SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For fiscal year ended December 31, 1997 Commission File Number 33-37418
DIAGNOSTIC IMAGING SERVICES, INC.
(Name of small business issuer in its charter)
Delaware 33-0443404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1516 Cotner Avenue 90025-3303
Los Angeles, California (Zip code)
(Address of principal executive office)
Issuer's telephone number, including area code: (310) 479-0399
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the part 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. ________
State issuer's revenues for its most recent fiscal year $13,265,744.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock as of March 9, 1998 was $2,782,140.
As of March 9, 1998, the Issuer had 11,310,110 shares of Common Stock, $.01 par
value outstanding [excluding treasury shares].
Documents Incorporated by Reference
None
Transitional Small Business Disclosure Format. Yes __ No X
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PART I
Item 1. Description of Business.
Diagnostic Imaging Services, Inc., a Delaware corporation ("DIS" or the
"Registrant"), is an independent regional network of multi-modality radiological
imaging facilities. The network provides radiological imaging services through
90 managed care payors pursuant to contractual arrangements. The DIS network
currently consists of six freestanding MRI and multi-modality imaging centers
located in Santa Monica , Thousand Oaks, Corona, Temecula, Riverside and Vista,
California. Registrant also operates an imaging center providing mammography,
ultrasound, and general radiology in Camarillo. These centers are staffed by
physicians who are specialists in diagnostic imaging. DIS also operates a cancer
care therapy center in Temecula, California, which is staffed by physicians who
are medical oncologists and radiation therapists.
Registrant provides administrative services, non-physician health care
personnel, facilities and equipment to the Registrant network. Registrant
contracts with its network physicians and with HMOs and other managed care
payors. The delivery of health care at the radiological imaging and cancer care
centers are coordinated principally through professional medical corporations or
independent physicians (the "network physicians"), the officers, directors and
shareholders of which are all licensed physicians specializing in radiology,
neurology, medical oncology or radiation therapy.
The DIS network arranges for health care services in the State of California,
which prohibits the practice of medicine by unlicensed persons or general
business corporations. Registrant does not engage in the practice of medicine,
as Registrant neither employs any of the network physicians nor exerts any
control over their decisions regarding medical care. These decisions are made
exclusively by network physicians and are rendered in connection with guidelines
and policies approved and administered by the medical directors of the
affiliated physician groups. The affiliated physician groups delegate to the
Registrant the performance of those administrative, management and support
functions which the network physicians require in order to efficiently conduct
the practice of medicine for HMO enrollees, managed care patients and other
patients. Substantially all Registrant revenue is derived from its management
agreements with the affiliated physician groups or from third party payors.
References to the "DIS network" refer to the separate entities which contract
with Registrant to render professional medical services and the functioning
within a contractual framework. None of the affiliated physician groups is a
subsidiary of the Registrant. However, at some of Registrant's centers physician
services are provided by Beverly Radiology Medical Group, a partnership in which
one entity is wholly-owned by Howard G. Berger, M.D., an officer and director of
Registrant (See "Item 9" and "Item 12"). See "Relationships Among Affiliates;
Management Agreements."
History
Prior to September 2, 1994, the Registrant, then known as IPS Health Care, Inc.
("IPS") was an operator of mobile medical imaging systems. By February 1992, IPS
was experiencing financial difficulties. Shortly thereafter, DVI, Inc., (see
"Item 12 Certain Relationships and Related Transactions") provided numerous
financing benefits to IPS (See "Item 1" of Registrant's Form 10-KSB for the year
ended December 31, 1995).
On September 2, 1994, pursuant to the Agreement and Plan of Reorganization dated
August 10, 1994, among IPS, IPS Acquisition Sub, Inc., a wholly-owned subsidiary
of IPS ("Merger Sub") and Diagnostic Imaging Services, Inc., Merger Sub was
merged with and into DIS and DIS continued as the surviving corporation (the
"IPS Merger"). The name of the Registrant was then changed to "Diagnostic
Imaging Services, Inc." As a result of the IPS Merger, the stockholders of DIS
received, in the aggregate, an amount equal to that number of shares of IPS
Common Stock that were outstanding immediately prior to the IPS Merger.
Accordingly, as a result of the IPS Merger, Norman Hames, the beneficial owner
of approximately 85% of the outstanding capital stock of DIS, and the other
stockholders of DIS acquired 50% of the issued and outstanding shares of IPS
Common Stock.
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Following completion of the IPS Merger, DVI Healthcare Operations entered into
an Agreement for the Exchange of Stock and Assets dated September 2, 1994,
pursuant to which the Registrant returned to DVI Healthcare Operations certain
equipment previously leased by Registrant from DVI and also transferred other
assets, in satisfaction of approximately 62% or $4.8 million of lease and debt
obligations owed by Registrant to DVI Healthcare Operations. The remaining
approximately 38% or $1.8 million of those obligations was satisfied by the
issuance of convertible preferred stock to DVI. As a result of this transaction,
DVI Healthcare Operations now owns convertible preferred stock of Registrant
having an aggregate liquidation preference of $4.482 million, which is
convertible under certain circumstances (see "Item 12. Certain Relationships and
Related Transactions") into two million shares of common stock of Registrant
(subject to adjustment).
Between 1988 and 1993, under the direction of Norman Hames (see "Management"),
the preSeptember 2, 1994, Diagnostic Imaging Services, Inc. established one
mobile and four freestanding imaging centers providing MRI and other imaging
services. The four freestanding Centers were established with the collaboration
of local physicians. The Centers were financed through limited partnerships with
the Registrant as general partner and operator of the imaging center and
generally with referring physicians as limited partners. As a result of
regulatory initiatives that prohibit ownership of health care facilities by
referring physicians, the limited partners in each of the partnerships agreed to
sell their interests to DIS at a price based upon a determination by an
independent appraiser.
In 1994, the pre-merger, Diagnostic Imaging Services, Inc., also acquired two
previously unaffiliated Centers, as well as establishing a cancer diagnosis and
treatment center (see "Cancer Therapy Center"). In 1994 and 1995, the
post-merger, DIS acquired an additional four previously unaffiliated centers.
On March 22, 1996, Registrant entered into two management agreements with
Primedex Health Systems, Inc., a New York corporation ("PHS, O-T-C Bulletin
Board - PMDX). PHS, through its RadNet subsidiary, operates 22 imaging centers
that provide diagnostic radiology services throughout California as well as
providing a broad array of healthcare management services to contracted centers
and to others, including, through its Radnet Managed Imaging Services, Inc.
subsidiary, performing utilization reviews, physician certification and
financial information services. PHS, subject to Registrant's ultimate control,
assumed administrative responsibility for many of Registrant's centralized
corporate activities. PHS will also, over time, assume management responsibility
for various patient services and billing and collection activities at each of
Registrant's imaging facilities. PHS and Registrant intend to coordinate their
offering of imaging services throughout California.
On or about June 28, 1996, Norman Hames, the president of Registrant agreed to
transfer all of his shares of Registrant's common stock and warrants to acquire
shares of common stock to PHS in exchange for a five year, interest only
promissory note from PHS aggregating $2,448,862 together with a five year
warrant to acquire 2,807,350 shares of PHS for $.60 per share. Subsequently, PHS
acquired additional shares of the Registrant's common stock from certain third
parties so as to bring its aggregate ownership interest in Registrant to
approximately 74%.
DIS acquired (Corona and Riverside) and/or opened (Camarillo and Scripps - Chula
Vista) four additional centers in 1996 and 1997. Effective March 1, 1997, DIS
sold four of its imaging centers and its ultrasound business to an unrelated
third party for approximately $15.5 Million and $8.5 Million, respectively, less
outstanding capital lease obligations and other liabilities of approximately
$7.6 Million. In February 1998, effective January 1, 1998, that same buyer
acquired the DIS partnership interest in Scripps Chula Vista MRI Center in
exchange for 127,250 shares of that entity's common stock. The shares are
restricted, nevertheless the public market value of such stock is approximately
$1,400,000.
As a result of a deteriorating business climate at Registrant's Santa Monica
facility, Registrant closed substantially all of its operations at the center on
or about August 29, 1997. Registrant recorded a loss as a result of the
discontinuance of the operations of approximately $3.4 million. In 1997,
Registrant sold the Center's MRI for $65,000 and the bulk of its other assets
for $400,000. Registrant still provides ultrasound, mammography, stereotactic
breast biopsy and bone densitometry services at its Women's Center in Santa
Monica.
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Multiple Modality Imaging Centers
The Registrant provides multi-modality radiological imaging services at its
centers. The following chart lists modalities offered:
Mammo- Ultra- Diagnostic Nuclear
Center MRI CT graphy sound Radiology Medicine
Camarillo * * *
Corona * * * * *
Riverside * * * * *
Santa Monica [Parkside Womens] * *
Temecula * * * * *
Thousand Oaks * * * * * *
Vista (North San Diego) * *
Radiological imaging systems facilitate the identification of diseases and
disorders at an early stage, often minimizing the amount and cost of care needed
to stabilize or cure the patient and frequently obviating the need for more
invasive diagnostic procedures, such as exploratory surgery. Radiological
imaging systems are based on the ability of radioactive and other energy waves
to penetrate human tissue and generate images of the body that can be displayed
either on film or on a video monitor. Imaging systems have evolved from
conventional x-rays to the advanced technologies of MRI, CT, echocardiography,
nuclear medicine and ultrasound.
MRI is used to provide high resolution images of the soft tissue of the body.
The MRI imaging process causes atoms in various kinds of body tissue to respond
to a magnetic field, enabling the differentiation of internal organs and normal
and diseased tissue. While MRI was initially used primarily for diagnosis of
neurological disorders of the spine, head or neck, MRI is now used increasingly
for other applications, such as imaging of the soft tissue of the knee and
shoulder. In addition, improvements in computer hardware and software, coupled
with improvements in the underlying technology, have reduced certain MRI
procedure times from more than an hour to less than 30 minutes, and have led to
an increased ability of MRI units to provide cardiac and blood vessel studies.
Contrast agents have been and are being developed to enhance MRI images and to
expand MRI applications.
CT is used to detect tumors and other conditions affecting the skeleton and
internal organs. In general, CT provides higher resolution images than
conventional x-rays, but not as well defined as those produced by MRI. During a
CT procedure, a patient is placed inside a ring on which a rotating x-ray tube
is mounted. A dedicated computer directs the movement of the x-ray tube to
produce multiple crosssectional images on a particular organ or area of the
body.
Ultrasound systems provide a low risk, non-invasive procedure for determining
the primary diagnosis in renal, pancreatic, vascular, abdominal and obstetrical
conditions. Ultrasound systems emit, detect and process high frequency sound
waves to generate images of soft tissues and internal body organs. The sound
waves used in ultrasound do not involve ionizing radiation and are not known to
cause any harmful effects to the patient or unborn child. Ultrasound systems can
also provide increasingly useful information on the cardiovascular system using
advanced doppler technology.
X-ray is the most common imaging modality and is primarily employed in the
following imaging methods: (i) Conventional x-ray systems, the oldest method of
imaging, are typically used to image bone, teeth, vessels and organs and
constitute the largest number of installed systems; (ii) CT scanners utilize the
x-ray, as well as computers to produce cross-sectional systems of particular
organs or areas of the body; and (iii) digital x-ray systems which add computer
image processing capability to conventional x-ray systems.
Nuclear Medicine is a diagnostic imaging system utilizing short-lived
radioactive isotopes injected into the body and, together with computer
assistance, then perform various examinations to establish the presence or
absence of disease. Nuclear medicine provides an anatomic image as well as
functional information which cannot be provided by MRI or CT. Nuclear medicine
is used to provide information about organ function as opposed to anatomical
size and shape
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Cancer Therapy Center
The Registrant opened its cancer therapy center, Valley Regional Oncology Center
("VROC"), in April 1994, in Temecula, California, near the Registrant's Temecula
Imaging Center. VROC is a limited partnership composed of the Registrant and
certain radiation therapists. The Registrant was the managing general partner
and owned 75% of VROC. During 1997, the Registrant purchased the remaining 25%
interest in VROC for $260,000. VROC provides services to cancer patients in San
Diego and Riverside Counties. VROC provides diagnosis and treatment on an
outpatient basis reducing the need for hospitalization or multiple site
evaluations for diagnosis and treatment. VROC services include radiation
therapy, chemotherapy, seed implantation therapy and education, as well as
substantially all outpatient treatment services at a single site and permit a
patient to return home after treatment.
Managed Care Market
Overview. A sustained and continuing increase in health care costs at a
significantly higher rate than overall inflation has caused insurers, employers,
and other payors ("payors") to employ a number of strategies to contain health
care expenditures. These cost-containment strategies are designed to reduce the
price per unit paid for health care services and the amount of health care
utilized. As a result, health insurance is gradually shifting away from
traditional fee-for-service based benefit plans toward alternative health
insurance products believed to manage the delivery of quality health care
services more efficiently.
At this time, the most prevalent of these alternative products is the HMO, which
provides comprehensive health care services to its enrollees for a fixed,
prepaid monthly premium that does not vary with the frequency, cost or type of
services utilized. In addition to the HMO, many hybrid managed care plans have
also emerged. The Registrant has experienced its greatest patient growth from
these alternative contracting parties. PPOs, IPAs, insurance companies and many
others contract to provide care (although not on a prepaid basis) through
loosely organized networks of hospitals and physicians that have agreed to
provide care to plan enrollees at reduced rates. While these hybrid plans do not
generally afford the degree of cost and utilization control associated with the
HMO model, the Registrant believes that these programs are the area of greatest
future growth and has determined to become a major participant in the
contracting of radiological imaging services with those entities on a regional
basis.
The Registrant's Managed Care Market. DIS network services are marketed
primarily to managed care organizations which have found it cost effective to
contract out their radiological imaging work to groups organized to provide that
service with the application of quality assurance, together with the related
management and organizational structures. As a consequence of the widespread
managed care and HMO acceptance in California, particularly as the number of
managed care organizations and HMOs serving the region has proliferated, the
competition for enrollees has become intense. Managed care organizations and
HMOs compete increasingly on the basis of the level of services offered and the
quality of the delivery network. The Registrant believes this environment
benefits Registrant by encouraging managed care organizations and HMOs to seek
efficient, high quality physicians together with the efficient and respected
facilities for their imaging services while providing convenience to their
patients.
The DIS Network
The DIS network together with the 22 RadNet centers is designed to provide
managed care, HMO and other providers with a high quality, cost-effective and
competitive vehicle for providing covered radiological imaging benefits to their
enrollees located in the DIS network's service area. The Registrant's contracts
with payors are typically non-exclusive arrangements (except in the case of
certain capitated arrangements which require their enrollees to utilize the DIS
or affiliated facilities, however, the number is not large) which are
renegotiated on an annual basis.
In entering into or renewing managed care contracts, Registrant considers a
number of specific factors which affect capitation rates and reduced fee for
service agreements. These factors include the demographic risk profile of the
enrollee pool, prior financial experience, and the fee-for-service equivalent
charges for anticipated care. In undertaking this process, Registrant analyzes
pertinent data in order to assess contractual and economic opportunity and
exposure, and then conducts the negotiations on behalf of its affiliated
physicians and the Registrant.
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HMO contracts obligate Registrant and the affiliated physicians to provide for
the delivery of all covered outpatient radiological imaging (and in the case of
the cancer center, all cancer therapy services) benefits. Under HMO contracts,
Registrant and the affiliated physicians receive a fixed monthly dollar
capitation payment for each HMO enrollee regardless of whether the services of
Registrant or the affiliated physicians are utilized. All managed care contracts
obligate Registrant and the affiliated physicians to provide radiological
imaging or cancer care treatment at a reduced fee for service.
The loss of any of these customers could have an adverse effect on the
Registrant until alternate sources for patient volume are substituted.
Quality Assurance
The Registrant believes that the quality of its services is critical to its
success and has initiated several programs to assure the delivery of quality
radiological imaging services. Prior to hiring technologists, the Registrant
requires that applicants perform sample imaging procedures in order to evaluate
their capabilities, and all technologists are required to be licensed by the
State of California as registered x-ray technologists. In addition, the
Registrant provides quarterly continuing education programs for its
technologists regarding imaging techniques and advances in technology, and each
technologist is required to attend ten hours of continuing education each year
in order to maintain their license. A physician serves as medical director of
each imaging center and reviews medical and professional issues arising in
connection with operation of the imaging center, including issues related to the
quality of service provided by the interpreting physicians. The Registrant also
requires that the radiologists and other interpreting physicians providing
services at the imaging centers or those providing radiation therapy be
specialists certified by the appropriate medical societies, such as the American
College of Radiology.
The Registrant also has a comprehensive quality assurance system in its cancer
center, including multiple levels of review for dose calculations and continuous
monitoring and checking of equipment, designed to ensure accurate dose delivery
to the patient. The linear accelerators themselves utilize a computerized
record-and-verify system that prevents the machine from operating unless it has
been set in strict accordance with a patient's treatment plan. The Registrant
has also adopted a peer review system whereby the treatment plans established by
each radiation oncologist are reviewed by another of the Registrant's radiation
oncologists on a weekly basis. The Registrant believes that its peer review
system is unusual for radiation therapy practices outside an academic setting.
The Registrant also utilizes the following additional quality assurance
initiatives:
Peer Review. The Registrant has established periodic peer reviews of the quality
of services rendered in each imaging center by having unrelated physicians
review random samples of images together with interpreting physicians'
diagnostic reports. Any unsatisfactory reports resulting from such reviews are
discussed with the interpreting physician by the imaging center administrator or
a vice-president of operations, and the physicians' failure to take appropriate
corrective action could lead to termination of the interpreting physician at the
imaging center.
Medical Advisory Committee. The Registrant has established medical advisory
committees in each community served by Registrant. The committees are headed by
a physician and comprised of local physicians and imaging center management and
meet periodically to focus on specific areas of operations such as equipment
evaluation, marketing, education, instrumentation, or one of the diagnostic
modalities.
Patient and Physician Surveys. In order to assess satisfaction levels and
solicit input for improvements, each patient is asked to complete a survey
related to his or her experience at the imaging center. Additionally, random
surveys are distributed to both patients and physicians on a quarterly basis.
Accreditation. The Registrant maintains accreditation for each of its imaging
centers by the Joint Commission on the Accreditation of Healthcare Organizations
("JCAHO"), an important aspect of the Registrant's business strategy. JCAHO is
an independent organization that reviews outpatient health care facilities and
accredits those facilities that meet its guidelines. JCAHO accreditation reviews
include an assessment of the facility and equipment, interpreting physician
credentials and operating policies and procedures.
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Management Information Systems. The Registrant's management information systems
are designed to enable DIS affiliated physicians to devote their time to the
practice of quality medicine. The Registrant maintains internally or utilizes
through its contractual arrangements with PHS (See "Management Service
Contracts" hereinbelow) a comprehensive database that provides patient
utilization statistics, complete patient encounter reporting and comprehensive
patient tracking. The Registrant believes that the availability of timely
information on utilization patterns improves physician productivity and
effectiveness. This data also plays an integral role in the physician
utilization control process by enabling the administrator and medical director
to monitor case management decisions, and monitor utilization trends. In
addition, the Registrant's management information systems perform various
administrative functions, including appointment scheduling, insurance
verification, billing, accounts payable and receivable, and verification,
financial reporting and all third party claims processing. Additional services
include billing and reimbursement assistance, patient and public relations
support, risk management and quality assurance consultation and policy and
procedure review.
Management Service Contracts
On March 22, 1996, the Registrant entered into two-five year management service
contracts with Primedex Health Systems, Inc., a New York corporation ("PHS").
The first agreement relates to Registrant's corporate operations and provides
that PHS arranges for maintenance for the Registrant's facilities, administers
its human resource functions, provides certain bookkeeping and payroll services
as well as certain accounting services. PHS also provides advice to Registrant
with regard to its accreditation program and negotiates on behalf of Registrant
for equipment, supplies, service and insurance. Registrant pays $45,000 per
month for these services. Additionally, PHS and Registrant entered into a second
agreement which is being phased in on a center by center basis which provides
for PHS to supply transcription services, patient scheduling, and billing and
collection services. All costs of equipment and training are the responsibility
of PHS. Registrant will pay an amount equal to 10% of its collections from each
covered center for such services. Registrant anticipates cost savings and
improved efficiency as a result of both of these agreements.
Relationships Among Affiliates; Management Agreements
The DIS network provides health care services in the State of California, which
prohibits the corporate practice of medicine except by professional medical
corporations. Accordingly, Registrant contracts with all Registrant network
physicians on an independent contractor basis. All decisions regarding patient
health care are made exclusively by physicians who contract with Registrant, but
are independent and are rendered in connection with guidelines and policies
developed and administered by the medical directors of the various centers.
Registrant has entered into agreements with the affiliated physicians which
delegate to Registrant administrative, management and support functions which
are required by physicians in the practice of medicine. The agreements
specifically obligate Registrant to provide suitable facilities, fixtures and
equipment, so that Registrant can adequately provide for all medical services,
and delegates to Registrant those management and administrative functions which
do not constitute the practice of medicine. Registrant is obligated to provide
to the physician administrative, bookkeeping and billing services and
non-physician support personnel (including nurses, technologists, marketing,
administrative and maintenance personnel), and to assist in all phases of
contract administration and marketing. The affiliated physicians are solely and
exclusively in control of and responsible for all aspects of the practice of
medicine and the delivery of medical services, including, but not limited to,
diagnosis, and in the case of the cancer diagnosis and therapy centers,
treatment, surgery and therapy. The affiliated physicians generally have
approval and authority over HMO and managed care contracts, including the right
to decline to enter any HMO and managed care contract negotiated on their behalf
by Registrant. If the physician so declines, and Registrant does not contract
with a substitute party, future growth could be adversely impacted. The
agreements are generally for periods of three to seven years. Thereafter,
contracts generally renew automatically unless either party elects to terminate
them.
Pursuant to the agreement, as payment for Registrant's management services the
affiliated physicians have either assigned to Registrant a percentage of the
physician's interest in substantially all of the revenue received by the
physician or the physicians and Registrant each bill separately for their
services. The percentage paid to Registrant varies between 76% and 85% of such
collections "Revenue" is defined in the agreement as all sums which the
Registrant receives or becomes entitled to receive for the
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performance of medical services by physicians under contract with Registrant,
from services performed by the physicians and from charges by Registrant for
supplies and other items of which Registrant is entitled to charge. Amounts that
may not be assigned to Registrant under applicable law (including Medicare
payments) are not included in the revenue assigned to Registrant. The physicians
have sole and exclusive control of and responsibility for all aspects of the
practice of medicine and the delivery of medical services.
At four of Registrant's centers and its oncology center the medical services,
including medical supervision, are supplied by Beverly Radiology Medical Group
("BRMG") a partnership where one entity's sole owner is Dr. Howard G. Berger
(See "Items 9 and 12"). Registrant collects for and then provides payment to
BRMG for the medical services it provides at its centers.
Competition
The market for radiological imaging services is highly competitive. The market
is highly fragmented, with no dominant national or regional imaging services
provider. The Registrant competes with larger healthcare providers, such as
hospitals, as well as other private clinics and radiology practices that own or
lease radiological imaging equipment. Competition often focuses on physician
referrals at the local market level. Successful competition for referrals is a
result of many factors, including pricing, quality and timeliness of test
results, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times. The Registrant's
facilities are primarily located near major hospital sites, which the Registrant
considers to be a competitive advantage.
The Registrant believes that the principal factors influencing a patient's
choice of radiation therapy provider and that of its contracting organization is
primarily the location of the center, cost of the service and the provider's
reputation in the medical community for high quality medical care, which, in
turn, is based primarily upon the reputation of its radiation oncologist. Other
factors include sensitivity to patient comfort and other needs. The Registrant's
center competes with other radiation therapy centers, which are more established
in the community and may have financial resources greater than those of the
Registrant. The Registrant attempts to attract radiation oncologists with
superior academic training and experience in their specialty, and encourages
their active participation in the medical community served by the center. The
center is designed to provide a pleasant, comfortable environment for patients,
and the entire staff is trained to be attentive to the patient's personal needs.
Regulation and Reimbursement
Overview. The health care industry is highly regulated and is undergoing
significant change as third party payors, such as Medicare and Medicaid and the
Blue Cross/Blue Shield plans, increase their efforts to control the cost,
utilization and delivery of health care services. Legislation has been proposed
or enacted at both the federal and state levels to regulate health care delivery
in general and radiology and radiation therapy services in particular. The
Registrant believes that reductions in reimbursement for Medicare services will
be implemented from time to time, which often lead to reductions in the
reimbursement rates of other third party payors as well. The Registrant cannot
predict the effect health care reforms may have on its business, and there can
be no assurance that such reforms will not have a material adverse effect on the
Registrant's operations. The Registrant's diagnostic and cancer radiation
therapy facilities are subject to governmental regulation at the federal, state
and local levels.
Regulation of Outpatient Imaging Services. The operation of outpatient imaging
centers requires a number of licenses, including licenses for technical
personnel and certain equipment. The Registrant believes that it is in
compliance with applicable licensure requirements. The Registrant further
believes that diagnostic testing will continue to be subject to intense
regulation at the federal and state levels and cannot predict the scope and
effect thereof.
Radiological imaging centers performing mammography services must meet federal,
and in some jurisdictions, state standards for quality as well as certification
requirements. All mammography facilities are required by the Food and Drug
Administration ("FDA") to be accredited; undergo an annual mammography facility
physical survey; be inspected annually; meet qualification standards for
interpreting physicians, mammography technologists, and medical physicists; meet
certification requirements for adequacy and training and experience of
personnel; meet quality standards for equipment and practices;
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and meet various requirements governing record keeping of patient files.
Although the Registrant's centers are currently accredited by the Mammography
Accreditation Program of the American College of Radiology and the Registrant
anticipates continuing to meet the requirements for accreditation, the
withdrawal of such accreditation could result in the revocation of
certification, if FDA so determines.
All facilities have received their FDA certifications.
Reimbursement of Radiology Services. In general, Medicare reimburses radiology
services under a physician fee schedule which covers services provided not only
by physicians, but also by freestanding imaging centers, radiation oncology
centers, portable x-ray suppliers, hospitals and other entities. The scheduled
amount is based on a resource-based relative value scale, recognizing three
separate components of the physician's service; professional, technical and
malpractice. For radiology there is a separate Medicare scheduled amount for the
professional component of a service or procedure (i.e., the physician's time)
and the technical component of the service or procedure (e.g., services and
supplies necessary to perform the procedure).
The Omnibus Budget Reconciliation Act of 1993 proposed to establish a
competitive bidding procedure for MRI services and CT scans. In addition, there
have been and continue to be other proposals that could affect Medicare's
reimbursement for radiology services. One proposal, for instance, would bundle
the professional fees paid to radiologists for services provided to hospital
inpatients into the DRG payment rates. Moreover, while research is underway that
could reform Medicare's methodology for reimbursing outpatient services in the
hospital setting, it is possible that such reform could be extended to
freestanding imaging centers as well. This research could have an impact on
payments for radiology services. The Registrant is unable to predict which, if
any, proposals will be adopted.
Regulation of Radiology Facility Ownership. Effective January 1, 1992, a
provision of the Omnibus Budget Reconciliation Act of 1989, commonly known as
"Stark II," prohibits, with certain exceptions, physicians from referring
Medicare patients, effective January 1, 1995, to radiology or other diagnostic
services and radiation therapy services in which they have an economic interest.
On October 8, 1994, Congress passed legislation deleting "or other diagnostic
services" from the federal self-referral law, and inserted instead "including
magnetic resonance imaging, CAT scans and ultrasound services." Violations of
the law may result in denial of payments for the service, an obligation to
refund payment for the service, payment of civil monetary penalties, and/or
exclusion from the Medicare and Medicaid programs.
The Registrant has structured its acquisitions of physician-owned ventures in a
manner which it believes does not raise significant issues under the
anti-kickback and self-referral regulations. The Registrant anticipates that an
insignificant portion of its revenues in 1996 is subject to loss as a result of
continuing financial relationships with physicians who previously owned
Registrant centers, as a result of such legislation. Due to the nature of this
legislation, Registrant management is unable to specifically quantify the amount
of revenue that would be potentially foregone as a result.
In addition to federal restrictions, California law (the "Speier bill")
prohibits a physician from referring a patient for diagnostic imaging goods or
services if the physician has a financial interest with the entity that receives
the referral. The Registrant believes that it has structured its operations so
as to ensure it complies with these requirements.
The Registrant is also subject to licensing and regulation under federal and
state laws relating to radioactive materials, as well as to the health and
safety of its employees. The sanctions for failure to comply with these
regulations may be denial of the right to conduct business, significant fines
and criminal penalties, any of which could have a material adverse effect on the
Registrant. The Registrant believes that it is in substantial compliance with
all applicable laws and regulations relating to these areas.
Governmental Regulation
Federal law and the laws of most states, including those in which the Registrant
operates, specify who may practice medicine and limit the scope of relationships
between medical practitioners and other parties such as Registrant. Under such
laws, Registrant is prohibited from practicing medicine or exercising control
over the provision of medical services. Accordingly, Registrant has entered into
agreements which delegate the performance of administrative management and
support functions which are required by affiliated physicians in the practice of
medicine. Registrant does not employ any practicing physicians and does not
represent to the public that it offers medical services. All physician services
are offered
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through Registrant independent contractor physicians. Furthermore, Registrant
does not exercise control over the practice of medicine by the physician under
contract with Registrant. Registrant believes that the services it provides to
the Registrant network and to its affiliated physicians do not constitute the
practice of medicine under applicable law.
The DIS network and its affiliated physicians are subject to federal legislation
which prohibits activities and arrangements which are designed to provide
kickbacks or to induce the referral of business under Medicare and Medicaid
programs. California and many other states have similar laws. Noncompliance with
the federal anti-kickback legislation can result in exclusion from Medicare
programs and civil and criminal penalties. Similar penalties are provided for
violations of state anti-kickback laws. In July 1991 the federal government
promulgated regulations which identify certain business and payment practices as
safe harbors under the federal anti-kickback statutes. The Registrant believes
that the Registrant network and its affiliated physicians are in compliance with
all such applicable laws in that the activities of the Registrant do not involve
conduct which is prohibited by the anti-kickback laws.
Risk Management
In recent years physicians, hospitals and other participants in the health care
industry have become subject to an increasing number of lawsuits alleging
medical malpractice and related legal theories, including the withholding of
approval for necessary medical services. Many of these lawsuits involve large
claims and substantial defense costs. Although Registrant does not engage in the
practice of medicine or provide medical services and has not been a party to any
material litigation relating to the practice of medicine, there can be no
assurance that Registrant will not become involved in such litigation in the
future. Moreover, its affiliated physicians have been the subject of lawsuits
alleging medical malpractice and related claims.
As part of its management services, Registrant negotiates and obtains
malpractice insurance, on a "claims-made" basis on behalf of Registrant and
requires its affiliated physicians with whom it contracts to maintain such
insurance. Registrant believes such insurance is adequate to cover claims for
medical malpractice which may arise out of the practice of medicine by the
affiliated physicians. The physicians provide coverage in the amount of
$1,000,000 per physician per claim, subject to a limit of $1,000,000 per
physician per incident and an aggregate per physician limit of $3,000,000 per
year. The Registrant maintains $32,000,000 of blanket general liability
insurance covering each center and its own principal offices as well as all of
its employees. Registrant, PHS and BRMG are all named insureds under this
policy. The Registrant also maintains two medical equipment repair and
maintenance policies through and in conjunction with Radnet Management, Inc.
covering each center with aggregate annual limits of approximately $10.6
million.
Registrant also requires physicians to obtain "tail" coverage for claims against
physicians arising from actions which occurred but were not reported during
periods for which the related risk was covered by "claims-made" insurance.
The Registrant may encounter substantially higher insurance costs in the future,
as well as reductions in the amount or nature of insurance coverage available.
Should such conditions be encountered, the Registrant's profitability may be
adversely affected and the Registrant may be unable to maintain insurance
coverage for all risks against which the Registrant network is currently
insured. In addition, there can be no assurance that a future claim or claims
will not exceed the limits of available insurance coverage. Furthermore, if any
of the Registrant network's unrelated insurance carriers are unable to pay
insurance on claims against the Registrant network's covered physicians, the
Registrant's financial condition could be materially adversely affected.
Employees
As of December 31, 1998, Registrant had 82 full-time employees. Although there
is intense competition for qualified personnel in the medical profession, to
date Registrant has had no significant problems recruiting and retaining
qualified personnel. None of the Registrant network's employees are subject to
collective bargaining agreements, and the Registrant has experienced no work
stoppages. Management believes that its employee relations are good.
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Item 2. Description of Property
Registrant's properties are leased and (except for Camarillo) provide the
Registrant with the option to renew. The following table sets forth the
location, approximate square footage and expiration dates of the leases covering
each of the Registrant's centers:
Lease
Square Date Expiration Annual
Location Feet Opened Date Rental ($)
-------- ---- ------ ---- ----------
Camarillo 2,035 1996 2002 34,000
Corona 5,328 1996 1998 90,000
Vista [North San Diego] 2,042 1988 2000 52,000
Riverside 8,312 1996 2001 156,000
Santa Monica [Parkside Womens] 3,103 1995 2000 106,000
Temecula 4,247 1992 1998 141,000
Temecula Oncology Center 5,418 1994 1998 95,000
Thousand Oaks [MDI] 8,300 1983 2001 281,000
Warehouse/Other 6,126 various various 160,000
Item 3. 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
is owed $141,658, which the Registrant denied. The Registrant has settled the
action with regard to the claim of Midway Hospital Medical Center for
approximately $60,000 and as to the counterclaim of the administrator for
approximately $95,000.
(b) On June 4, 1997, the Registrant was served with a complaint entitled
Gerald E. Dalrymple, M.D. and Gerald E. Dalrymple, M.D., Inc., a California
professional corp. v. Primedex Health Systems, Inc., Diagnostic Imaging
Services, Inc. and Diagnostic Health Services, Inc. filed in the Los Angeles
Superior Court and bearing case number SC 047 526. The complaint alleges that
Registrant failed to properly pay plaintiff fees for performing professional
services to which he was entitled as well as damages for violation of the
implied covenant of good faith and fair dealing, fraud, conversion, breach of
fiduciary duty, interference with existing and prospective business advantage,
negligent and intentional infliction of emotional distress and defamation and
seeks damages for an unspecified amount in excess of $25,000. The complaint also
alleges that by virtue of the investment by Primedex Health Systems, Inc. in
Registrant and the sale of four of Registrant's imaging centers and its
ultrasound business to Diagnostic Health Services, Inc. (see "Item 1") 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. Registrant denies each and every allegation and
intends to vigorously defend against the legal action.
The Registrant is currently party to other litigation, none of which is deemed
by management to be material in nature.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the year
ended December 31, 1997.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Registrant's Common Stock is traded in the over-the-counter market on the
Over-The-Counter Electronic Bulletin Board under the symbol "DIAM". The
following table sets forth, for the periods indicated, the high and low bid and
ask prices for the Common Stock, as reported by the National Quotation Bureau,
Inc. Such quotations reflect inter-dealer prices without adjustment for retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
BID ASK
High Low High Low
Calendar Year 1996
1st Quarter 1-7/8 1-1/2 2-1/8 1-3/4
2nd Quarter 1-7/8 1 2-1/8 1-1/4
3rd Quarter 1-3/8 1/2 1-5/8 3/4
4th Quarter 7/8 3/8 1-1/8 5/8
Calendar Year 1997
1st Quarter 1-21/32 1-21/32 1-23/32 1-23/32
2nd Quarter 1-1/8 1-1/8 1-1/4 1-1/4
3rd Quarter 1-1/4 1-1/4 1-3/8 1-3/8
4th Quarter 1-1/16 1-1/16 1-3/32 1-3/32
On February 27, 1998, the last reported bid and ask price of the Common Stock by
the National Quotation Bureau, Inc., was no bid and $1-1/16. As of February 27,
1998, there were 65 holders of record of the Common Stock. However, a
substantial number of Registrant's outstanding shares of Common Stock were owned
of record on said date by "Cede & Co.", the nominee for Depository Trust
Company, the clearing agency for most broker/dealers. Management believes that
these shares are beneficially owned by customers of these broker/dealers and
that the number of beneficial owners of Registrant's Common Stock is
substantially greater than 65.
Item 6. Management's Discussion And Analysis or Plan of Operation
Background:
Diagnostic Imaging Services, Inc. ["DIS" or the "Registrant"] was incorporated
in California on June 27, 1986. In 1992, the Registrant'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" or "Chino"] 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; the transfer resulted in a gain of
approximately $296,000. In December 1993, Norman Hames [see "Item 9"] 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.
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During the months of January and February 1994, DIS purchased the remaining
limited partnership units of Tarzana, SGV and Chino. Additionally, in February
1994, DIS purchased the assets of two freestanding multi-modality imaging
centers: Thousand Oaks Medical Diagnostic Imaging ["MDI"] and Parkside Radiology
["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 [see "Item 1"]. Registrant'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
subsequently sold for $230,000 in June 1996.
In January 1995, DIS assumed ownership of West Los Angeles MRI ["WLA"]. 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
Murrieta, California ["Murrieta"]. Murrieta 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. 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 December 31, 1997, through various transactions with related and unrelated
parties, PHS acquired an additional 5,327,477 shares of DIS common stock
bringing its total ownership to 8,074,970 shares, or approximately 71%. In
subsequent purchases through February 27, 1998, PHS acquired an additional
453,000 common shares in transactions with unrelated parties increasing its
ownership of DIS to approximately 74%, or 8,527,970 shares [excluding warrant
shares].
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 Registrant 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"] resulting in goodwill of $0.
Effective March 1, 1997, DIS sold the assets and related liabilities of four of
its hospital-based MRI facilities [Tarzana, SGV, Chino and SMIC] and its
Ultrasound Division to Diagnostic Health Services, Inc. ["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 on the Registrant's books
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"]. Effective April 7, 1998, the Company accepted 200,000 shares of DHS
common stock in cancellation of the DHS obligation to make post closing
payments. The shares are restricted, however, the market value of the publicly
trading DHS common shares at April 7,
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1998 was approximately $2,300,000. In addition, DHS assumed the operating lease
of the Registrant's WLA center. Effective January 1, 1998, the assets [net book
value $905,151] and related capital lease obligations [principal due $902,781]
of WLA were assumed PHS' Radnet Management, Inc. subsidiary. Effective January
1, 1997, the Registrant opened its Scripps Chula Vista MRI, L.P. ["SCV"]
servicing patients in San Diego. The Registrant and Scripps were equal partners
with the Registrant serving as managing partner. In February 1998, Registrant
sold its interest in SCV to DHS in exchange for 127,250 shares of DHS common
stock. While the shares received are restricted, the current market value of the
shares received if equated to the market value of DHS shares is approximately
$1,400,000 as of February 27, 1998.
As a result of a continuing deteriorating business climate and other business
reasons at the Registrant's Santa Monica ["Parkside"] facility, in August 1997,
the Registrant closed substantially all of its operations at that center [the
Registrant continues to operate its Parkside Radiology Women's Center ["Parkside
Womens"] which provides ultrasound, mammography, stereotactic breast biopsy and
bone densitometry services]. Due to this decision, Registrant recognized a loss
in December 1996 of approximately $3.4 million. In August 1997, Registrant
recognized a gain of $400,000 for the sale of certain assets of Parkside. The
buyer also assumed Parkside's building leases.
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 Registrant will have adequate financial resources
to fund the development and operation of its business, and that there will be no
material adverse change in the Registrant's operations or business. The
foregoing assumptions are based on judgment with respect to, among other things,
information available to the Registrant, 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 Registrant's
control. Accordingly, although the Registrant 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 Registrant's business and operations
which could cause the Registrant'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 Registrant to alter its capital
investment and other expenditures, which may also adversely affect the
Registrant's results of operations. In light of significant uncertainties
inherent in forward-looking information included in this Annual Report on Form
10-KSB, the inclusion of such information should not be regarded as a
representation by the Registrant or any other person that the Registrant's
objectives or plans will be achieved.
Discussion of Operations for the Year Ended December 31, 1997 vs.
December 31, 1996
The following discussion relates to the continuing activities of Diagnostic
Imaging Services, Inc.
Results of Operations
For the year ended December 31, 1997 and 1996, DIS had operating losses of
$1,752,558 and $5,170,982, respectively.
DIS generated net revenue of $13,265,744 and $22,555,570 for the years ended
December 31, 1997 and 1996, respectively. The decrease in net revenue was
primarily due to the sale of the Ultrasound Division and four hospital-based MRI
facilities to DHS and the closure of Parkside and West L.A. during 1997. During
the years ended December 31, 1997 and 1996, the Ultrasound Division generated
net revenues of $536,057 and $3,767,464, respectively, the four MRI sites
generated net revenues of $699,550 and $6,165,752, respectively, Parkside
generated net revenues of $1,121,911 and $3,034,404, respectively, and West L.A.
generated net revenues of $237,148 and $472,257, respectively.
The new sites added in late 1996 generated net revenue for the years ended
December 31, 1997 and 1996 as follows: Camarillo generated net revenue of
$241,055 and $49,381, respectively, HCI generated net revenue of $538,963 and
$271,892, respectively, and Corona generated net revenue of $550,460 and
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$231,660, respectively. In its start-up year, SCV generated net revenue of
$1,192,283 for the year ended December 31, 1997. Sites sold in early 1996
generated net revenue of approximately $410,000 in that year only. Both VROC and
MDI showed 1997 net revenue improvements of approximately 17.1% and 19.8%,
respectively. North County's 1997 net revenue decreased approximately 24% from
1996 primarily due to the sale of that center's nuclear medicine business
earlier that year.
For the years ended December 31, 1997 and 1996, operating expenses totaled
$15,018,302 and $27,726,552, respectively. During the year ended December 31,
1996, Registrant recognized an impairment loss for Parkside of $3,424,548. The
remaining decrease in operating expenses is primarily attributable to the sale
of the Ultrasound Division and MRI sites to DHS and reductions in expenditures
at Corporate. During the years ended December 31, 1997 and 1996, expenditures
for salaries and reading fees were $5,497,567 and $10,026,287, respectively,
building and equipment rental was $1,632,709 and $2,088,408, respectively,
depreciation and amortization was $2,441,358 and $3,917,271, respectively, and
other expenses were $5,446,668 and $8,270,038, respectively. Building rental
expense in 1997 included settlement costs for one building lessor of $245,000.
For the years ended December 31, 1997 and 1996, interest expense was
approximately $2,190,000 and $3,550,000, respectively. Interest expense of DIS
was primarily attributable to equipment financing, acquisition notes payable and
lines of credit charges. The primary reasons for the 1997 decrease in interest
expense was the transfer of related debt with the sale of the Ultrasound
Division and MRI sites to DHS, the elimination of the line of credit and the pay
off of PHS for prior 1996 loans. For the years ended December 31, 1997 and 1996,
interest income was approximately $474,000 and $-0-, respectively. Interest
income for 1997 consisted primarily of approximately $131,000 was received from
DHS for the sale of the MRI facilities accrued for the period from the effective
sale date of March 1, 1997 and the receipt of the proceeds on April 17, 1997,
approximately $110,000 was earned on the discounted note receivable due from DHS
in three annual installments and approximately $232,000 was earned on loans made
to PHS during the year.
For the years ended December 31, 1997 and 1996 the gain on sale of subsidiaries
and divisions was $8,658,259 and $514,631, respectively. 1997's gain consisted
of the gain from the sale to DHS of $8,258,259 and the gain from the sale of the
remaining assets at Parkside for $400,000. 1996's gain consisted primarily of
net gains from the sales of ICVS, MBM and the nuclear medicine business at North
County.
For the year ended December 31, 1997, DIS had net income after interest and
taxes of $5,104,287. For the year ended December 31, 1996, DIS had net losses
after interest and taxes of $8,142,910.
Liquidity and Capital Resources
Cash decreased for the years ended December 31, 1997 and 1996 by $6,518 and
$5,335, respectively.
Cash generated from investing activities for the years ended December 31, 1997
and 1996 was $12,094,238 and $158,568, respectively. During the years ended
December 31, 1997 and 1996, DIS received proceeds from the sales of divisions,
centers and equipment of $15,227,720 and $1,028,000, respectively. During 1997,
DIS received $6,519,475 from the sale of the Ultrasound Division, $7,453,245
from the sale of the four hospital-based MRI facilities, $1,000,000 for a
ten-year covenant not-to-compete and $255,000 for the sale of assets at
Parkside. During 1996, DIS received proceeds of $1,028,000 primarily from the
sale of ICVS and the nuclear medicine business at North County. During the years
ended December 31, 1997 and 1996, DIS made capital expenditures of approximately
$500,000 and $225,000, respectively, payments for deposits and other assets of
approximately $160,000 and $440,000, respectively, and acquisitions of operating
entities for approximately $490,000 and $200,000, respectively. During 1997, DIS
acquired the assets of Las Posas Medical Imaging for $35,000, acquired
additional units in TVIC for $196,875 and acquired the remaining 25% interest in
VROC for $260,000. During 1996, DIS acquired HCI for $200,000. In addition,
during the year ended December 31, 1997, DIS loaned PHS approximately $5.5
million in short-term loans, at 10% interest, of which approximately $3,525,000
was repaid by year end.
Cash utilized for financing activities for the years ended December 31, 1997 and
1996 was $10,193,566 and $1,114,342, respectively. The primary reason for the
1997 increase was the overall reduction in DIS borrowings on notes payable and
from related parties. For the years ended December 31, 1997 and 1996,
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DIS's borrowings on notes payable were $10,000 and $2,196,775, respectively, and
DIS received loans from related parties of $-0- and $1,982,103, respectively. In
addition, during 1996, DIS received $3,000,000 in proceeds from the issuance of
common stock. For the years ended December 31, 1997 and 1996, DIS made principal
payments on notes payable and capital leases of approximately $7,860,000 and
$9,170,000, respectively, and made payments to related parties of approximately
$2,070,000 and $50,000, respectively. Included in 1997 payments to related
parties was approximately $89,000 due to an officer of DIS at December 31, 1996
and approximately $1,980,000 for repayment of PHS's prior 1996 loans. During the
year ended December 31, 1997, DIS received proceeds from a joint venture partner
of $250,000 and decreased its cash overdraft by approximately $520,000. During
the year ended December 31, 1996, DIS increased its cash overdraft approximately
$990,000 and made payments to joint venture partners of approximately $65,000.
At December 31, 1997, DIS had a working capital deficit of $2,997,074 compared
to a working capital deficit of $14,270,257 at December 31, 1996, a deficit
decrease of $11,273,183. The improvement was primarily due to the sales of the
Company's ultrasound division and four of its MRI sites to DHS and the use of
the proceeds to reduce short-term debt and eliminate lines of credit.
Effective January 1, 1998, assets with a net book value of $905,151 and related
capital lease obligations due of $902,781 of WLA were assumed by PHS' Radnet
Management, Inc..
DIS's future payments for debt and equipment under capital leases for the next
five years, will be approximately $7,040,000, $4,630,000, $4,430,000, $3,480,000
and $240,000, respectively. Interest expense for the Registrant for the next
five years, included in the above payments, will be approximately $1,780,000,
$1,040,000, $630,000, $215,000 and $25,000, respectively. In addition, DIS has
noncancellable operating leases for use of its facilities and certain medical
equipment which will average approximately $555,000 in annual payments over the
next five years.
In 1996, DIS renegotiated some notes payable and obligations under capital
leases in order to consolidate debt, reduce interest rates, obtain approximately
$2.2 million in working capital loans, and pay off its second line of credit
with DVI Business Credit.
DIS's working capital needs are currently provided under one line of credit. The
remaining DVI line of credit was paid in full and terminated at DIS's request in
September 1997. Under the agreement with PHS, DIS may borrow up to $1,000,000
with interest payable at 4% greater than the prime rate. The revolving line is
due March 2001. At December 31, 1997, $-0- is due under this line.
In February of 1998, DIS sold its interest in Scripps Chula Vista MRI,
L.P.["SCV"] to DHS in exchange for 127,250 shares of Diagnostic Health Services,
Inc. ["DHS"] stock. While the shares are restricted, the current market value of
the shares received if equated to the market value of DHS shares is
approximately $1,400,000 as of February 27, 1998.
New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employees Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
16
<PAGE>
Inflation
To date, inflation has not had a material effect on the Registrant's operations.
Item 7. Financial Statements
The Financial Statements are attached hereto and begin at page F-1.
Index to Consolidated Financial Statements and Supplementary Data Page No.
Reports of Independent Accountants.................................. F-1
Consolidated Balance Sheet at December 31, 1997..................... F-2 - F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996.......................................... F-4
Consolidated Statements of Shareholders' Deficit for the years
ended December 31, 1997 and 1996.................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996.......................................... F-6 - F-7
Notes to Consolidated Financial Statements.......................... F-8 - F-21
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Diagnostic Imaging Services, Inc.
Dover, Delaware
We have audited the accompanying consolidated balance sheets of
Diagnostic Imaging Services, Inc. and its subsidiaries as of December 31, 1997,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for the years ended December 31, 1997 and 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Diagnostic Imaging Services, Inc. and its subsidiaries as of
December 31, 1997, and the consolidated results of their operations and their
cash flows for the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 16 to the consolidated financial statements, the Company has
suffered recurring losses from operations, has been in default under various
notes and capital leases and has negative working capital which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 16. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey April 3, 1998, Except as to Note 15[C] for which the date
is April 7, 1998
F-1
<PAGE>
<TABLE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
- ------------------------------------------------------------------------------
Assets:
Current Assets:
<S> <C>
Cash $ 6,140
Accounts Receivable - Net 3,242,282
Other Receivables - Current 384,337
Due from Related Party - PHS 1,978,829
Other Current Assets 218,430
-----------
Total Current Assets 5,830,018
-----------
Property and Equipment - Net 10,471,920
-----------
Other Assets:
Accounts Receivable - Net 332,520
Goodwill - Net 1,996,674
Other Intangible Assets - Net 755,285
Other Receivables 917,605
Other Assets 71,477
-----------
Total Other Assets 4,073,561
-----------
Total Assets $20,375,499
===========
See Notes to Consolidated Financial Statements.
</TABLE>
F-2
<PAGE>
<TABLE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Deficit:
Current Liabilities:
<S> <C>
Cash Overdraft $ 468,227
Accounts Payable 579,540
Accrued Expenses 2,180,851
Accrued Professional Fees 238,946
Notes and Capital Leases Payable 5,259,528
Deferred Revenue 100,000
-----------
Total Current Liabilities 8,827,092
-----------
Long-Term Liabilities:
Notes and Capital Leases Payable 11,053,151
Deferred Revenue 816,667
Accrued Professional Fees 19,444
-----------
Total Long-Term Liabilities 11,889,262
-----------
Total Liabilities 20,716,354
-----------
Minority Interest 397,764
Commitments and Contingencies --
-----------
Shareholders' Deficit:
Preferred Stock - Series F, $.01 Par Value, 5,000,000 Shares
Authorized, 2,482,000 Shares Issued and Outstanding, Stated
Liquidation Preference of $2,482,000 24,820
Preferred Stock - Series G, $.01 Par Value, 5,000,000 Shares
Authorized, 2,000,000 Shares Issued and Outstanding, Stated
Liquidation Preference of $2,000,000 20,000
Common Stock, $.01 Par Value, 20,000,000 Shares Authorized,
11,463,956 Shares Issued, and 11,310,110 Shares Outstanding 114,639
Additional Paid-in Capital - Common Stock 4,251,059
Additional Paid-in Capital - Preferred Stock - Series F 102,309
Additional Paid-in Capital - Preferred Stock - Series G 82,441
Stock Purchase Warrants 1,175,317
Subscriptions Receivable (10,994)
Accumulated Deficit (6,496,672)
Treasury Stock - 153,846 Shares of Common Stock, At Cost (1,538)
-----------
Total Shareholders' Deficit (738,619)
-----------
Total Liabilities and Shareholders' Deficit $20,375,499
===========
See Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
<TABLE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Revenue:
<S> <C> <C>
Net Patient Service Revenue $13,265,744 $22,555,570
----------- -----------
Operating Expenses:
Cost of Services 10,344,189 17,034,067
General and Administrative 2,232,755 3,350,666
Depreciation and Amortization 2,441,358 3,917,271
Impairment Loss of Long-Lived Assets -- 3,424,548
----------- -----------
Total Operating Expenses 15,018,302 27,726,552
----------- -----------
Operating Loss (1,752,558) (5,170,982)
----------- -----------
Other [Expenses] and Revenue:
Interest Expense (2,189,997) (3,550,767)
Interest Income 242,123 --
Interest Income - Related Party 231,765 --
Gain on Sale of Subsidiaries and Divisions 8,658,259 514,631
Other Income 62,459 --
----------- -----------
Total Other Income [Expenses] 7,004,609 (3,036,136)
----------- -----------
Income [Loss] Before Income Taxes and Minority Interest
in [Income] Loss of Subsidiaries 5,252,051 (8,207,118)
Minority Interest in [Income] Loss of Subsidiaries (147,764) 64,208
----------- -----------
Net Income [Loss] $ 5,104,287 $(8,142,910)
=========== =============
Basic EPS Computation:
Net Income $ 5,104,287 $(8,142,910)
Preferred Stock Dividends 224,100 224,100
----------- -----------
Net Income [Loss] Available to Common Shareholders $ 4,880,187 $(8,367,010)
=========== ===========
Basic EPS:
Net Income [Loss] $ .43 $ (.79)
=========== ===========
Diluted EPS Computation:
Net Income [Loss] Available to Common Shareholders $ 4,880,187 $(8,367,010)
Income Impact of Assumed Conversions of Preferred
Stock Dividends 224,100 --
----------- -----------
Income Available to Common Shareholders and
Assumed Conversions $ 5,104,287 $(8,367,010)
=========== ===========
Diluted EPS:
Net Income [Loss] $ .37 $ (.79)
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
F-4
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
- ------------------------------------------------------------------------------
<TABLE>
Paid-in
Paid-in Capital -
Preferred Stock Capital - Series F
Common Stock Series F Series G Treasury Stock Common Preferred
Shares Amount Shares Amount Shares Amount Shares Amount Stock Stock
---------- ------- --------- ------- --------- ------ -------- ------- --------- ---------
Balance -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 8,716,463 $87,164 2,482,000 $24,820 2,000,000 $20,000 (153,846) $(1,538) $1,459,241 $226,409
Issuance of Shares
and Warrants
[See Note 1 - [A]] 2,747,493 27,475 -- -- -- -- -- -- 2,791,818 --
Amortization of
Deferred
Compensation -- -- -- -- -- -- -- -- -- --
Elimination of
Deferred
Compensation on
Discontinuance of
Center -- -- -- -- -- -- -- -- -- --
Net Loss for the
Year Ended
December 31, 1997 -- -- -- -- -- -- -- -- -- --
---------- -------- --------- ------- --------- ------ -------- ------ ---------- --------
Balance -
December 31, 1997 11,463,956 $114,639 2,482,000 $24,820 2,000,000 $20,000 (153,846) $(1,538) $4,251,059 $226,409
Dividends on
Preferred Stock -- -- -- -- -- -- -- -- -- (124,100)
Net Income for the
Year Ended
December 31, 1997 -- -- -- -- -- -- -- -- -- --
---------- ------- --------- ------- --------- ------- -------- ------- --------- --------
Balance -
December 31, 1997 11,463,956 $114,639 2,482,000 $24,820 2,000,000 $20,000 (153,846) $(1,538) $4,251,059 $102,309
========== ======== ========= ======= ========= ======= ======== ======= ========== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
- ------------------------------------------------------------------------------
<TABLE>
Paid-in
Capital -
Series G
Preferred Purchase Deferred Subscriptions Accumulated
Stock Warrants Compensation Receivable Deficit Total
-------- -------- ----------- ---------- ------------ ----------
Balance -
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 $182,441 $994,610 $(816,785) $(10,994) $(3,458,049) $(1,292,681)
Issuance of Shares and Warrants
[See Note 1 - [A]] -- 180,707 -- -- -- 3,000,000
Amortization of Deferred
Compensation -- -- 34,512 -- -- 34,512
Elimination of Deferred Compensation on
Discontinuance of Center -- -- 782,273 -- -- 782,273
Net Loss for the Year Ended
December 31, 1996 -- -- -- -- (8,142,910) (8,142,910)
------- ------- ---------- -------- ----------- ----------
Balance - December 31, 1996 182,441 1,175,317 -- (10,994) (11,600,959) (5,618,806)
Dividends on Preferred Stock (100,000) -- -- -- -- (224,100)
Net Income for the Year Ended
December 31, 1997 -- -- -- -- 5,104,287 5,104,287
-------- --------- ---------- -------- ---------- ---------
Balance - December 31, 1997 $82,441 $1,175,317 -- $(10,994) $(6,496,672) (738,619)
======== ========== ========== ========= =========== =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Operating Activities:
<S> <C> <C>
Net Income [Loss] $ 5,104,287 $(8,142,910)
Adjustments to Reconcile Net Income [Loss] to Net Cash
Provided by [Used In] Operating Activities:
Depreciation and Amortization 2,441,358 3,917,271
Allowance for Contractual Adjustments 1,479,288 445,873
[Gain] on Sale of Centers and Equipment (8,752,252) (633,210)
Loss on Assets Held for Divestiture -- 118,579
Write Down of Long-Lived Assets -- 3,424,548
Imputed Interest Income (109,312) --
Deferred Revenue - Covenant not-to-Compete (83,333) --
Gain on Early Extinguishment of Debt (22,756) --
Amortization of Deferred Compensation -- 34,512
Minority Interest in Consolidated Subsidiaries 147,764 (64,208)
Write-off Employment Contract -- 121,923
Write-off Other Assets 184,532 18,667
----------- -----------
Net Income [Loss] Adjusted for Noncash Items 389,576 (758,955)
Changes in Operating Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 691,616 1,142,630
Other Current Assets 58,800 60,271
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (3,047,182) 506,493
----------- -----------
Net Cash - Operating Activities - Forward (1,907,190) 950,439
----------- -----------
Investing Activities:
Purchase of Property and Equipment (500,468) (226,428)
Acquisitions of Imaging Centers (491,875) (200,000)
Proceeds from Sale of Divisions and Equipment 15,227,720 1,028,000
Loans to Related Parties (5,500,000) --
Receipt on Loans to Related Parties 3,521,171 --
Payments for Deposits and Other Assets (162,310) (443,004)
----------- -----------
Net Cash - Investing Activities - Forward 12,094,238 158,568
----------- -----------
Financing Activities:
Cash Overdraft (522,409) 990,636
Proceeds from Borrowings on Notes Payable 10,000 2,196,775
Principal Payments on Notes and Leases (7,860,487) (9,169,798)
Proceeds from Issuance of Common Stock -- 3,000,000
Loans from Related Parties -- 1,982,103
Payments to Related Parties (2,070,670) (48,433)
Proceeds from Joint Venture Partners 250,000 --
Payments to Joint Venture Partners -- (65,625)
----------- ------------
Net Cash - Financing Activities - Forward $(10,193,566 $(1,114,342)
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $(1,907,190)$ 950,439
Net Cash - Investing Activities - Forwarded 12,094,238 158,568
Net Cash - Financing Activities - Forwarded (10,193,566) (1,114,342)
----------- -----------
Net [Decrease] in Cash (6,518) (5,335)
Cash - Beginning of Years 12,658 17,993
----------- -----------
Cash - End of Years $ 6,140 $ 12,658
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $2,380,594 $ 3,952,766
Income Taxes $ -- $ --
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
DIS entered into capital leases or financed equipment with notes payable for
$640,934 and $1,316,110 during 1997 and 1996, respectively.
During 1997, DIS acquired the assets of Las Posas Medical Imaging for $35,000.
During 1996, DIS acquired medical equipment of approximately $804,000 as part of
the Corona Imaging and Healthcare Imaging Centers acquisitions along with the
assumption of notes payable of $567,518, and accounts payable and accrued
expenses of $44,575 thereon.
DIS converted accrued maintenance costs with outside vendors into various
notes payable totaling approximately $560,000 and $1,100,000 during 1997 and
1996, respectively.
During 1997, distributed dividends on preferred stock in the amount of
$224,100 through the issuance of a note payable.
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
[A] Organization, Business and Basis of Presentation - Diagnostic Imaging
Services, Inc. and its subsidiaries [the "Company" or "DIS"] provides management
systems and services, non-physician health care personnel, facilities and
equipment through a network of facilities owned or leased by the Company [the
"Network"]. As of December 31, 1997, the Network, operating in Southern
California, was composed of eight imaging centers and one cancer care center
[See Notes 15 and 16]. The Company primarily contracts with health maintenance
organizations, hospitals and other health care providers to perform the services
described above. The Company does not engage in the practice of medicine and
neither employs any physicians nor exerts any control over decisions regarding
medical care.
In March of 1996, Primedex Health Systems, Inc. ["PHS"] [a publicly-held
company] acquired 2,747,493 of previously unissued common shares of the Company,
for $3,000,000 with a five-year warrant to acquire an additional 1,521,739
shares of the Company's common stock at $1.60 per share [See Note 12[B]]. As of
December 31, 1997, through various transactions with related and unrelated
parties since March 1996, PHS acquired an additional 5,327,477 shares of DIS
common stock for approximately $6 million increasing its total ownership to
8,074,970 shares, or approximately 71%. Subsequent to December 31, 1997, through
February 27, 1998, PHS acquired an additional 453,000 shares of common stock for
approximately $510,000 from various unrelated parties, increasing its ownership
to 8,527,970 shares, or approximately 74%.
[B] Consolidation - The accompanying consolidated financial statements include
the accounts of DIS and Scripps Chula Vista Imaging Center, L.P. ["SCV"], a
joint venture. All significant intercompany accounts and transactions have been
eliminated in consolidation.
[C] Property and Equipment and Depreciation and Amortization - Property and
equipment are recorded at cost, less accumulated depreciation and amortization
and includes equipment held under capital lease agreements. Depreciation is
computed by the straight-line method and is based on the estimated useful lives
of the various assets ranging from three to sixteen years. Leasehold
improvements are amortized over the shorter of the life of the lease or their
estimated useful life, using the straight-line method. When assets are sold or
retired, the cost and accumulated depreciation are removed from the accounts and
any gain or loss is included in operations.
[D] Revenue and Related Accounts Receivable and Allowances - Revenue is
recognized when the related service is performed [including physician services,
a portion of which are remitted to physicians in accordance with underlying
service agreements; physician services are included in cost of services] less
contractual adjustments and reserves for doubtful accounts ["allowances"]. A
significant portion of the Company's accounts receivable involve third party
payors, primarily insurance companies. The current portion of accounts
receivable are the amounts which are reasonably expected to be collected within
a year, based upon historical collection data.
Accounts receivable as of December 31, 1997 are shown net of allowances of
$4,006,612 of which $3,633,926 has been deducted from current receivables and
$372,686 has been deducted from noncurrent receivables. The Company records its
allowances based on historical collection percentages. While management feels
that these percentages are reliable, they are subject to change in the near
term.
[E] Intangibles - Goodwill is recognized in business combinations accounted for
under the purchase method of accounting and represents the excess of the
purchase price over the fair value of identifiable net assets acquired. Goodwill
is amortized on a straight-line basis over twenty-years which is the period
during which the Company expects to receive benefits. Organization costs, loan
fees and covenants-notto compete are recorded at cost and are amortized over
their estimated useful lives ranging from two to twenty years.
F-8
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[F] Long-Term Accrued Professional Fees - Accrued professional fees for
physician services are classified as either long-term or short-term depending on
the classification of the related amounts due from the patient or third-party
payor for the related services performed.
[G] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Accordingly, actual results could differ from those estimates.
[H] Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and accounts
receivable arising from its normal business activities. The Company routinely
assesses the financial strength of its customers and third party payors and,
based upon factors surrounding their credit risk, establishes an allowance for
uncollectible accounts, and as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is limited. The Company
places its cash and cash equivalents with high credit quality financial
institutions. The amount on deposit in any one institution that exceeds
federally insured limits is subject to credit risk. As of December 31, 1997, the
Company had $51,597 with financial institutions subject to credit risk beyond
the insured amount. The Company does not require collateral or other security to
support financial instruments subject to credit risk.
[I] Impairment - Certain long-term assets [including goodwill] of the Company
are reviewed at least annually as to whether there are indications their
carrying value has become impaired, pursuant to guidance established in
Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Management considers assets to be impaired if the carrying value exceeds
the future projected cash flows from related operations [undiscounted and
without interest charges]. If impairment is deemed to exist, the assets will be
written down to fair value. Management also reevaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. [See Note 5]. As of December 31, 1997,
management expects these assets to be fully recoverable.
[J] Stock Options - On January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards ["SFAS"] No. 123,
"Accounting for Stock-Based Compensation," for stock options and similar equity
instruments [collectively, "Options"] issued to employees, however, the Company
will continue to apply the intrinsic value based method of accounting for
options issued to employees prescribed by Accounting Principles Board ["APB"]
Opinion No. 25, "Accounting for Stock Issued to Employees" rather than the fair
value based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
[K] Earnings Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended December 31, 1997, have been calculated in
accordance with SFAS No. 128. Prior periods earnings per share data have been
recalculated as necessary to conform prior years data to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period.
F-9
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[K] Earnings Per Share [Continued] - SFAS No. 128 also requires a dual
presentation of basic and diluted earnings per share on the face of the
statement of operations for all companies with complex capital structures.
Diluted earnings per share reflects the amount of earnings for the period
available to each share of common stock outstanding during the reporting period,
while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e., increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
[L] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
carrying amount of cash and cash equivalents approximates their fair value. The
Company has no cash equivalents at December 31, 1997.
[M] Reclassifications - Certain amounts in the prior-year consolidated financial
statements have been reclassified to conform to the current-year presentation.
[2] Business Combinations, Acquisitions and Divestitures
On March 1, 1996, the assets and related liabilities of Mission Bay Mobile [a
prior joint venture of the Company] were assumed by Mobile Technology, Inc., an
unrelated party. The transfer resulted in a net gain of approximately $296,000.
On April 1, 1996, substantially all of the assets and liabilities of the nuclear
medicine business at North County were sold to Tri-City Hospital District for
$230,000. The sale resulted in a net loss of $147,093.
During 1996, DIS rented its PPS mobile MRI unit to a hospital with the
expectation of eventually selling the unit to the hospital. On April 30, 1996,
the hospital terminated its rental agreement and DIS reclaimed the unit and
set-up an additional loss reserve of approximately $119,000 with the intention
of selling the unit by year-end. In January 1997, the PPS mobile unit and
related liabilities were transferred to RadNet Management, Inc., a 100%-owned
subsidiary of PHS. DIS recognized a gain of approximately $94,000 on the
transaction.
Substantially all of the remaining assets of Integrated Cardiovascular Systems,
Inc. [a division of the Company] were sold on May 29, 1996 to Baxter Healthcare
Corporation for approximately $798,000.
The sale resulted in a gain of approximately $313,000.
On July 31, 1996, effective August 1, 1996, DIS acquired substantially all of
the business and assets of Healthcare Imaging Center, L.P. for $200,000 plus
assumed liabilities resulting in goodwill of $10,000.
In September 1996, DIS opened the Camarillo Imaging Center ["Camarillo"], a
start-up operation primarily utilizing equipment transferred from other sites.
The facility functions as a satellite office to the Company's MDI center and
provides mammography, ultrasound and general diagnostic radiology services.
F-10
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[2] Business Combinations, Acquisitions and Divestitures [Continued]
On September 30, 1996, effective October 1, 1996, DIS acquired substantially all
of the business and assets of the Corona Imaging Center ["Corona"] in exchange
for the Company taking over payments under the existing building and equipment
financing leases and other accrued liabilities. There was no goodwill recognized
in this transaction.
As a result of a continuing deteriorating business climate and other business
reasons at the Company's Santa Monica ["Parkside"] facility, on June 25, 1997,
the Company tentatively determined to close substantially all of its operations
at that center on or about August 29, 1997 [the Company continues to operate its
Parkside Radiology Women's Center ["Parkside Womens"] which provides ultrasound,
mammography, stereotactic breast biopsy and bone densitometry services]. Due to
this decision, the Company recognized an impairment loss in December 1996 of
approximately $3,425,000. In August 1997, the Company recognized a gain of
$400,000 for the sale of certain assets of Parkside. The buyer also assumed
Parkside's building leases.
Effective January 1, 1997, the Company opened its Scripps Chula Vista MRI, L.P.
["SCV"] servicing patients in San Diego. The Company and Scripps are equal
partners with the Company serving as managing partner [See Note 15]. In February
1998, effective January 1, 1998, the Company sold its interest in SCV to DHS in
exchange for 127,250 shares of DHS common stock.
Effective March 1, 1997, DIS sold the assets and related liabilities of four of
its hospital-based MRI facilities [Tarzana, SGV, Chino and SMIC] and its
Ultrasound Division to Diagnostic Health Services, Inc. ["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], and a non-interest bearing
note receivable valued at approximately $1,190,000 which represents the
discounted value at 11.75% of three $500,000 payments to be made by DHS to DIS
on the first, second and third anniversaries of the closing date. There was an
option to receive these 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
15[C]]. In addition, DHS assumed the operating lease of the Registrant's WLA
center. The company recognized a gain on the sale of $8,258,259.
During 1997, DIS acquired the assets of Las Posas Medical Imaging for $35,000
and moved its Camarillo facility to its location. There was no goodwill recorded
in this transaction. The previous Camarillo space is now being used for storage.
Effective January 1, 1998, assets with a net book value of $905,151 and related
capital lease obligations of $902,781 of the West LA MRI Center ["WLA"] were
assumed by PHS' Radnet Management, Inc. There was no consideration and a loss of
$2,370 was recorded in the transaction.
During 1997, DIS acquired the remaining 25% interest in Valley Regional Oncology
Center for $260,000 cash, resulting in goodwill of $260,000. In 1997, the
Company acquired the remaining units in TVIC for $196,875 in cash and a note
payable for $157,500, resulting in goodwill of $354,375.
All acquisitions in 1996 and 1997 are immaterial to the financial statements.
F-11
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[3] Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments are as follows:
1 9 9 7
Carrying Fair
Amount Value
Notes Payable - Long-Term $(9,421,107) $(9,354,228)
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash, due to/from related parties, and debt maturing within one year, it was
estimated that the carrying amount approximated fair value for the majority of
these instruments because of their short maturities. The fair value of the notes
payable long-term is based on current rates at which the Company could borrow
funds with similar remaining maturities.
[4] Property and Equipment and Depreciation and Amortization
Property and equipment and accumulated depreciation and amortization as of
December 31, 1997 are as follows:
Medical Equipment $8,870,787
Office Equipment and Furniture and Fixtures 638,982
Leasehold Improvements 2,085,367
Property Held Under Capital Lease 4,136,295
----------
Total 15,731,431
Less: Accumulated Depreciation and Amortization (5,259,511)
Net Property and Equipment $10,471,920
Property and equipment depreciation expense was approximately $1,990,000 and
$2,945,000 for 1997 and 1996, respectively.
For property held under capital leases, depreciation expense for the years ended
December 31, 1997 and 1996 was approximately $510,000 and $1,090,000,
respectively and accumulated depreciation at December 31, 1997 was approximately
$1,695,000.
Certain assets were written down during 1996 [See Note 5]. Certain assets were
sold during 1997 [See Note 2].
[5] Goodwill and Intangible Assets and Amortization
A breakdown of goodwill and intangible assets is as follows:
Goodwill Other
Cost $2,359,905 $1,523,091
Less: Accumulated Amortization 363,231 767,806
---------- ----------
Net Intangible Assets $1,996,674 $ 755,285
--------------------- ========== ==========
Amortization expense relating to intangible assets was approximately $450,000
and $970,000 for 1997 and 1996, respectively.
F-12
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[5] Goodwill and Intangible Assets and Amortization [Continued]
Pursuant to SFAS No. 121, the Company, in 1996, recorded an impairment loss of
$3,424,548 from writing down goodwill, property and equipment, deferred
compensation, covenants not-to-compete and loan fees. Facts and circumstances
leading to the impairment loss consisted principally of the decision to close
the Parkside facility on or about August 29, 1997. The impairment loss recorded
is the carrying values of the assets and deferred compensation less the
estimated depreciation and amortization for 1997 up to the expected date the
center was closed.
Effective March 1, 1997, DIS wrote-off goodwill and accumulated amortization of
$4,820,805 and $691,158, respectively and intangible assets and accumulated
amortization of $1,291,343 and $787,157, respectively related to the sale of
four of its MRI facilities and its Ultrasound Division to DHS. These amounts are
included in the gain on sale of subsidiaries and divisions.
[6] Related Party Transactions
During 1997, DIS repaid Norman Hames, President of DIS, $88,567, without
interest, for prior loans made by him to the Company. Also, during the year
1997, DIS repaid PHS $1,982,103 for prior short-term working capital loans and
its revolving line of credit. DIS loaned PHS $5,500,000, with interest at 10%,
with the proceeds from the sale to DHS. PHS repaid DIS approximately $3,520,000
including approximately $232,000 of interest. At December 31, 1997, PHS owed DIS
approximately $1,980,000.
DIS entered into an agreement with PHS, whereby PHS will provide management
services to DIS for a monthly fee of $45,000. During 1997, DIS incurred $540,000
in management fees.
[7] Litigation
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 to the 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 PHS in the
Company 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 the Company's Common Stock
exercisable at $.01 per share which plaintiff received in connection with the
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 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.
The Company is currently party to other litigation, none of which is deemed by
management to be material in nature.
F-13
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
[8] Long-Term Debt and Capital Leases
Long-term debt at December 31, 1997 consisted of the following:
Notes payable to a financial institution, which is also the shareholder of the
Series F and G Preferred Stock of the Company, bearing interest from 9.75% to
12.75%; monthly principal plus interest is due until maturity at various dates
through 2003; collateralized primarily by medical equipment. $ 9,978,245
Notes payable to a financial institution bearing interest at fixed rate of
11.25%; monthly principal plus interest is due until maturity in 1998;
collateralized primarily by medical equipment. 36,464
Notes payable to former limited partners of acquired partnerships bearing
interest at a fixed rate of 8%; varying payment terms until maturity at
various dates through 1999. 1,996,508
Various notes payable to financial institutions; bearing interest at rates from
10% to 10.5%; maturing through 2001; collateralized by medical
equipment. 2,255,192
Obligations under capital leases, collateralized primarily by medical equipment,
originally costing approximately $4,100,000, payable in monthly installments
including interest at rates from 10% to 11.5% through 2004. 2,046,270
-----------
Total 16,312,679
Less: Current Portion Debt and Capital Leases (5,259,528)
-----------
Non-Current $11,053,151
===========
The Company is in default on approximately $1,830,000 under four note
agreements, pertaining to the acquisition of centers, for non-payment of
principal and interest. These notes have been classified as current [See Note
16].
The following shows the future maturities of long-term debt exclusive of capital
leases:
Years Ended
December 31,
1998 $ 4,845,302
1999 3,129,257
2000 3,279,412
2001 2,837,763
2002 136,020
Thereafter 38,655
-----------
Total $14,266,409
===========
</TABLE>
F-14
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[8] Long-Term Debt and Capital Leases [Continued]
The Company leases property under capital leases. The following schedule shows
the minimum lease payments under capital leases as of December 31, 1997:
Years Ended
December 31,
1998 $ 619,611
1999 619,611
2000 619,611
2001 474,787
2002 98,593
Thereafter 156,106
-----------
Total 2,588,319
Less: Amount Representing Interest (542,049)
Total 2,046,270
Less: Current Portion (414,226)
Long-Term Portion $ 1,632,044
----------------- ===========
[9] Commitments and Contingencies
[A] Leases - The Company and its subsidiaries have noncancellable operating
leases for use of their facilities and certain medical equipment. The leases
require payment of various expenses as additional rent and expire at various
times through 2002. Certain leases provide for renewal options from two to five
years, rent increases based on changes in the Consumer Price Index and are
guaranteed by certain shareholders and officers of the Company. Rent expense
under the leases was approximately $1,630,000 and $2,100,000 for the years ended
December 31, 1997 and 1996, respectively.
The following summarizes future minimum rental payments required under the
operating leases that have initial or remaining lease terms in excess of one
year as of December 31, 1997:
Year Ended
December 31, Total Equipment Facilities
1998 $1,059,100 $ 32,396 $1,026,704
1999 780,924 16,070 764,854
2000 736,185 949 735,236
2001 191,729 -- 191,729
2002 15,775 -- 15,775
---------- ---------- ----------
Totals $2,783,713 $ 49,415 $2,734,298
------ ========== ========== ==========
[B] Salary and Consulting Contractor Agreements - The Company has certain
arrangements for payment of professional services based upon the percentage of
revenue collected from 15% to 20%.
The Company also has employment agreements with an officer and key employee at
annual compensation rates ranging from $50,000 to $200,000 and for periods up to
four years. Total commitments under the agreements are approximately $603,000 as
of December 31, 1997.
F-15
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[10] Income Taxes
Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards.
The tax effects of significant items comprising the Company's net deferred tax
assets as of December 31, 1997 are as follows:
Deferred Tax Assets:
Net Operating Loss Carryforwards $7,336,000
Tax Basis of Intangible Assets in Excess of Book Basis 707,000
----------
Total 8,043,000
Deferred Tax Liability:
Book Basis of Property and Equipment in Excess of
Tax Basis 3,719,000
----------
Deferred Tax Asset 4,324,000
Valuation Allowance 4,324,000
----------
Net Deferred Tax Asset $ --
---------------------- ==========
The valuation allowance of $4,324,000 represents a decrease of $4,905,000 over
the preceding year. The decrease in the valuation allowance is primarily due to
the disposal of a significant amount of property and equipment upon the sale of
subsidiaries and divisions. Net operating loss carryforwards of $18,340,000
expire as follows:
Years ended
2004 $ 955,000
2005 817,000
2006 4,053,000
2007 3,439,000
2008 1,226,000
2010 2,513,000
2011 5,337,000
----------
Total $18,340,000
===========
A portion of the available losses is limited according to Section 382 of the
Internal Revenue Code. Section 382 of the Internal Revenue Code limits the
annual utilization of net operating losses to the value of the Company
immediately prior to an ownership change [generally, more than a 50% ownership
change at any time within a three-year period multiplied by the "long-term
tax-exempt rate"]. Due to certain significant changes in ownership of DIS's
stock, the annual utilization of federal NOL carryforwards may be limited,
depending on the determination of the fair values of the Company immediately
before the change in ownership.
F-16
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[10] Income Taxes [Continued]
Components of income tax expense:
1 9 9 7 1 9 9 6
------- -------
Tax Expense Before Application of Operating Loss Carryforwards:
Federal $ 269,980 $ --
State 78,533 --
Tax Benefit of Operating Loss Carryforwards:
Federal (269,980) --
State (78,533) --
----------- -----------
Totals $ -- $ --
------ =========== ===========
A reconciliation between statutory federal income tax and the effective rate of
income tax expense for each of the two years during the period ended December
31, 1997 follows:
1 9 9 7 1 9 9 6
------- -------
Statutory Federal Income Tax Rate (34)% (34)%
Change in Valuation Allowance -- 34
Use of Net Operating Loss 34 --
--------- ---------
Totals -- --
------ ========= =========
[11] Shareholders' Deficit
The Series F convertible preferred shares are redeemable at the Company's option
for $1.00 per share plus accumulated unpaid dividends and are convertible to
common shares at a ratio of 2.482 preferred shares, subject to certain
restrictions, in exchange for one common share, and accrued dividends, which are
cumulative, of $.05 per share through July 15, 2000, $.07 per share thereafter
through July 15, 2001, $.085 per share thereafter through July 15, 2002 and $.10
per share thereafter, payable quarterly.
The Series G convertible preferred shares have substantially the same terms as
the Series F and are convertible to common shares at a ratio of 2 preferred
shares in exchange for one common share. The Company and DVI have entered into
an agreement which provides that DVI would not convert its preferred stock to
common stock without the approval of the Chairman of the Company, prior to the
price of the common stock in the public market in which it trades closing for 20
consecutive days at a price of five dollars per share or higher.
During 1997, DIS distributed $224,100 for dividends on preferred stock. At
December 31, 1997 and 1996, cumulative preferred stock unpaid dividends totaled
$336,150 [$.075 per share].
F-17
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[12] Stock Options and Warrants
[A] Stock Options - In October 1990, the Company adopted a stock option plan
covering up to 250,000 shares of the Company's common stock. Options to purchase
shares of the Company's common stock may be granted to employees, officers and
directors at the fair market value at the date of grant for incentive stock
options or 85% of the fair market value at the date of grant for nonqualified
stock options.
The following table summarizes the activity in common shares subject to
incentive stock options and nonqualified options for 1997 and 1996:
<TABLE>
Weighted Average
Common Exercise Price
Shares Per Share
<S> <C> <C>
Options Outstanding and Exercisable at January 1, 1996 715,917 $ 1.78
Options Granted 10,000 $ 1.00
Options Exercised -- $ --
Options Canceled 10,000 $ .63
---------
Options Outstanding and Exercisable at December 31, 1996 715,917 $ 1.78
Options Granted -- $ --
Options Exercised -- $ --
Options Canceled 9,995 $ 2.25
---------
Options Outstanding and Exercisable at December 31, 1997 705,922 $ 1.78
-------------------------------------------------------- =======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding
Number Weighted-Average
Range of Outstanding at Remaining Weighted-Average
Exercise Prices December 31, 1997Contractual Life Exercise Price
$.01 - $1.00 80,360 1.3 Years $ .67
$1.01 - $2.00 325,566 3.0 Years $ 1.15
$2.01 - $3.00 299,996 .8 Years $ 2.75
---------
705,922 1.9 Years $ 1.78
=========
The exercise prices of the options outstanding at December 31, 1997 range
between $.625 and $3.00.
No compensation cost was recognized during 1997 or 1996.
F-18
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[12] Stock Options and Warrants [Continued]
[A] Stock Options [Continued] - Had compensation cost been determined on the
basis of fair value pursuant to SFAS No. 123, net income and earnings per share
for 1997 and 1996 would have been as follows:
1 9 9 7 1 9 9 6
------- -------
Net Income [Loss]:
As Reported $4,880,187 $(8,367,010)
========== ===========
Pro Forma $4,880,187 $(8,374,571)
========== ===========
Basic Income [Loss] Per Share:
As Reported $ .43 $ (.79)
========== ==========
Pro Forma $ .43 $ (.79)
========== ==========
Diluted Income [Loss] Per Share:
As Reported $ .37 $ (.77)
========== ==========
Pro Forma $ .37 $ (.77)
========== ==========
At the grant dates, the weighted average fair value of the above options were
$-0- and $.76 during 1997 and 1996, respectively.
Generally, stock options are exercisable upon granting and expire five years
from the date of grant.
The fair value used in the pro forma data was estimated by using an option
pricing model which took into account as of the grant date, the exercise price
and the expected life of the option, the current price of the underlying stock
and its expected volatility, expected dividends on the stock and the risk-free
interest rate for the expected term of the option. The following is the average
of the data used for the following items.
Risk-Free Expected Expected Expected
Interest Rate Life Volatility Dividends
1997 -- -- -- --
1996 6.63% 5 Years 81.97% N/A
The following table summarizes the activity in common shares subject to warrants
for the year ended December 31, 1997 [See Note 1A]:
Common Warrant
Shares Exercise Price
Warrants Outstanding and Exercisable at January 1, 1996 [1] 319,488 $ .01
Warrants Granted [2] 1,521,739 $ 1.60
Warrants Exercised -- $ --
Warrants Canceled -- $ --
---------
Warrants Outstanding and Exercisable at December 31, 1996 1,841,227 $.01-1.60
Warrants Granted -- $ --
Warrants Exercised -- $ --
Warrants Canceled -- $ --
---------
Warrants Outstanding and Exercisable at December 31, 1997 1,841,227 $.01-1.60
------------------------------------------------------- =========
[1] See Note 7.
[2] The 1,521,739 warrants, valued at $180,707, issued in 1996, were issued to
PHS [See Note 1[A]].
Warrants outstanding at December 31, 1997 expire from February 1999 to March
2001.
F-19
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[13] Employee Benefit Plan
The Company adopted a savings plan pursuant to Section 401(K) of the Internal
Revenue Code, that covers substantially all employees. Eligible employees may
contribute on a tax deferred basis a percentage of compensation, up to the
maximum allowable amount under the tax law. Employee contributions vest
immediately. The Plan does not require a matching contribution by the Company.
The Company did not make a contribution to the plan or record any expense in
1997 or 1996.
[14] Income [Loss] Per Share
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows:
1 9 9 7 1 9 9 6
------- -------
Average Common Shares Outstanding 11,310,010 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 44,154 --
Purchase Warrants 316,826 --
--------- ---------
Average Common Shares Outstanding Assuming Dilution 13,671,090 10,554,073
Stock options and purchase warrants outstanding at December 31, 1997 to purchase
309,996 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.
[15] Subsequent Events
[A] Effective January 1, 1998, assets with a net book value $905,151 and related
capital lease obligations of $902,781 of WLA were assumed PHS' Radnet
Management, Inc. There was no consideration and the Company realized a loss of
$2,370 on the transaction.
[B] In February 1998, subsequent to year-end, the Company entered into an
agreement to sell its interest in SCV to Diagnostic Health Services, Inc.
["DHS"] for 127,250 shares of DHS stock. While the shares are restricted, the
current market value of the shares received if equated to the market value of
DHS shares is approximately $1,400,000 as of February 27, 1998.
[C] Effective April 7, 1998, the Company accepted 200,000 shares of DHS common
stock in cancellation of the DHS obligation to make post-closing payments
pursuant to the March 1, 1997 agreement whereby the Company sold to DHS the
assets and related liabilities of four of its hospital-based MRI facilities and
its Ultrasound Division. While the shares are restricted, the current market
value of the shares received if equated to the market value of DHS shares is
approximately $2,300,000 as of April 7, 1998.
[16] Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.
F-20
<PAGE>
DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- ------------------------------------------------------------------------------
[16] Going Concern [Continued]
The Company has suffered recurring losses from operations, has been in default
under various notes and has negative working capital which raises substantial
doubt about its ability to continue as a going concern. During 1997 and 1996,
DIS had net income [loss] of $5,104,287 and $[8,142,910], respectively, and
negative working capital of $2,997,074 and $14,270,257, respectively. The
improvements came from the sale of its ultrasound division and MRI sites to DHS
as well as the closings of certain unprofitable centers.
Effective January 1, 1998, assets with a net book value of $905,151 and related
capital lease obligations with principal due of $902,781 WLA were assumed PHS'
Radnet Management, Inc.. The current portion of WLA debt as of December 31, 1997
was approximately $200,000.
In February 1998, subsequent to year-end, Registrant entered into an agreement
to sell its interest in SCV to Diagnostic Health Services, Inc. ["DHS"] for
127,250 shares of DHS stock. While the shares are restricted, the current market
value of the shares received if equated to the market value of DHS shares is
approximately $1,400,000 as of February 27, 1998.
Management has taken a number of steps to revise the profitability of its
operations and its financial condition, which it believes are sufficient to
provide the Company with the ability to continue in existence.
During 1997, the Company continued to streamline and economize its operations
and make changes to enhance revenues. The Company entered into two healthcare
equipment insurance policy service arrangements where the Company's exposure to
medical equipment repairs and maintenance expense would be limited, and in the
worst case scenario still offer the Company significant savings. The policy
includes stop loss limits on the annual aggregate loss expectancies of the
medical equipment contained on each policy. Equipment has been or will be
upgraded if market conditions dictate the necessity of enhanced equipment.
The Company has reduced its Corporate salary costs by reducing staffing, and by
eliminating its in-house legal department while retaining a formerly employed
lawyer with a separate consulting fee arrangement at significant savings
overall.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
[17] New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employees Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
. . . . . . . . .
F-21
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act:
Directors serve a term of one year and until their successors are duly elected
and qualified. The Registrant's By-Laws currently provide for a Board of not
less than one. Mr. Hames and Dr. Berger currently serve as directors. Two
positions on the Board are vacant which Registrant anticipates filling when
competent and qualified individuals are located. During the year ended December
31, 1997, the Board of Directors held one meeting and took action by unanimous
written consent on six occasions. Each director who served during 1997 attended
all of the meetings of the Board held during such fiscal year. The following
table sets forth certain information concerning the directors and officers of
the Registrant:
Year First
Elected
Name Age Position To Serve
Norman Hames 42 President and Chief Financial Officer 1994
Howard G. Berger, M.D. 53 Chairman of the Board of Directors 1996
Judy Perez-Haley 41 Vice President 1994
Norman Hames, a founder of the Registrant, has served as President, CEO and
Director of the Registrant since 1986. In 1996 he became an officer and director
of Primedex Health Systems, Inc.
("PHS").
Howard G. Berger, M.D., was appointed as a director of DIS in March 1996.
Dr. Berger was elected a director of PHS in July 1992 and in September 1996, was
appointed president and chief executive officer and is currently serving in
those capacities. Dr. Berger is the sole owner of Beverly Radiology Medical
Group which supplies the medical services at four of Registrant's imaging
centers and at its oncology center. Dr. Berger received his medical degree from
the University of Illinois Medical School and is Board certified in nuclear
medicine.
Judy Perez-Haley has been the Vice President-Central Region of DIS since May
1993 and, prior to that, served as an administrator for DIS for eight years.
The officers of DIS are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships among any of the officers
and directors.
The Board of Directors intends to establish an Executive Committee which is
authorized to exercise the authority of the Board of Directors to the extent
permitted by Delaware law. The Board of Directors of Registrant also intends to
establish an Audit Committee, which reviews the results and scope of the audit
and other services provided by Registrant's independent auditors, and a
Compensation Committee, which makes recommendations concerning salaries and
incentive compensation for employees of and consultants to Registrant.
Compliance with the Securities Exchange Act of 1934. Section 16(a) of the
Securities Exchange Act of 1934 requires the Registrant's directors and officers
and persons who own more than 10% of a registered class of the Registrant's
equity securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Directors and officers and greater
than ten percent stockholders are required by SEC regulation to furnish the
Registrant with copies of the reports they file. Based solely upon a review of
the copies of such reports and the written representations from certain persons
that certain reports were not required to be filed by such persons, the
Registrant believes that all its directors, officers and greater than ten
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during fiscal 1994.
18
<PAGE>
Item 10. Executive Compensation
Summary Compensation Table
Set forth below is the cash compensation paid by the Registrant during 1997 to
its President. No other executive officer received during 1997 compensation
which exceeded, on an annualized basis, $100,000.
Annual Compensation(1)
Fiscal Year Salary ($) Bonus ($)
----------- ---------- ---------
Norman Hames, President 1997 200,000(2) --
- -----------------------
(1) The dollar value of prerequisites and other personal benefits, if any, for
each of the named executive officers was less than the reporting
thresholds established by the Securities and Exchange Commission.
(2) Mr. Hames waived compensation in excess of $150,000 for 1997. See
"Employment Contracts and Termination of Employment and Change in Control
Arrangements."
Compensation of Directors
Directors who also serve as officers of the Registrant are eligible to receive
options to purchase Common Stock under the Registrant's 1990 Stock Option Plan,
which grants are made at the discretion of the Board of Directors or a committee
thereof which administers the plan.
Option Grants in Last Fiscal Year
There were no options granted nor options held during the fiscal year ended
December 31, 1997, to or by any of the executive officers named in the Summary
Compensation Table hereinabove.
Stock Option Plan
The Board of Directors and stockholders of the Registrant adopted the
Registrant's 1990 Stock Option Plan (the "Plan") covering 250,000 Common Shares.
Options may be granted under the Plan to key employees (including officers who
may also be directors) of the Registrant and its subsidiaries, if any, as
selected by the Board of Directors or by a committee appointed by the Board of
Directors to administer the Plan (in either case, the "Administrator").
Non-Employee Directors are not eligible to participate in the Plan.
Options granted to employees may either be incentive stock options (as defined
in the Internal Revenue Code of 1986, as amended) or nonqualified stock options.
The purchase price of the Common Shares made subject to an option may not be
less than the fair market value of the Registrant's Common Shares on the date of
grant in the case of incentive stock options or 85% of such value in the case of
nonqualified stock options. The terms of each option and the increments in which
it is exercisable are determined by the Administrator, provided that no option
may be exercised after ten years from the date of grant. No option may be
granted under the Plan after October 11, 2000. The options are nontransferable
during the life of the option holders. As of December 31, 1997, 215,500 options
under the plan have been granted.
19
<PAGE>
Employment Contracts and Termination of Employment
and Change-in-Control Arrangements
The Registrant has a five year employment contract with Norman R. Hames,
expiring January 31, 2001, which provides for annual compensation of $200,000
and a bonus to be determined by the Board based upon Registrant's performance.
Mr. Hames agreed to waive all compensation in excess of $150,000 during fiscal
1997 and has continued to so defer, however, he is not required to continue such
deferral.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of Registrant's Common Stock as reported to the Registrant as of
February 27, 1998, (i) by each person who is known by Registrant to own
beneficially more than five percent of the outstanding shares of Common Stock,
(ii) by each director of Registrant and (iii) by all officers and directors of
Registrant as a group. Except as otherwise indicated, Registrant believes the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
Shares Percent
Beneficially of Common
Name/Address of Beneficial Owner Owned Stock(1)
Howard G. Berger, M.D.
1516 Cotner Avenue
Los Angeles, CA 90025 10,565,631(2)(3) 76%
Primedex Health Systems, Inc.
1516 Cotner Avenue
Los Angeles, CA 90025 10,565,631(2) 76%
DVI Healthcare, Inc.
One Park Plaza, Suite 800
Irvine, CA 92714 (4) (4)
Norman Hames
1516 Cotner Avenue
Los Angeles, CA 90025 --- ---
All officers and
directors as a group
(four persons)(3) 10,565,631(2) 76%
- -----------------
(1) Includes 11,310,110 shares outstanding as of February 27, 1998, and options
and warrants convertible into an additional 2,547,149 shares within 60
days. Does not include Preferred Stock held by DVI Healthcare which is
convertible after September 1996, provided the price of the Common Stock is
at least five dollars per share (see "Item 12 Certain Relationships and
Related Transactions").
(2) Includes 1,521,739 shares subject to a five year warrant expiring in 2001
exercisable at a price of $1.60 per share and 515,922 shares issuable upon
exercise of options at varying exercise prices between $.62-1/2 and $2.50
per share that are exercisable within 60 days.
(3) Dr. Berger is a director and major stockholder of PHS which is the owner of
the securities.
(4) DVI Healthcare owns Preferred Shares (see "Item 12. Certain Relationships
and Related Transactions") convertible into two million shares of Common
Stock subject to certain requirements. Upon such conversions DVI Healthcare
would then own 12.6% of the Registrant.
20
<PAGE>
Item 12. Certain Relationships and Related Transactions
1. The Registrant leases and operates medical equipment owned by DVI (see
"Item 11") or its subsidiary and leased to the Registrant.
2. Following the September 2, 1994 merger with Diagnostic Imaging Services,
Inc., the Registrant entered into the following transactions with DVI:
Issuance of Series F Convertible Preferred Stock: The Registrant executed an
agreement with DVI, whereby the Registrant issued to DVI Healthcare 2,482,000
shares of a new series F Redeemable Convertible Preferred stock, with an
aggregate stated value of $2,482,000, in exchange for the cancellation of all
outstanding shares of Series B, C, D and E Redeemable Convertible Preferred
Stock, which shares have an aggregate stated value of $2,482,000 (see "Item 13"
of Registrant's Form 10-KSB for the year ended October 31, 1995). The Series F
Redeemable Convertible Preferred Stock has rights and preferences substantially
similar to those applicable to the Series, B, C, D and E Redeemable Convertible
Preferred Stock except that the dividend rate is now five percent per annum with
the shares convertible into Common Stock on the basis of one share of Common
Stock for each 2.482 shares of Preferred.
Forgiveness of Debt: Issuance of Series G Convertible Preferred Stock: DVI
forgave substantially all of the Registrant's pre-September 2, 1994, liabilities
to DVI and assumed the liabilities of the Registrant to unaffiliated parties in
exchange for the assignment of certain assets consisting of equipment and
accounts receivable of the Registrant and delivery to DVI of newly issued shares
of Series G Redeemable Convertible Preferred Stock with an aggregate stated
value of $2,000,000. The Registrant retained the assets and liabilities
associated with a mobile MRI vehicle. The Series G Redeemable Convertible
Preferred Stock has rights and preferences substantially similar to the Series F
Redeemable Convertible Preferred Stock and is convertible into Common Stock on
the basis of one share of Common Stock for each two shares of Preferred. As of
April 30, 1994, the account balances subject to the transactions with DVI,
approximately $4,768,000 and $1,494,000 was owed to DVI and to unrelated
parties, respectively, and equipment and accounts receivable aggregated
approximately $2,781,000. Gains resulting from the reduction of the Registrant's
liabilities to unaffiliated parties were recorded subsequent to April 30, 1994,
and net reductions in liabilities resulting from the transaction with DVI were
recorded as a capital contribution at the transaction date.
As a result of a Stockholders Agreement entered on September 2, 1994, between
Norman Hames and DVI, it was agreed that DVI would not convert its Preferred
Stock to Common, without the approval of Mr. Hames, prior to September 1996 and
prior to the price of the Common Stock in the public market in which it trades
closing for 20 consecutive days at a price of five dollars per share or higher.
Additionally, Mr. Hames retains the right to purchase the Preferred Stock from
DVI for $4,482,000 plus accrued and unpaid dividends. In the event DVI sells a
portion of the converted Preferred Stock and recovers $4,482,000, it has agreed
to assign any remaining shares to Mr. Hames.
Additionally, DVI leased the Hitachi 7000 MRP MRI System to the Registrant for
82 months with payments commencing in the fourth month at $12,000 per month, in
the twelfth month at $20,000 per month, in the twenty-fourth month at $22,000
per month, with monthly payments of $23,075 commencing in the thirty-sixth
month.
DVI provided the Registrant with a four million dollar line of credit that at
December 31, 1996, was approximately $3,200,000. The line was secured by the
Registrant's accounts receivable. Interest was charged at the bank's prime rate
plus 3.5%. The line was paid in full and closed at the Company's request in
September 1997.
2. Norman Hames was owed by the Registrant $88,567 at December 31, 1996
pursuant to a promissory note, which was repaid in full during 1997.
21
<PAGE>
3. On March 22, 1996, Primedex Health Systems, Inc., a New York corporation
("PHS") acquired from the Registrant 2,747,493 shares of common stock and a five
year warrant to purchase an additional 1,521,739 shares for $3,000,000 and a
five year revolving $1,000,000 line of credit (all of which was immediately
drawn down) bearing interest at four percent greater than the prime rate. During
1996, DIS incurred interest of approximately $90,000 on this loan. During 1997,
DIS repaid the loan. Registrant and PHS also entered into two Management
Agreements on March 22, 1996. Pursuant to the first agreement PHS will provide
management services to DIS for a monthly fee of $45,000. Under the second
agreement which is being phased in on a center by center basis, PHS will provide
transportation services, patient scheduling, and billing and collection
services. DIS will pay an amount equal to 10% of its collections for each
covered center. During 1997, DIS incurred $540,000 in management fees. The
agreements expire April 1, 2001 with an option to renew for an additional year.
4. On or about June 28, 1996, Norman Hames, the President of Registrant,
transferred all of his shares [2,424,862] of Registrant's common stock and
warrants to acquire shares of common stock to PHS in exchange for a five year,
interest only promissory note from PHS aggregating $2,448,862 together with a
five year warrant to acquire 2,807,350 shares of Primedex for common stock $.60
per share.
5. As of December 31, 1997, through various transactions with unrelated
parties, PHS acquired an additional 2,902,615 shares of DIS common stock
increasing its total ownership to 8,074,970 shares, or approximately 71%.
6. In connection with the sale of Registrant's ultrasound business and four
of its imaging centers to DHS Health Services, Inc. (see Item 1") PHS received
$1,000,000 for its agreement not to compete with DHS near the locations sold by
Registrant.
7. Howard G. Berger, M.D. (See "Items 9 and 11") is the sole owner of one of
the entities forming the partnership of Beverly Radiology Medical Group ("BRMG")
which has executed a Management and Service Agreement with Registrant pursuant
to which it supplies the medical services at the Registrant's Thousand Oaks,
Santa Monica, Corona and Riverside imaging centers and Temecula Oncology Center
(See "Item 1") through 2002. The management fees paid to the Registrant by BRMG
is 81% of collections.
8. During 1996, the Registrant rented its mobile MRI unit to a hospital with
the expectation of eventually selling the unit to the hospital. On April 30,
1996, the hospital terminated its rental agreement and the Registrant reclaimed
the unit with the intention of selling the unit by year-end. During 1997, the
mobile unit and related liabilities were assumed by PHS. The Registrant believes
the related liabilities are at least equal to the units fair market value.
9. During 1996, PHS loaned DIS approximately $375,000 in non-interest
bearing short-term working capital loans.
10. In 1996, DIS sold medical equipment to PHS for $40,000, which
represented book value of the equipment at the time of sale.
11. On April 18, 1997, Registrant loaned $5,500,000 to PHS, payable monthly
interest only at 10% per annum, with the principal due and payable on or before
March 31, 1998. As of December 31, 1997, approximately $3,520,000 of this loan
was repaid by PHS.
22
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
2. Agreement and Plan of Reorganization dated August 10, 1994
(Incorporated by reference to the Registrant's Form 8-K for event dated
September 2, 1994)
3.1 The Registrant's Certificate of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, as amended (the "Registration
Statement") (File No. 33-37418)
3.2 Bylaws, as amended. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement)
3.3 Certificate of Designations of the Series B, C and D Convertible
Preferred Stock of IPS Health Care, Inc. (Incorporated by reference to
the Registrant's Form 8-K filed on November 19, 1992.)
3.4 Certificate of Designations of the Series E Convertible Preferred Stock
of IPS Health Care, Inc. (Incorporated by reference to the Registrant's
Form 8-K filed on November 19, 1992.)
10.3 International Physical Systems, Inc. 1990 Stock Option Plan.
(Incorporated by reference to Exhibit 10.3 to the Registrant'
Registration Statement.)
10.40 1990 Stock Option Plan. (Incorporated by reference to Exhibit 10.40 to
the Registrant's Form 10-K for the fiscal year ended April 30, 1992.)
10.58 Agreement and Plan of Reorganization by and among Registrant and
Diagnostic Imaging Services, Inc. dated August 10, 1994. (Incorporated
by reference to Exhibit 10.58 to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1995.)
10.59 Agreement for the Exchange of Stock and Assets between Registrant and
DVI Healthcare Operations, Inc. dated September 2, 1994. (Incorporated
by reference to Exhibit 10.58 to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1995.)
10.60 Stockholders Agreement among DVI Healthcare Operations, Inc.,
Registrant, and Norman Hames. (Incorporated by reference to Exhibit
10.58 to the Registrant's Form 10-KSB for the fiscal year ended
December 31, 1995).
10.61 Securities Purchase Agreement among Registrant and Primedex Health
Systems, Inc. ("PHS"), Management Services Contracts with PHS,
Revolving Loan Agreement with PHS and Stockholders Agreement with PH
and Norman Hames (Incorporated by reference to Registrant's Form 8-K
filed on March 28, 1996).
10.62 Asset Purchase Agreement executed March 21, 1997 by and among
Registrant, Registrant's wholly-owned subsidiary, Diagnostic Health
Services, Inc., a Delaware corporation and its wholly-owned subsidiary
(Incorporated by reference to Registrant's Form 8-K filed on April 28,
1997).
10.63 Stock Purchase Agreement executed March 21, 1997 by and among
Registrant, Diagnostic Health Services, Inc., a Delaware corporation
and its wholly-owned subsidiary (Incorporated by reference to
Registrant's Form 8-K filed on April 28, 1997).
10.64 Purchase and Sale Agreement executed February 27, 1998, by and among
Registrant and Diagnostic Health Services, Inc., a Delaware corporation
and its wholly-owned subsidiary (Incorporated by reference to
Registrant's Form 8-K filed on April 13, 1998).
23
<PAGE>
13 Annual Report to Shareholders for the year ended December 31, 1996 - to
be filed by amendment.
*21.1 Subsidiaries of the Registrant.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of
the fiscal year ended December 31, 1997.
*24 Consent of Independent Accountants
*28 Undertakings
- ------------------------------
*Exhibits filed herewith. Other exhibits are incorporated by reference to the
previous filings.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 13, 1998 DIAGNOSTIC IMAGING SERVICES, INC.
By: /s/ Norman Hames
-----------------------------------
Norman Hames, President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature and Capacity
/s/ Norman Hames Dated: April 13, 1998
- ---------------------------------
Norman Hames, President and Director
/s/ Howard G. Berger Dated: April 13, 1998
- ---------------------------------
Howard G. Berger, M.D., Director
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
GHS National, Inc., a Delaware corporation
Parkside Radiology, Inc., a California corporation
MDI Imaging, Inc., a California corporation
North County Mediscan Imaging, Inc., a California corporation
North County MRI, Inc., a California corporation
Exhibit 24
Consent of Independent Accountants
<PAGE>
Exhibit 28
To be Incorporated By Reference Into Form S-8 Registration Statement
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereto) which, individually or in the aggregate, represents a
fundamental change in the information set forth in this registration statement;
(iiiTo include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(I) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<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> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 6,140
<SECURITIES> 0
<RECEIVABLES> 3,242,282
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,830,018
<PP&E> 10,471,920
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,375,499
<CURRENT-LIABILITIES> 8,827,092
<BONDS> 0
0
44,820
<COMMON> 114,639
<OTHER-SE> (898,078)
<TOTAL-LIABILITY-AND-EQUITY> 20,375,499
<SALES> 13,265,744
<TOTAL-REVENUES> 13,265,744
<CGS> 10,344,189
<TOTAL-COSTS> 4,674,113
<OTHER-EXPENSES> (242,123)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,189,997
<INCOME-PRETAX> 5,104,287
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,104,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,104,287
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.37
</TABLE>
