California ["Murietta"]. Murietta ceased its
operations 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.
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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Background [Continued]
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.
As of June 30, 1998, through various transactions with related and unrelated
parties, PHS acquired an additional 7,020,851 shares of DIS common stock
bringing its total ownership to 9,768,344 shares, or approximately 86%
[excluding treasury shares].
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 were 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 [See Note 5].
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 [classified as "Other Receivables" on historical financial statements].
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 5]. The combined sales to DHS
resulted in a net gain of approximately $8,260,000 recorded in 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.
13
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
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 Six Months Ended June 30, 1998 vs. June 30,
1997
The following discussion relates to the continuing activities of Diagnostic
Imaging Services, Inc.
Results of Operations
For the six months ended June 30, 1998 and 1997, the Company had operating
losses of approximately $755,000 and $340,000, respectively.
For the six months ended June 30, 1998 and 1997, the Company had net revenue of
approximately $5,460,000 and $8,045,000, 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 [the "DHS sold sites"]
and the closure of Parkside and West L.A. during 1997 ["the closed sites"].
The combined net revenues for the "DHS sold sites" for the six months ended June
30, 1997 was approximately $2,170,000. The combined net revenues for "the closed
sites" for the six months ended June 30, 1998 and 1997 was approximately
$305,000 and $1,165,000, respectively. Parkside Women's Center continues to
operate in 1998. In addition, the Company wrote-down some of its historical
accounts receivable by approximately $240,000 during the six months ended June
30, 1998. Net revenue for the six months ended June 30, 1998 increased for the
remaining active sites by approximately $685,000 from the prior year's six month
period.
Total operating expenses for the six months ended June 30, 1998 and 1997 were
approximately $6,215,000 and $8,400,000, 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 six months ended June 30, 1997 was
approximately $1,250,000. The combined operating expenses for "the closed sites"
for the six months ended June 30, 1998 and 1997 was approximately $345,000 and
$1,065,000, respectively. Depreciation and amortization decreased approximately
$470,000 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.
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 Six Months Ended June 30, 1998 vs. June 30,
1997
Results of Operations [Continued]
For the six months ended June 30, 1998 and 1997, the Company recognized gains
from the sales of assets and centers of approximately $1,290,000 and $8,355,000,
respectively. During 1998, the Company sold its share of SCV to DHS generating a
net gain of approximately $790,000. In addition, the Company exercised its
option to receive the post-closing payments related to the sale of DIS's MRI
facilities to DHS in the form of 200,000 shares of DHS common stock. In May
1998, the Company sold the stock generating a gain of approximately $500,000.
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 six months ended June 30, 1998 and 1997, interest expense was
approximately $716,000 and $1,200,000, 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 six months ended
June 30, 1998 and 1997, interest income was approximately $133,000 and $255,000,
respectively. In 1998, approximately $77,000 of interest income was generated
from PHS loans, approximately $52,000 of interest was generated from Other
Receivables and approximately $4,000 was generated from the Company's bank
accounts. During 1997, approximately $130,000 of interest income was generated
from the sale to DHS, approximately $90,000 was generated from PHS loans and
approximately $35,000 was generated from Other Receivables.
For the six months ended June 30, 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 six months
ended June 30, 1998, the Company recognized gains from the early extinguishment
of debt of approximately $135,000.
For the six months ended June 30, 1998, the Company had a net loss of
approximately $880,000 compared to net income of approximately $6,900,000 for
the six months ended June 30, 1997.
Liquidity and Capital Resources
Cash increased for the six months ended June 30, 1998 by approximately $98,000.
Cash decreased for the six months ended June 30, 1997 by approximately $5,569.
Cash generated from investing activities for the six months ended June 30, 1998
and 1997 was approximately $2,100,000 and $8,860,000, respectively. During the
six months ended June 30, 1998, the Company purchased property and equipment for
approximately $115,000, made loans to related parties of approximately
$2,039,000, received repayments on loans to related parties of approximately
$1,175,000 and received proceeds of approximately $3,080,000 from the sale of
DHS common stock. The Company received 127,250 shares of DHS common stock from
the sale of SCV and received 200,000 shares of DHS common stock when the Company
exercised an option to receive post-closing payments from the sale of its
hospital-based MRI facilities in the form of common stock. During the six months
ended June 30, 1997, the Company received approximately $14,975,000 from the
sale of its Ultrasound Division and MRI facilities to DHS and $65,000 from the
sale of Parkside MRI to an outside party, purchased property and equipment for
approximately $335,000, made loans to related parties of approximately
$5,420,000, made acquisitions or increased its joint venture interest by
approximately $230,000 and made payments for deposits and other assets of
approximately $190,000.
15
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Six Months Ended June 30, 1998 vs. June 30,
1997
Liquidity and Capital Resources [Continued]
Cash utilized for financing activities for the six months ended June 30, 1998
and 1997 was approximately $1,300,000 and $6,770,000, respectively. For the six
months ended June 30, 1998, the Company increased its cash overdraft
approximately $80,000 and made principal payments on notes and capital leases of
approximately $1,380,000. For the six months ended June 30, 1997, the Company
decreased its cash overdraft by approximately $390,000, made principal payments
on notes and capital leases of approximately $4,610,000, received proceeds from
joint venture partners of $175,000 and made payments to related parties for
prior loans of approximately $1,945,000. 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 June
30, 1998, the Company's outstanding obligations for notes and capital leases
payable was approximately $13,290,000.
At June 30, 1998, the Company had a net working capital deficit of $2,177,480, a
decrease of $819,594 from December 31, 1997. A key reason for the improvement
was due to increased borrowings from PHS classified as current assets on the
Company's financial statements.
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 June 30, 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 $6,250,000, $3,765,000, $3,515,000,
$1,490,000 and $575,000, respectively. Interest expense, included in the above
payments, will be approximately $1,460,000, $770,000, $435,000.
$155,000 and $80,000, respectively.
16
<PAGE>
PART II
Item 5. Other Information
As of June 30, 1998, the Company had fewer than 300 shareholders.
Accordingly, the Company filed Form 15 "Certification and Notice of Termination
of Registration under Section 12(g) of the Exchange Act." This will be the
Company's last filing pursuant to Sections 13 and 15(d) of the Exchange Act.
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.
September 24, 1998 By:/s/Norman Hames
Norman Hames, President and
Chief Financial Officer
<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> 6-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 103,964
<SECURITIES> 0
<RECEIVABLES> 2,970,896
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,056,369
<PP&E> 7,447,992
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,894,407
<CURRENT-LIABILITIES> 8,233,849
<BONDS> 0
0
44,820
<COMMON> 114,639
<OTHER-SE> (1,776,682)
<TOTAL-LIABILITY-AND-EQUITY> 15,894,407
<SALES> 5,458,451
<TOTAL-REVENUES> 5,458,451
<CGS> 4,051,571
<TOTAL-COSTS> 6,215,559
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 716,593
<INCOME-PRETAX> (410,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (410,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 133,832
<CHANGES> (601,921)
<NET-INCOME> (878,604)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
