<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to '240.14a-11(c) or '240.14a-12
Diagnostic Health Services, Inc.
...............................................................................
(Name of Registrant as Specified In Its Charter)
................................................................................
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
Title of each class of securities to which transaction applies:
.................................................................
Aggregate number of securities to which transaction applies:
.................................................................
Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-(Set forth the amount on which the filing fee is
calculated and state how it was determined):
.................................................................
Proposed maximum aggregate value of transaction:
.................................................................
Total fee paid:
.................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
.................................................................
2. Form, Schedule or Registration State No.:
.................................................................
3. Filing Party:
.................................................................
4. Date Filed:
.................................................................
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
2777 STEMMONS FREEWAY
DALLAS, TEXAS 75207
-------------------------------------------------
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
TO BE HELD MAY 30, 1997
-------------------------------------------------
To the Stockholders of
DIAGNOSTIC HEALTH SERVICES, INC.:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting (the "Annual
Meeting") of Stockholders of Diagnostic Health Services, Inc. (the "Company")
will be held at the Company's offices located at 2777 Stemmons Freeway, Suite
1525, Dallas, Texas 75207, on Friday, May 30, 1997, commencing at 8:00 a.m.
local time, for the following purposes:
1. To authorize and approve an amendment of the Company's
certificate of incorporation to increase the number of common shares authorized
for issuance from 15,000,000 shares, $.001 par value per share, to 50,000,000
shares, $.001 par value per share, and to increase the number of preferred
shares authorized for issuance from 3,000,000 shares, $.001 par value per share,
to 10,000,000 shares, $.001 par value per share (such preferred shares to be
issuable in one or more series, having such relative rights, preferences,
limitations and other attributes as may be fixed by the Board of Directors of
the Company from time to time);
2. To elect one (1) Class II Director to hold office until the
2000 Annual Meeting (such election having been deferred from November 1996 by
reason of the amendment, adopted by the Board of Directors of the Company, of
the Company's by-laws changing the date of the Company's annual meeting from on
or about November 15 of each year to on or about May 31 of each year);
3. To ratify the selection of Simonton, Kutac & Barnidge, L.L.P.,
as auditors of the Company and its subsidiaries for the fiscal year ending
December 31, 1997; and
4. To transact such other business as may properly come before
the Annual Meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed April 25, 1997 as the record date for
the determination of stockholders entitled to notice of and to vote at the
Annual Meeting or any adjournment(s) thereof. The stock transfer books of the
Company will not be closed, but only stockholders of record at the close of
business on April 25, 1997 will be entitled to vote at the Annual Meeting or any
adjournment(s) thereof.
By Order of the Board of Directors
Shahe Sinanian, Secretary
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE COMPLETE, SIGN AND RETURN YOUR PROXY
FORM PROMPTLY IN THE ENCLOSED ENVELOPE PROVIDED FOR YOUR USE.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
2777 STEMMONS FREEWAY
DALLAS, TEXAS 75207
-----------------------------------
PROXY STATEMENT
-----------------------------------
GENERAL INFORMATION CONCERNING SOLICITATION
This proxy statement is furnished in connection with the solicitation of
proxies by and on behalf of the Board of Directors of Diagnostic Health
Services, Inc. (the "Company" or "DHS"), for its 1997 Annual Meeting of
Stockholders (the "Annual Meeting") to be held at the Company's offices located
at 2777 Stemmons Freeway, Suite 1525, Dallas, Texas 75207, commencing at 8:00
a.m. local time on Friday, May 30, 1997, or any adjournment(s) thereof. Shares
cannot be voted at the Annual Meeting unless their owner is present in person or
represented by proxy. Copies of this Proxy Statement (which includes the annual
report and financial statements required by applicable proxy rules) and the
accompanying form of proxy are being mailed to the stockholders of the Company
(as same were constituted on the April 25, 1997 record date) on or about April
30, 1997. The principal executive offices of the Company are located at the
address indicated above.
If a proxy is properly executed and returned, the shares represented
thereby will be voted in accordance with the specifications made, or if no
specification is made, the shares will be voted to approve each proposition and
to elect each nominee for director identified on the proxy. Any stockholder
giving a proxy has the power to revoke it at any time before it is voted by
filing with the Secretary of the Company a notice in writing revoking it. A
proxy may also be revoked by any stockholder present at the Annual Meeting who
expresses a desire in writing to revoke a previously delivered proxy and to vote
his or her shares in person. The mere presence at the Annual Meeting of the
person appointing a proxy does not revoke the appointment. In order to revoke a
properly executed and returned proxy, the Company must receive a duly executed
written revocation of that proxy before it is voted. A proxy received after a
vote is taken at the Annual Meeting will not revoke a proxy received prior to
the Annual Meeting; and a subsequently dated proxy received prior to the vote
will revoke a previously dated proxy.
All expenses in connection with the solicitation of proxies, including
the cost of preparing, handling, printing and mailing the Notice of Annual
Meeting, Proxies and Proxy Statements, will be borne by the Company. Directors,
officers and regular employees of the Company, who will receive no additional
compensation therefor, may solicit proxies by telephone or personal call, the
cost of which will be nominal and will be borne by the Company. In addition, the
Company will reimburse brokerage houses and other institutions and fiduciaries
for their expenses in forwarding proxies and proxy soliciting material to their
principals.
As of April 25, 1997 (the "Record Date"), the following stockholders,
holding an aggregate of 911,152 shares of common stock of the Company
(constituting approximately 9.4% of the total votes entitled to vote at the
Annual Meeting), have indicated their intention to vote in favor of the nominee
for director and all other matters to be submitted for consideration at the
Annual Meeting: Max W. Batzer (181,168 shares), Thomas M. Sestak (151,421
shares), Brad A. Hummel (2,311 shares), James R. Angelica and Janet L. Angelica
(372,752 shares), Bo W. Lycke (1,000 shares) and Carol J. Gannon (202,500
shares).
<PAGE>
DESCRIPTION OF BUSINESS
Diagnostic Health Services, Inc. ("DHS" or the "Company") is a leading
outsource provider of medical services to hospitals, physicians' offices and
other healthcare facilities in the Midwest, West and South Central United
States. DHS primarily provides radiology and cardiology diagnostic services and
equipment, as well as departmental management services, to healthcare facilities
on an in-house and shared basis. The Company also provides skilled allied
healthcare personnel, including radiology technologists, physical and
occupational therapists and other healthcare professionals, on a temporary basis
to perform a variety of functions in hospitals, long-term care facilities,
physicians' offices, clinics and home healthcare settings.
Shared Services
The Company operates a fleet of specially equipped vehicles (vans and
trucks) to transport its imaging equipment to hospitals, clinics, long-term care
facilities and other healthcare settings. The services provided via the shared
services mechanism are predominantly diagnostic ultrasound, for which the
equipment is portable and service is rendered on an "as needed" basis. This
includes a large number of regular and routed schedules as well as "on call"
services to customers in response to emergent demand.
At year-end 1996, the Company provided mobile services to approximately
311 hospitals and approximately 566 additional clients across the healthcare
spectrum, including physicians' offices, sub acute and long-term care
facilities, managed care systems, and government facilities.
In-House Services (also referred to as Fixed Site Services)
In additional to the shared mobile services, the Company provides
diagnostic services within hospitals and clinical radiology or cardiology
departments. These services include the provision of the allied healthcare
professional (technologist) who staffs the equipment and is responsible for
image acquisition; the provision and management of diagnostic equipment or other
related instrumentation; the management and processing of data for the
procedures conducted within the respective department; and in some instances the
provision, via subcontracting, of the professional component (interpretation) of
the data by a physician.
These in-house services may include any or all of the aforementioned
responsibilities. The imaging modalities under management include, but are not
limited to, diagnostic ultrasound, computerized tomography, MRI, nuclear
medicine, and cardiac catherization services.
Generally, the Company is responsible for various quality assurance
programs related to the services it provides and assumes documentation
responsibility and management oversight of departmental compliance issues,
licenses, accreditation and certification requirements.
At December 31, 1996, the Company provided in-house services at 96
hospitals throughout its operational markets.
Ancillary Services
During 1996, the Company reorganized its former "TempTech" division into
an operating unit that included (i) the provision of contract occupational and
physical therapists on a long or short term basis to healthcare facilities
throughout the United States, (ii) the provision of therapists and nurses in a
home healthcare setting in Mexico City and surrounding areas, and (iii) the
provision of cardiac monitoring services, such as Holter monitoring, pacemaker
monitoring and event recording to patients in several of the Company's markets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-2-
<PAGE>
CONDITION AND RESULTS OF OPERATIONS
At the back of this Proxy Statement are the Company's audited
consolidated financial statements for the years ended December 31, 1996 and
1995. The following discussion and analysis should be read in conjunction with
the information set forth in the financial statements and the notes thereto.
RESULTS OF OPERATIONS
The following table sets forth operating data of the Company in both
dollar amounts and as a percentage of gross revenues for the Company's 1996 and
1995 fiscal years.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C> <C> <C>
Gross revenues $24,171 100.0% $17,083 100.0%
Operating expenses 20,268 83.9 15,336 89.8
Income from operations 3,904 16.1 1,747 10.2
Interest expense 870 3.6 442 2.6
Other income 487 2.0 98 0.6
Income before taxes 3,521 14.6 1,403 8.2
Income tax expense 1,062 4.4 175 1.0
----- --- --- --- ---
Net income 2,459 10.2% 1,228 7.2%
Earnings per share(1) .30 .21
Adjusted weighted average common
shares and equivalents outstanding (1) 8,121 5,816
- -----------------------
Note: Numbers may not add due to rounding
</TABLE>
(1) Outstanding common shares and equivalents, and per share data, are on a
fully diluted basis.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Gross revenues increased by 41.5% to approximately $24,171,000 in 1996
from approximately $17,083,000 in 1995. Excluding revenues attributable to
acquired businesses, gross revenues increased by 25.5% to approximately
$18,791,000 for 1996 from approximately $14,966,000 for 1995.
The Company's operating expenses increased from approximately
$15,336,000 in 1995 to approximately $20,268,000 in 1996. As a percentage of net
sales, operating expenses decreased from 89.8% to 83.9%. The decrease was due to
increased efficiencies realized through consolidation of various overhead and
administrative functions, and absorption of fixed costs over an increased
revenue base.
Income from operations increased by 123.4% to approximately $3,904,000
in 1996 from approximately $1,747,000 in 1995. As a percentage of gross
revenues, income from operations increased from 10.2% in 1995 to 16.1% in 1996.
-3-
<PAGE>
Interest expense increased by 96.8% from approximately $442,000 in 1995
to approximately $870,000 in 1996, primarily as a result of new obligations
acquired in connection with the ACT acquisition. As a percentage of net sales,
interest expense increased from 2.6% in 1995 to 3.6% in 996.
"Other income" is primarily interest earned on liquid investments.
Net income approximately doubled from $1,228,000 in 1995 to $2,459,000
in 1996. This increase is primarily due to continued consolidation of the
Company's administrative functions, and increased sales. As a percentage of
sales, all expense categories were down in 1996, except for depreciation and
amortization.
COMPETITION
Radiology and cardiology diagnostic services, as well as the provision
of allied healthcare professionals, are characterized by a high degree of
competition. This competition comes from a number of independent local operators
specializing in one or two clinical applications, and from a few large
diversified healthcare companies (primarily larger hospitals having the
resources and capability to provide shared diagnostic services to other
healthcare facilities) which provide these services as part of their overall
business. Although the Company believes that it has a competitive advantage over
most of the small operators (primarily because most of them do not provide the
full range of services offered by the Company, and do not have the same volume
of revenues to absorb necessary fixed overhead costs), the Company may be
vulnerable to competition from the larger healthcare companies, at least one of
which can be found in each of the Company's geographic markets, and all of which
are substantially larger and possess greater financial resources than the
Company. There can be no assurance that the Company will be able to compete
successfully in its markets.
SEASONALITY
The Company's results of operations have, in some years, varied
significantly from quarter to quarter, for reasons particular to each quarter.
For instance, hospital admissions and doctor visits (and, therefore, the
Company's imaging revenues) are typically lower during holiday periods, and at
other times when physicians traditionally take their own vacations. Conversely,
revenues from ancillary services have generally increased in holiday periods,
due to increased demand for temporary personnel when regular staff is away.
LIQUIDITY AND CAPITAL RESOURCES
In July 1996, the Company and its subsidiaries entered into an amended
and restated revolving credit and term loan facility with TCB, providing for up
to $2,500,000 in available revolving credit (or, if less, 75% of the Company's
and its subsidiaries' eligible accounts receivable from time to time), and an
acquisition term loan facility of up to $17,500,000 in original principal
amount. At December 31, 1996, the Company's outstanding borrowings under the
loan agreement were $1,572,000 under the revolving credit facility, and
$8,569,573 under the term loan facility. These loans bear interest at varying
rates, depending on the Company's relative leverage from time to time. The
Company and its subsidiaries have also entered into various financing
arrangements with commercial leasing companies and equipment suppliers, bearing
interest ranging from 6% to 11% per annum.
In July 1996, the Company also completed a public offering of Common
Stock, pursuant to which the Company realized net proceeds of approximately
$17,504,500. The proceeds of this offering have been and continue to be utilized
to retire debt and lease financing liabilities, to consummate acquisitions, and
for working capital.
At December 31, 1996, the Company had approximately $5,220,000 in cash,
cash equivalents and short-term investments and additional unused availability
of $928,000 under its revolving credit facility. From February 1 to March 31,
1997, the Company received approximately $8,674,000 from the exercise of its
publicly traded warrants and certain other warrants. Based on the Company's
operating plan, management believes that available
-4-
<PAGE>
resources and funds generated from operations will be sufficient to meet the
Company's operating requirements through the close of the Company's fiscal year
ending December 31, 1997.
The Company has retained Prudential Securities, Inc. to effect a private
placement of $20,000,000 of senior subordinated promissory notes, in connection
with (a) the Company's proposed acquisition of four magnetic resonance imaging
centers in California from Diagnostic Imaging Services, Inc. ("DIS"), and (b) to
retire a $5,500,000 advance made to the Company by TCB in connection with the
Company's acquisition of the ultrasound division of DIS consummated in March
1997.
TRENDS AND UNCERTAINTIES
The Company's future revenues and results of operations may be
substantially affected by proposed reforms of the nation's healthcare system and
by potential reductions in reimbursement rates and policies imposed by Medicare
and other third-party reimbursement programs (from which the Company derives a
material portion of its receipts). Continuing pressures on pricing structures
applicable to the Company's services could have the effect of reducing the
Company's revenues and operating profit margins. The Company is unable to
predict the nature or extent of any such policy changes and/or the effects
thereof on the Company.
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
At the close of business on the Record Date, there were outstanding
9,647,055 shares of common stock of the Company ("Common Stock"), which
constituted all of the voting securities of the Company as of the Record Date.
Each stockholder is entitled to cast one vote for each share of Common Stock
held by him or her as of the Record Date, which is present at the Annual Meeting
either in person or by proxy. Only holders of record of the outstanding shares
of the Common Stock at the close of business on the Record Date will be entitled
to vote at the Annual Meeting. Stockholders of the Company do not have
cumulative voting rights in the election of directors, and the nominee receiving
a plurality of the votes cast at the Annual Meeting (assuming a quorum is duly
constituted) will be elected to the Class II directorship which is up for
election at the Annual Meeting. Pursuant to the Company's by-laws, the holders
of one-third of the outstanding Common Stock, if present in person or by proxy,
are sufficient to constitute a quorum for the transaction of the business
scheduled for the Annual Meeting, except that, under Delaware law, the
affirmative vote of a majority of all of the outstanding Common Stock is
required for approval of the proposed amendment to the Company's certificate of
incorporation.
The following table sets forth certain information as of the Record Date
with respect to the beneficial ownership of the Common Stock of by each
beneficial owner of more than 5% of the outstanding shares of the Common Stock,
each director and nominee for director, and all executive officers and directors
of the Company as a group. Unless otherwise indicated, the owners have sole
voting and investment power with respect to their respective shares.
-5-
<PAGE>
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Owned Percentage
of Beneficial Owner Position (1) Owned(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Max W. Batzer Director, Chairman of the Board
2777 Stemmons Freeway of Directors, and Chief
Dallas, Texas 75207 Executive Officer 591,395 (2) 5.9%
Thomas M. Sestak
1226 Ninth Avenue
San Francisco, California
94122 Director and Nominee for Director 338,066 (3) 3.4%
Brad A. Hummel Director, President, Chief
2777 Stemmons Freeway Operating Officer, and Chief
Dallas, Texas 75207 Financial Officer 317,538 (4) 3.2%
Bo W. Lycke
2777 Stemmons Freeway
Dallas, Texas 75207 Director and Nominee for Director 83,000 (5) 0.9%
James R. Angelica
10405 Baur Boulevard Director and Senior Vice
Olivette, Missouri 63132-1908 President 466,552 (6) 4.8%
All directors and executive
officers as a group (eight (1)(2)(3)
persons) 2,159,962 (4)(5)(6 19.8%
- --------------------------------
</TABLE>
(1) Except to the extent of those options held by the subject individual(s),
does not give effect to an aggregate of up to 4,123,377 shares of Common
Stock issuable (i) upon exercise of outstanding options and warrants,
and options granted or available for grant pursuant to the Company's
stock option plans; (ii) pursuant to contingent share agreements with
former stockholders of certain of the Company's subsidiaries; and (iii)
upon conversion of outstanding shares of Series A Preferred Stock of the
Company.
(2) Includes 410,227 shares which are subject to currently exercisable stock
options.
(3) Includes 452 shares held by Mr. Sestak as custodian for his minor
children, and 186,645 shares which are subject to currently exercisable
stock options.
(4) Includes 315,227 shares which are subject to currently exercisable stock
options.
(5) Includes 82,000 shares which are subject to currently exercisable stock
options.
(6) 370,252 outstanding shares are held jointly by Mr. Angelica and his
spouse, and 2,500 outstanding shares are held in Mr. Angelica's name.
Total beneficial ownership includes 56,800 shares which are subject to
currently exercisable warrants held by Mr. Angelica and his spouse, and
37,000 shares which are subject to currently exercisable stock options
held by Mr. Angelica individually. Mr. and Mrs. Angelica have granted to
Max W. Batzer a proxy, expiring September 5, 1997, to vote 370,252
shares owned by Mr. and Mrs. Angelica (a) as to the election of
directors, in such manner as Mr. Batzer may determine in his sole
discretion, and (b) as to all other matters, in the same manner as the
greatest plurality of votes otherwise cast or given by holders of Common
Stock with respect to the particular matter under consideration.
-6-
<PAGE>
DIRECTORS, NOMINEES FOR DIRECTOR,
AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information with respect to directors,
nominees for director and executive officers of the Company as of the Record
Date. There are no pending legal proceedings in which any director, nominee for
director, executive officer or key employee of the Company is a party adverse to
the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Director, Chairman of the Board of Directors,
Max W. Batzer (1)(2) 53 and Chief Executive Officer
Director, President, Chief Operating Officer,
Brad A. Hummel 40 Chief Financial Officer and Nominee for Director
Thomas M. Sestak (1)(2) 54 Director
Bo W. Lycke (1)(2) 51 Director
James R. Angelica 49 Director and Senior Vice President
Bonnie G. Lankford 41 Senior Vice President-Operations
Don W. Caughron 41 Senior Vice President-Finance
Carol J. Gannon 37 Senior Vice President - Clinical Services
- ------------------------------
</TABLE>
(1) Member of the compensation committee
(2) Member of the audit committee
The Board of Directors of the Company is divided into three classes of
an equal (or as nearly equal as possible) number of directors, with each
director serving for a term of three years, and with elections for only one
class of directors to be held in each year. Mr. Hummel's seat (Class II
directorship) is up for election at the Annual Meeting, Mr. Batzer's and Mr.
Angelica's seats (Class III directorships) next come up for election on or about
May 31, 1998, and Mr. Sestak's and Mr. Lycke's seats (Class I directorships)
next come up for election on or about May 31, 1999.
The following is a summary of the business experience of each director,
nominee for director and executive officer of the Company:
Max W. Batzer has been the Chairman of the Board and Chief Executive
Officer of the Company since January 1987, and a stockholder and Director of the
Company since its inception in 1983. From 1981 to 1991, Mr. Batzer was also
President of General Hide & Skin Corporation, a worldwide commodity trading
organization headquartered in New York City. In addition, Mr. Batzer has also,
at various times during the past 20 years, worked as an analyst for Pan American
World Airways, served as Vice President for Marketing for World Courier Inc.,
and served as a director and executive committee member of Simmons Airlines,
Inc. (which was a publicly traded company that was purchased by and is now a
subsidiary of American Airlines). Mr. Batzer holds a B.S.E. degree from The
Wharton School of the University of Pennsylvania, and an M.B.A. degree from the
University of Arizona.
Brad A. Hummel has been a Director and the President and Chief Operating
Officer of the Company since January 1987, and Chief Financial Officer of the
Company since February 1994, and was employed by the Company in other capacities
from 1984 to 1986. From 1981 to 1984, Mr. Hummel was an associate with Covert,
Crispin and Murray (a Washington, D.C. and London-based management consulting
firm), and from 1979 to 1981, Mr. Hummel
-7-
<PAGE>
served as an executive assistant to United States Senator John C. Culver. Mr.
Hummel holds a bachelor's degree (with honors) from the University of Iowa.
Thomas M. Sestak has been a Director of the Company since its inception
in 1983, and was the Secretary of the Company from November 1987 to March 1993.
Mr. Sestak has also been employed since 1972 as the Chairman and Chief Executive
Officer of Standard Construction of San Francisco, Inc., a general construction
contractor operating in the greater San Francisco area. Mr. Sestak holds a
B.S.E. degree from The Wharton School at the University of Pennsylvania.
Bo W. Lycke has been a Director of the Company since April 1993. Since
February 1991, Mr. Lycke has been employed as Chairman of the Board and Chief
Executive Officer of American Medical Finance, Inc. and its affiliate, National
Financial Corporation, each of which is engaged in providing financial services
to various medical businesses. Mr. Lycke holds an M.B.A. degree from the
University of Goteborg, Sweden.
James R. Angelica was appointed a Director and Vice President-Sales of
the Company in September 1994, upon the consummation of the Company's
acquisition of Mobile Diagnostic Imaging, Inc. ("MDI"), and was promoted to
Senior Vice President in January 1996. From June 1991 through September 1994,
Mr. Angelica was the President and Chief Operating Officer of MDI. From June
1990 through June 1991, Mr. Angelica was an Executive Vice President of Cost
Management Technologies, a third-party insurance claims administrator
headquartered in St. Louis. From May 1981 through January 1990, Mr. Angelica was
an Executive Vice President of Group Health Plan, a health insurance
administrator headquartered in St. Louis. Mr. Angelica holds a bachelor's degree
in business administration from Pacific University.
Bonnie G. Lankford has been Senior Vice President-Operations of the
Company since January 1996, and has been employed in other management capacities
by the Company at all times since 1985. Ms. Lankford has received a
certification in echocardiography from Grossmont College, and is a registered
diagnostic medical sonographer in both echocardiology and obstetrics/gynecology.
Don W. Caughron has been Senior Vice President-Finance of the Company
since January 1996, and has been employed in other financial capacities with the
Company at all times since April 1994. From May 1993 to April 1994, Mr. Caughron
was a self-employed accountant. From 1990 to 1993, Mr. Caughron was Corporate
Controller for Actuarial Computer Technology, Inc., a privately held Dallas-
based actuarial computer software company. Mr. Caughron is a Certified Public
Accountant in the State of Texas, and a member of the Texas Society of CPA's and
the American Institute of CPA's. Mr. Caughron holds a B.B.A. degree from Texas
Tech University.
Carol J. Gannon was appointed Senior Vice President-Clinical Services of
the Company in January 1996, upon the consummation of the Company's acquisition
of Advanced Diagnostic Imaging, Inc. ("ADI"). Ms. Gannon was the President and
Chief Operating Officer of ADI from September 1990 to December 1995. She is a
registered nurse with additional ultrasound registries in vascular technology
and cardiac stenography. From 1991 to 1995, she served on the Board of Directors
and the Executive Committee of the Society of Vascular Technology. Ms. Gannon
holds an Associate Degree in nursing from Rochester (Minnesota) Community
College.
-8-
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION
Restricted
Name & Other Stock
Principal Year Salary Annual Awards Options/ LTIP All Other
Position Bonus Compensation(1) SAR's (#) Payouts Compensation(2)
- --------- ----- ------ ----- --------------- ------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Max W.
Batzer 1996 305,900 20,000 0 0 0 0 0
Chairman 1995 231,000 7,500 0 0 75,000 0 0
and CEO 1994 173,666 0 0 0 128,500 0 0
Brad A.
Hummel 1996 225,570 15,000 0 0 0 0 0
President 1995 173,133 7,500 0 0 30,000 0 0
and COO 1994 127,750 0 0 0 103,500 0 0
James R.
Angelica(2)
Director
and Senior 1996 89,824 0 25,000 0 0 0 0
Vice 1995 89,824 0 27,500 0 25,000 0 0
President 1994 21,644 0 0 0 0 0 0
Carol J.
Gannon
Senior 1996 85,102 ) 0 65,000 0 0 0 0
Vice 1995 32,828(3) 0 0 0 0 0 0
President 1994 280,673(3 0 0 0 0 0 0
</TABLE>
- -----------------
Does not include benefits or perquisites in an aggregate amount, as to each
person, which is less than the lesser of $50,000 or 10% of the total
salary and bonus for the subject year.
Represents compensation from commencement of Mr. Angelica's employment on
September 6, 1994.
(3) Includes compensation paid by a subsidiary of the Company to Ms. Gannon
prior to the acquisition of such subsidiary from Ms. Gannon on December
7, 1995.
A table indicating the stock options granted to Named Officers and
directors is included under the heading "Stock Option Plans" below.
The Company does not pay directors' fees. Rather, the Compensation
Committee of the Company's Board of Directors is authorized to consider the
grant of non-qualified stock options to members of the Board, consistent with
the Company's philosophy of incentivizing directors to foster, contribute to and
participate in the Company's growth.
EMPLOYMENT AND INCENTIVE COMPENSATION
AGREEMENTS
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Max W. Batzer, pursuant to
which Mr. Batzer is to serve as Chairman of the Board and Chief Executive
Officer of the Company through December 31, 2001. The employment agreement
provides for a minimum base salary of $360,000 per annum, and benefits
comparable to those provided to other Company employees. Although Mr. Batzer
presently devotes his full business time to the Company, his employment
agreement permits him to engage in other business activities that are not
competitive with the business of the Company and that do not materially
interfere with his performance of his duties and responsibilities to the
Company.
The Company has an employment agreement with Brad A. Hummel, pursuant to
which Mr. Hummel is to serve as President and Chief Operating Officer of the
Company through December 31, 2001. In February 1994, Mr.
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Hummel also assumed the duties of Chief Financial Officer of the Company, upon
the resignation of the prior CFO. The employment agreement provides for a
minimum base salary of $270,000 per annum, and benefits comparable to those
provided to other Company employees. The agreement further provides for Mr.
Hummel to devote substantially all of his business time to the performance of
his duties and responsibilities to the Company.
Each of Mr. Batzer's and Mr. Hummel's employment agreements grants to
the subject employee the right to elect, within one year after any change in
control of the Company, to terminate his employment on not less than 90 days'
prior written notice, and thereafter receive his salary and benefits for a
period of 24 months or to the scheduled expiration date of such employment
agreement (whichever is later). Such salary continuation is also applicable in
the event that the Company terminates such individual's employment (other than
"for cause") within one year after any change in control of the Company. For
purposes of such agreements, a "change in control" is deemed to occur at such
time as 20% of the total outstanding votes eligible to vote for directors of the
Company are owned (legally or beneficially) by any person (or group of persons
acting in concert) who was not a stockholder of the Company as of March 13,
1996.
The Company also has employment agreements with James R. Angelica,
Bonnie G. Lankford and Carol J. Gannon. Mr. Angelica's employment agreement (as
amended) calls for him to serve as a Senior Vice President of the Company
through August 31, 1997, at a base salary of $85,000 per annum, and benefits
comparable to those provided to other Company employees. Ms. Lankford's
employment agreement (as amended) calls for her to serve as Senior Vice
President-Operations of the Company through December 31, 1999, at a minimum base
salary of $110,000 per annum, and benefits comparable to those provided to other
Company employees. Ms. Gannon's employment agreement calls for her to serve as
Senior Vice President-Clinical Services of the Company through December 31,
1998, and provides for a fixed annual salary of $85,000 per annum, and benefits
comparable to those provided to other Company employees.
Any increases in the annual rates of compensation of Messrs. Batzer,
Hummel and Angelica under their employment agreements must be approved by a
majority of both the disinterested directors and the Compensation Committee of
the Company's Board of Directors.
STOCK OPTION PLANS
On April 15, 1992, the stockholders of the Company approved the
Company's 1992 Stock Option Plan, as previously adopted by the Company's Board
of Directors (the "1992 Plan"), pursuant to which officers, directors, and/or
key employees and/or consultants of the Company can receive incentive stock
options and non-qualified stock options to purchase up to an aggregate of
903,509 shares of the Company's Common Stock (of which no more than 180,702
shares may be pursuant to qualified incentive stock options, and no more than
722,807 shares may be pursuant to non-qualified stock options). On the Record
Date, there are outstanding, under the 1992 Plan, stock options for an aggregate
of 859,085 shares of Common Stock at exercise prices ranging from $.94 to $7.50
per share, and expiring at various times from January 1998 through April 2003.
The weighted average exercise price under such options is approximately $1.80
per share. The exercise prices applicable under such outstanding stock options
represent not less than 100% of the fair market value of the underlying Common
Stock as of the date that such options were granted, as determined from the
closing bid price most recently quoted in the over-the-counter "pink sheets" or
on the National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ") prior to the date that such options were granted.
With respect to incentive stock options, the 1992 Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (and
110% of fair market value in the case of stockholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Stock), and
requires that all such options have an expiration date not later than that date
which is one day before the tenth anniversary of the date of the grant of such
options (or the fifth anniversary of the date of grant in the case of 10%
stockholders). However, with certain limited exceptions, in the event that the
option holder ceases to be associated with the Company, or engages in or is
involved with any business similar to that
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<PAGE>
of the Company, such option holder's incentive options immediately terminate.
Pursuant to the 1992 Plan, the aggregate fair market value, determined as of the
date(s) of grant, for which incentive stock options are first exercisable by an
option holder during any one calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the 1992 Plan requires that
the exercise price of all such options be at least equal to 100% of the fair
market value of the Common Stock on the date such option is granted, provided
that non-qualified options may be issued at a lower exercise price (but in no
event less than 85% of fair market value) if the net pre-tax income of the
Company in the full fiscal year immediately preceding the date of the grant of
such option (the "Prior Year") exceeded 125% of the mean annual average net
pre-tax income of the Company for the three fiscal years immediately preceding
such Prior Year. Non-qualified options must have an expiration date not later
than that date which is the day before the eighth anniversary of the date of the
grant of the subject option. However, with certain limited exceptions, in the
event that the option holder ceases to be associated with the Company, or
engages in or becomes involved with any business similar to that of the Company,
such option holder's non-qualified options immediately terminate.
The 1992 Plan further provides that non-qualified options may (but need
not) include a provision that, in the event of any change in control and
management of the Company or any sale of the business of the Company, except to
the extent that the subject option holder affirmatively elects, during a limited
period of time following such event, to permanently revoke and terminate the
subject non-qualified option (in whole or in part) and/or to reaffirm all or any
portion of such non-qualified option without giving effect to the reduction in
exercise price herein described, then the otherwise applicable exercise price in
respect of such option may thereafter be reduced (but not by more than 50%) in
the event that, and at such time(s) as, the subject option holder thereafter
exercises such option (or the non-revoked and non-reaffirmed portion thereof, as
the case may be). All but 39,000 of the 690,935 outstanding non-qualified
options under the 1992 Plan contain such provision, and this could have the
effect of delaying or hindering potential change in control or sale
transactions, and/or providing additional compensation or consideration to the
subject option holders in connection with any such transaction that may be
consummated.
In April 1995, in response to substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Non-Qualified Stock Option Plan (the "1995
Non-Qualified Plan"), pursuant to which officers, directors, and/or key
employees and/or consultants of the Company can receive non-qualified stock
options to purchase up to an aggregate of 500,000 shares of Common Stock. The
exercise price, expiration date and other terms of any options granted under the
1995 Non-Qualified Plan are substantially similar to the requirements applicable
to non-qualified options under the 1992 Plan. As of March 31,1997, there were
outstanding, under the 1995 Non-Qualified Plan, stock options for an aggregate
of 454,625 shares of Common Stock at exercise prices ranging from $1.94 to $6.25
per share, and expiring at various times from December 2000 through January
2005. The weighted average exercise price under such options is $4.14 per share.
Of the outstanding options under the 1995 Non-Qualified Plan, 60,000
(exercisable at $5.25 per share) are subject to certain contingencies relating
to the Company's earnings, and 225,000 other options contain price reduction
provisions similar to those described in the immediately preceding paragraph.
The Company also maintains a 1995 Incentive Stock Option Plan (the "1995
Incentive Plan"), as approved by the Company's stockholders on November 22,
1995, pursuant to which key employees of the Company can receive incentive stock
options to purchase up to an aggregate of 500,000 shares of Common Stock. The
requirements of the 1995 Incentive Plan are substantially identical to the
provisions of the 1992 Plan which are specifically applicable to incentive stock
options, except that the 1995 Incentive Plan will expire on August 31, 2005
(after which date no further options may be granted under the 1995 Incentive
Plan). As of March 31, 1997, 61,750 options were outstanding under the 1995
Incentive Plan at an exercise price of $6.25 per share and expiring on July 17,
2001.
In January 1997, the Board of Directors of the Company adopted the
Company's 1997 Non-Qualified Stock Option Plan (the "1997 Non-Qualified Plan"),
pursuant to which officers, directors and/or key employees and/or consultants of
the Company can receive non-qualified stock options to purchase up to an
aggregate of 1,000,000 shares of Common Stock. The exercise price, expiration
date and other terms of any options granted under the 1997 Non-
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<PAGE>
Qualified Plan are substantially similar to the requirements applicable to non-
qualified options under the 1992 Plan. As of March 31, 1997, options for an
aggregate of 345,000 shares of Common Stock had been issued and were outstanding
under the 1997 Non-Qualified Plan at an exercise price of $7.44 per share and
expiring on January 2, 2005. 235,000 of such options contain price reduction
provisions similar to those described above.
The following table lists information on stock options granted under the
Plan to each of the Company's Named Officers and directors through December 31,
1996.
<TABLE>
<CAPTION>
Percent of
Total Options
Granted to Exercise
Type of Number Employees in Price Expiration
Name Option of Shares Fiscal Year Per Share Date
- ---- ------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Max W. Batzer Qualified 5,082 1.6% $2.21 January 13, 1998
Non-Qualified 101,645 32.5% $2.21 January 13, 2001
Qualified 3,500 1.2% $ .94 April 3, 1999
Non-Qualified 75,000 24.8% $ .94 April 3, 2002
Non-Qualified 50,000 16.6% $1.69 August 8, 2002
Qualified 5,000 1.7% $1.94 April 4, 2000
Non-Qualified 50,000 16.7% $1.94 April 4, 2003
Non-Qualified 20,000 6.7% $4.25 December 4, 2003
Brad A. Hummel Qualified 5,082 1.6% $2.21 January 13, 1998
Non-Qualified 101,645 32.5% $2.21 January 13, 2001
Qualified 3,500 1.2% $ .94 April 3, 1999
Non-Qualified 50,000 16.6% $ .94 April 3, 2002
Non-Qualified 50,000 16.6% $1.69 August 8, 2002
Non-Qualified 30,000 10.0% $4.25 December 4, 2003
Thomas M. Sestak Non-Qualified 101,645 N/A $2.21 January 13, 2001
Non-Qualified 5,000 N/A $ .94 April 3, 2002
Non-Qualified 50,000 N/A $1.69 August 8, 2002
Non-Qualified 10,000 N/A $1.94 April 4, 2003
Non-Qualified 15,000 N/A $4.25 December 4, 2003
Bo W. Lycke Non-Qualified 2,000 N/A $ .94 April 3, 2002
Non-Qualified 50,000 N/A $1.69 August 8, 2002
Non-Qualified 10,000 N/A $1.94 April 4, 2003
Non-Qualified 15,000 N/A $4.25 December 4, 2003
James R. Angelica Qualified 2,000 0.7% $1.94 April 4, 2000
Non-Qualified 10,000 3.3% $1.94 April 4, 2003
Non-Qualified 15,000 5.0% $4.25 December 4, 2003
</TABLE>
Through December 31, 1996, a total of 2,625 incentive stock options
granted under the 1992 Plan had been exercised (none by executive officers or
directors), and no other options granted under any of the Plans had been
exercised.
The following table sets forth all stock option exercises by Named
Officers and directors of the Company during the fiscal year ended December 31,
1996, and the "value" (i.e., the amount by which the exercise price exceeded the
fair market value of the underlying Common Stock) as of December 31, 1996 of all
unexercised stock options then
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<PAGE>
held by Named Officers and directors of the Company. All of such stock options
were then and now are currently exercisable.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-The-Money
Acquired Options at Fiscal Options
Name on Exercise Value Realized Year End at Fiscal Year End
- ---- ----------- -------------- -------- ------------------
<S> <C> <C> <C> <C>
Max W. Batzer 0 0 310,227 $1,895,960
Brad A. Hummel 0 0 240,227 $1,423,660
Thomas M. Sestak 0 0 181,645 $1,056,175
Bo W. Lycke 0 0 77,000 $446,470
James R. Angelica 0 0 27,000 $128,970
Carol J. Gannon 0 0 0 0
</TABLE>
Prior to April 16, 1993, the 1992 Plan was administered by the Company's
Board of Directors. Beginning on April 16, 1993, administration of the 1992 Plan
was delegated to the Compensation Committee of the Company's Board of Directors,
which has wide discretion in determining the recipients of options, the amounts
of options awarded, and various other terms and conditions applicable to options
granted under the 1992 Plan. The 1995 Non-Qualified Plan, the 1995 Incentive
Plan and the 1997 Non-Qualified Plan have at all times been administered by the
Compensation Committee, which has similar wide discretion in the administration
thereof. In determining whether and to what extent specific employees or
consultants will be awarded options, the Compensation Committee takes into
account the value of the specific individual's services to the Company, the
individual's time in service, the long-term prospects for the individual to
handle additional responsibilities within the Company, and such other factors as
the Compensation Committee may deem relevant in order to reward and motivate the
Company's employees and consultants.
CERTAIN TRANSACTIONS
In April 1996, in connection with the Company's private placement of
promissory notes (the "Bridge Notes") and warrants (the "Bridge Warrants"), an
aggregate of $50,000 of Bridge Notes and 2,500 Bridge Warrants were purchased by
James R. Angelica, $100,000 of Bridge Notes and 5,000 Bridge Warrants were
purchased by Thomas M. Sestak, and $50,000 of Bridge Notes and 2,500 Bridge
Warrants were purchased by Carol J. Gannon. All of such Bridge Notes have since
been repaid, and all of such Bridge Warrants have been exercised.
In October 1989, Mr. Batzer, Mr. Sestak and Mr. Hummel borrowed $66,000,
$10,000 and $33,000, respectively, from the Company. The proceeds of these loans
were utilized by Messrs. Batzer, Sestak and Hummel to purchase shares of Common
Stock. The loans were amended and restated as of January 1, 1993, such that the
loans now bear simple interest at a certain bank's prime rate (adjusted annually
for purposes of the loans), with payment of all principal and accrued interest
due on December 31, 1997. Mr. Sestak's loan was repaid in full in October 1993.
Mr. Batzer's and Mr. Hummel's loans are non-recourse, and are secured solely by
shares of Common Stock having an aggregate market value equal to 50% of the
outstanding loan obligations, provided that the number of shares pledged as
collateral will never exceed the number of shares (185,265 in the case of Mr.
Batzer, and 92,633 in the case of Mr. Hummel) purchased with the proceeds of the
loans. The Company has retained a right of first refusal in connection with any
proposed sale of the pledged shares while they remain subject to such pledge,
although the Company is now prohibited, under its loan agreement with TCB, to
redeem or purchase any shares of Common Stock without TCB's prior consent.
To the knowledge of the Company, there are no officers, directors,
beneficial owners of more than 10% of any class of equity securities of the
Company registered pursuant to Section 12 of the Securities Exchange Act of
1934,
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<PAGE>
as amended (the "Exchange Act"), or any other persons subject to Section
16 of the Exchange Act with respect to the Company that failed to file on a
timely basis reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year or prior thereto, except that, following the
consummation of the Company's initial public offering in June 1993, each of the
directors and officers of the Company was late in filing his or her Form 3 (all
of which filings have since been made).
MARKET PRICE AND DIVIDENDS
Since January 22, 1996, the Company's Common Stock has been listed on
the NASDAQ National Market under the symbol "DHSM." From June 23, 1993 to
January 19, 1996, the Common Stock was listed on the SmallCap Market of the
National Association of Securities Dealers Automated Quotation System. The range
of reported high bid and low bid quotations for the Common Stock on a quarterly
basis from January 1, 1995 through January 19, 1996, and the high and low daily
last sale price on a quarterly basis from January 22, 1996 through March 31,
1997, is reflected in the table below. These quotations reflect inter-dealer
prices without adjustment for retail mark-up, mark-down or commission and may
not represent actual transactions.
High Low
---- ---
1995
- ----
1st Quarter $2.63 $1.88
2nd Quarter $3.38 $1.94
3rd Quarter $4.75 $2.94
4th Quarter $5.25 $3.81
1996
- ----
1st Quarter $7.50 $4.875
2nd Quarter $8.375 $5.00
3rd Quarter $8.375 $5.875
4th Quarter $8.50 $6.625
1997
- ----
1st Quarter $10.125 $7.44
On March 31, 1997, the last reported sale price for the Common Stock was
$7.875, and the Company had approximately 181 stockholders of record as of that
date. The Company believes that there are more than 1,200 beneficial owners of
Common Stock.
DIVIDEND POLICY
The Company has not previously paid any dividends on its Common Stock,
and for the foreseeable future intends to continue its policy of retaining any
earnings to finance the development and expansion of its business. In addition,
the Company's loan agreement with TCB prohibits the payment of dividends without
TCB's prior consent. In the future, the payment of dividends by the Company on
its Common Stock will also depend on the Company's financial condition, results
of operations and such other factors as the Board of Directors of the Company
may consider relevant.
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<PAGE>
ACTION TO BE TAKEN UNDER THE PROXY
Unless otherwise directed by the grantor of the proxy, the persons
acting under the accompanying proxy will vote the shares represented thereby:
(a) for the authorization and approval of the proposed amendment of the
Company's certificate of incorporation to increase the number of authorized
common shares from 15,000,000 shares, $.001 par value per share, to 50,000,000
shares, $.001 par value per share, and to increase the number of preferred
shares authorized for issuance from 3,000,000 shares, $.001 par value per share,
to 10,000,000 shares, $.001 par value per share (such preferred shares to be
issuable in one or more series, having such relative rights, preferences,
limitations and other attributes as may be fixed by the Board of Directors of
the Company from time to time); (b) for the reelection of Brad A. Hummel as a
Class II Director of the Company; (c) for the proposal to ratify the appointment
of Simonton, Kutac & Barnidge, L.L.P., as the Company's auditors for the fiscal
year ending December 31, 1997; and (d) in connection with the transaction of
such other business that may be brought before the Annual Meeting, in accordance
with the judgment of the person or persons voting the proxy.
I. AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE
COMPANY'S AUTHORIZED COMMON STOCK TO 50,000,000 SHARES AND AUTHORIZED
PREFERRED STOCK TO 10,000,000 SHARES
At the Annual Meeting, a vote will be taken on a proposal to authorize
an amendment of the Company's Certificate of Incorporation to increase the
number of common shares authorized for issuance thereunder from 15,000,000
authorized shares of Common Stock to 50,000,000 authorized shares of Common
Stock, and to increase the number of preferred shares authorized for issuance
thereunder ("Preferred Stock") from 3,000,000 authorized shares of Preferred
Stock to 10,000,000 authorized shares of Preferred Stock (collectively, the
"Amendment"). Preemptive rights will not attach to any of the newly created
shares of Common Stock or Preferred Stock following approval of this proposal.
At the close of business on April 25, 1997, the record date for
determining the stockholders entitled to vote at the Annual Meeting, there were
9,647,055 shares of Common Stock outstanding, and the Company had reserved
4,123,377 shares of Common Stock for issuance (i) upon exercise of outstanding
options and warrants, and options granted or available for grant pursuant to the
Company's stock option plans, (ii) pursuant to contingent share agreements with
former stockholders of certain of the Company's subsidiaries, and (iii) upon
conversion of shares of Series A Preferred Stock of the Company outstanding as
of December 31, 1996. As a result, on a fully diluted basis, the Company
currently has only 1,229,568 shares of authorized Common Stock unreserved and
available for issuance, and the Company will be required in the future to
reserve additional shares of Common Stock for conversion purposes as additional
in-kind dividends accrue on the Company's outstanding Series A Preferred Stock.
With respect to the Preferred Stock, at the close of business on the Record
Date, an aggregate of 1,125,000 shares of Preferred Stock had been designated as
Series A Preferred Stock (of which 648,986 shares were outstanding), leaving
1,875,000 shares of Preferred Stock unreserved and available for future
issuance. In reflecting upon the Company's present capital structure, management
of the Company believes that the current authorized capital is inadequate for
the Company's purposes, and that the Company needs more authorized shares of
Common Stock and Preferred Stock in its capital structure in order to support
its ability to consummate potential future acquisitions, and/or to raise
additional funds for working capital and/or in connection with potential future
acquisitions.
Stockholders need to be aware of certain potential adverse effects which
may result from increasing the Company's authorized capital as proposed. In
addition to the lack of preemptive rights in connection with the issuance of the
newly authorized shares, the Company's Board of Directors will have the power
and authority (as it now has with respect to the currently authorized Preferred
Stock) to designate and issue the additional Preferred Stock in one or more
series, with each series having such rights, powers, preferences, limitations
and other attributes as are fixed by the Board of Directors in the resolutions
authorizing the issuance of that particular series. In designating any series of
Preferred Stock, the Board of Directors may, without further action by the
Company's stockholders, fix the number of shares constituting that series and
fix the dividend rights, dividend rates, conversion rights, voting rights (which
may be greater or lesser than the voting rights of the Common Stock), rights and
terms of redemption (including any sinking fund provisions), and the liquidation
preferences of the series of Preferred Stock. It should be expected that the
holders of any series of Preferred Stock, when and if issued, will have priority
claims to dividends and to any distributions upon liquidation of the Company,
and that they may have other preferences over the holders of the Common Stock.
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<PAGE>
Furthermore, the Company's stockholders will have very limited ability
to vote upon the manner in which or the persons to whom the newly created shares
of capital stock are issued or sold, unless stockholder consent is either
required under Delaware law (e.g., certain merger transactions) or sought by
management although not required (e.g., approval of certain employee benefit
plans which include issuance of Common Stock). In addition, by having a large
pool of capital stock (including, without limitation, Preferred Stock having
certain preferences over the Common Stock) available for issuance at the
discretion of management following approval of this proposal, management could
defeat attempts to take control of the Company or could discourage consideration
of such attempts by potential takeover suitors. Actual or threatened issuance of
large blocks of capital stock (including, without limitation, Preferred Stock
having certain preferences over the Common Stock) to management, their
affiliates, or persons "friendly" to management could defeat such efforts and
maintain current management in place, even if such efforts or the removal of
management was in the best interests of stockholders. Such anti-takeover aspects
of the current proposal, and its potential adverse effects on the value of the
Common Stock and on stockholder values resulting from an investment in the
Common Stock, should be considered by stockholders in voting on this proposal.
Issuance of additional shares of capital stock out of newly created authorized
capital, if issued in consideration for property or at values below the then
current market price per share, would lead to economic dilution of shareholder
investment (e.g., in terms of potentially lower earnings per share recorded by
the Company), as well as to dilution of prior stockholders' voting power.
Although the Company does not have any current or immediately
foreseeable plans for issuance of such shares to raise additional working
capital funds, or in connection with any specific acquisitions, the Company has
historically been an active acquiror of businesses, and has frequently used its
capital stock as a means of paying all or a portion of the purchase price for
such acquisitions. Accordingly, to avoid potential delays in or frustration of
future acquisitions, management believes that approval of the Amendment at this
time is in the best interests of the Company and its stockholders. Management
also believes that, insofar as the Company is seeking stockholder approval at
this time for the other proposals identified in this solicitation material, it
is more cost-effective for the Company concurrently to approach stockholders for
approval of the Amendment.
Under Delaware law, the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock will be required to approve the
Amendment. Abstentions and broker non-votes (if present, in person or by proxy)
will be counted for purposes of determining the shares present at the Annual
Meeting, but will not be deemed to have voted in favor of the Amendment.
(However, any proxies which are not specifically marked to be voted against or
to abstain with respect to the Amendment may be voted in favor of the
Amendment.)
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE AMENDMENT, AND
RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF THE AMENDMENT.
II. ELECTION OF DIRECTORS
Nominee
At the Annual Meeting, one Class II Director is to be elected, to
hold office until the 2000 Annual Meeting of Stockholders or until his successor
shall be elected and shall qualify. Brad A. Hummel, who currently serves as a
Class II Director of the Company, has been nominated by management for
reelection; and biographical information regarding Mr. Hummel can be found under
the heading "Directors, Nominees for Director, and Executive Officers of the
Company" on pages 7 and 8 above. Unless authority to vote for such nominee is
withheld, it is intended that shares represented by proxies in the accompanying
form will be voted for the election of such nominee. If such nominee becomes
unable or unwilling to accept nomination or election, it is intended that the
proxies will be voted for the election in his stead of such person as the Board
of Directors may recommend, but the Board does not know of any reason why such
nominee will be unable or unwilling to serve if elected.
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<PAGE>
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE
IN FAVOR OF THE NOMINEE FOR DIRECTOR.
Committees and Meetings of the Board
The Board of Directors has two committees, the Compensation
Committee and the Audit Committee, which were established in April 1993 and were
the first committees ever established within the Company's Board of Directors.
The members of each committee consist of Max W. Batzer, Thomas M. Sestak and Bo
W. Lycke. The function of the Compensation Committee includes responsibility for
reviewing the compensation for all of the Corporation's officers and management
employees and the granting of stock options under the Company's outstanding
stock option plans and any other such plans that may exist and be in effect from
time to time. The function of the Audit Committee includes the review of the
Company's financing arrangements, internal financial controls and performance of
independent auditors.
During the Company's fiscal year ended December 31, 1996, the Board of
Directors met a total of 10 times, including actions taken by unanimous written
consent. All of the nominated directors attended all of the meetings of the
Board held during periods of their tenure during such fiscal year. In addition,
during the Company's fiscal year ended December 31, 1996, the Compensation
Committee met a total of four times (including actions taken by unanimous
written consent), and the Audit Committee met a total of two times (including
actions taken by unanimous written consent), and all members of each of such
committees attended all such meetings.
III. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1997
At the Annual Meeting, a vote will be taken on a proposal to ratify the
appointment by the Board of Directors of Simonton, Kutac & Barnidge, L.L.P.,
independent certified public accountants, as the independent auditors of the
Company for the fiscal year ending December 31, 1997. Such firm has no interest
in or relationship with the Company except as its auditors.
MANAGEMENT BELIEVES THE APPOINTMENT TO BE IN THE BEST INTEREST OF THE
COMPANY AND RECOMMENDS THAT IT BE RATIFIED.
A representative of Simonton, Kutac & Barnidge, L.L.P., will be present
at the Annual Meeting and will be given an opportunity to make a statement to
the stockholders if he so desires. The representative will be available to
respond to questions from stockholders.
IV. OTHER BUSINESS
While management of the Company does not know of any matters which may
be brought before the Annual Meeting other than as set forth in the Notice of
Annual Meeting, the proxy confers discretionary authority with respect to the
transaction of any other business. It is expected that the proxies will be voted
in support of management on any question which may properly be submitted to the
Annual Meeting.
INCLUSION OF STOCKHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT
If any stockholder desires to put forth a proposal to be voted on at the
1998 Annual Meeting of Stockholders and wishes that proposal to be included in
the Company's Proxy Statement to be delivered to stockholders in connection with
such meeting, that stockholder must cause such proposal to be received by the
Company at its principal executive office no later than December 31, 1997. Any
request for such a proposal should be accompanied by a written representation
that the person making the request is a record or beneficial owner of the lesser
of at least 1% of the outstanding shares of Common Stock or $1,000 in market
value of the Company's common shares and has held such shares for a least one
year as required by the proxy rules of the Securities and Exchange Commission.
-17-
<PAGE>
AVAILABILITY OF FORM 10-K OR FORM 10-KSB
Certain additional information regarding the Company can be found in the
Company's annual report on Form 10-KSB for the fiscal year ended December 31,
1996. The Company will provide, without charge, to any stockholder, upon written
request of such stockholder, a copy of such annual report. Any request for such
annual report should include a representation that the person making the request
was the beneficial owner, as of the Record Date, of securities entitled to vote
at the Annual Meeting. Such request should be addressed to: Diagnostic Health
Services, Inc., 2777 Stemmons Freeway, Dallas, Texas 75207; Attention:
Stockholder Relations.
-----------------------------------------------------------------
PLEASE SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ENVELOPE PROVIDED FOR SUCH PURPOSE
-----------------------------------------------------------------
-18-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
Independent Auditors Report............................................... F-2
Consolidated Balance Sheet, December 31, 1996 and December 31, 1995....... F-3
Consolidated Statement of Operations for the years ended
December 31, 1996 and December 31, 1995........................... F-5
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996 and December 31, 1995........................... F-6
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and December 31, 1996........................... F-7
Notes to Financial Statements............................................. F-8
F-1
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Diagnostic Health Services, Inc.
We have audited the accompanying consolidated balance sheets of Diagnostic
Health Services, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diagnostic Health
Services, Inc. and Subsidiaries at December 31, 1996 and 1995, and the results
of their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
/S/ Simonton, Kutac & Barnidge, L.L.P.
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
March 21, 1997
F-2
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
--------------- --------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 229,547 $ 705,179
Short-term investments 5,000,000 --
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $1,413,168 and $114,817, respectively 10,530,807 2,810,912
Accrued interest and other 701,438 177,054
Stockholders 40,453 34,243
Employees 185,892 56,795
Contracts receivable - current 1,317,146 434,008
Prepaid expenses 1,359,596 397,807
Deferred tax asset 57,876 55,023
------------ -------------
Total Current Assets 19,422,755 4,671,021
------------ -------------
Property & Equipment:
Office furniture & equipment 1,139,535 654,970
Machinery & service equipment 20,089,559 9,527,210
Leasehold improvements 45,526 19,009
Less: Accumulated depreciation and amortization (5,425,437) (3,705,988)
------------ -------------
Total Property & Equipment 15,849,183 6,495,201
------------ -------------
Other Assets:
Deposits and other 958,391 362,320
Deferred acquisition costs 164,199 57,523
Contracts receivable - long-term 1,739,587 1,458,481
Goodwill 15,022,858 5,584,306
Noncompete agreements 1,586,818 1,335,892
Less: Accumulated amortization (1,423,418) (673,215)
------------ -------------
Total Other Assets 18,048,435 8,125,307
------------ -------------
Total Assets $ 53,320,373 $ 19,291,529
============ =============
</TABLE>
F-3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
------------ --------------
Current Liabilities:
<S> <C> <C>
Accounts payable 1,957,758 $ 1,070,915
Accrued liabilities 1,534,551 207,133
Current lease obligations 2,154,035 759,079
Current portion of long-term debt 1,991,824 1,403,463
Notes payable 1,572,000 700,000
Current income taxes 195,000 23,965
------------ -------------
Total Current Liabilities 9,405,168 4,164,555
Long-term lease obligations 4,865,190 1,243,231
Long-term debt 7,081,745 4,418,396
Deferred rent 155,426 --
Other liabilities 778,446 353,192
Deferred income taxes 1,057,779 205,961
------------ -------------
Total Liabilities 23,343,754 10,385,335
------------ -------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value; authorized 15,000,000
shares; issued 8,400,762 shares in 1996 and
5,206,361 shares in 1995; outstanding 8,167,503
shares in 1996 and 4,973,102 shares in 1995 8,401 5,206
Preferred stock, $.001 par value; authorized 3,000,000
shares; issued and outstanding 648,986
shares in 1996 and zero shares in 1995 649 --
Additional paid-in capital 27,617,425 9,018,442
Retained earnings 2,567,195 108,118
Foreign currency translation (5,900) (6,171)
Stock subscription receivable -- (8,250)
Stockholder receivable (103,500) (103,500)
Treasury stock (at cost) (107,651) (107,651)
------------ -------------
Total Stockholders' Equity 29,976,619 8,906,194
------------ -------------
Total Liabilities & Stockholders' Equity $ 53,320,373 $ 19,291,529
============ ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Gross revenues $ 24,171,286 $ 17,083,447
------------ -------------
Expenses:
General & administrative 1,385,305 1,112,212
Salaries & employee benefits 11,898,905 9,449,639
Legal & professional 177,756 231,063
Rent & utilities 389,533 290,464
Taxes & insurance 420,375 400,213
Technical operating expenses 3,158,037 2,380,849
Provision for doubtful accounts 40,970 37,529
Depreciation and amortization 2,796,865 1,434,443
------------ -------------
Total operating expenses 20,267,746 15,336,412
------------ -------------
Income from operations 3,903,540 1,747,035
------------ -------------
Other income (expense):
Other income 486,704 97,509
Interest expense (869,601) (441,928)
------------ -------------
Total other income (expense) (382,897) (344,419)
------------ -------------
Income before taxes 3,520,643 1,402,616
Provision for income taxes 1,061,560 174,903
------------ -------------
Net income $ 2,459,083 $ 1,227,713
============ ============
Net income per share:
Primary $ 0.32 $ 0.23
============ ==============
Fully Diluted $ 0.30 $ 0.21
============ ==============
Weighted average common shares outstanding
Primary 7,738,414 5,408,643
============ ============
Fully Diluted 8,133,401 5,816,188
============ ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Additional Retained Foreign Stock
Common Preferred Paid In Earnings Currency Subscription Stockholder Treasury
Stock Stock Capital (Deficit) Translation Receivable Receivable Stock Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 5,034 -- 8,735,476 (769,595) (3,562) (8,250) (103,500) (107,651) 7,747,952
Shares issued in
connection with the
following acquisitions:
Alpha 24 (24) --
HomeCare 8 15,992 16,000
Medmark 24 41,644 41,668
Reliascan 13 24,987 25,000
HDI 84 199,917 200,001
SIS 18 (18) --
Options exercised 1 468 469
Foreign currency
translations (2,609) (2,609)
Distributions (350,000) (350,000)
Net income 1,227,713 1,227,713
---------------------------------------------------------------------------------------------------------
Balance, December 31,
1995 5,206 -- 9,018,442 108,118 (6,171) (8,250) (103,500) (107,651) 8,906,194
Shares issued in
connection
with secondary
offering 2,955 17,494,019 17,496,974
Shares issued in
connection
with the following
acquisitions:
Alpha 24 (24) --
Medmark 24 41,644 41,668
Reliascan 13 24,987 25,000
NPE/PEDI 85 425,915 426,000
CCI 23 149,977 150,000
ACT 643 643
DDI 40 274,960 275,000
Options exercised 1 1,468 1,469
MDI warrants exercised 3 9,231 9,234
Foreign currency
translations 271 271
Stock subscription
collection 8,250 8,250
Shares issued in
payment of debt 27 176,806 176,833
Preferred stock dividend 6 (6) --
Net income 2,459,083 2,459,083
---------------------------------------------------------------------------------------------------------
Balance, December 31,
1996 $ 8,401 $ 649 $27,617,425 $ 2,567,195 $(5,900) $ -- $(103,500) $ (107,651) $29,976,619
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
------------- -------------
Cash Flows from Operations:
<S> <C> <C>
Net income $ 2,459,083 $ 1,227,713
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 2,796,865 1,434,443
Deferred federal income taxes 848,965 150,938
Deferred rent expense 155,426 (6,747)
Foreign currency translation 271 (2,609)
Increase in trade receivable (4,331,129) (591,401)
Increase in contracts receivable (1,164,244) (1,892,489)
Increase in prepaid expenses (701,492) (47,566)
(Increase) decrease in other assets (590,986) 77,242
Increase in accounts payable 14,404 432,385
Increase (decrease) in accrued liabilities 655,716 (201,426)
Increase in income taxes payable 171,035 23,965
Increase in other liabilities 279,411 152,830
------------ -------------
Net Cash Provided by Operations 593,325 757,278
------------ -------------
Cash Flows Used in Investing Activities:
(Increase) decrease in cash investments (5,000,000) 1,750,100
Cash payments for the purchase of property (1,487,178) (211,669)
Acquisition of businesses net of cash acquired (13,003,736) (278,222)
Additional subsidiary acquisition costs (449,829) (382,400)
Increase in other receivables (524,384) (72,605)
Increase in employee receivables (87,587) (6,763)
Increase in stockholder receivable (6,210) (6,210)
Decrease in minority interest -- (6,235)
------------ -------------
Net Cash (Used in) Provided by Investing Activities (20,558,924) 785,996
------------ --------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 17,751,177 469
Net borrowings on line of credit 872,000 736,798
Proceeds from issuance of bridge loans 2,000,000 --
Proceeds from banks loans 6,569,573 --
Proceeds from stock subscription receivable 8,250 --
Principal payments on long-term debt (6,315,642) (562,681)
Principal payments on capital lease obligations (1,395,391) (941,000)
Distributions -- (350,000)
------------ -------------
Net Cash (Used in) Provided by Financing Activities 19,489,967 (1,116,414)
------------ -------------
Net increase (decrease) in cash (475,632) 426,860
Cash balance, beginning of year 705,179 278,319
------------ -------------
Cash balance, end of year $ 229,547 $ 705,179
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1996 AND 1995
--------------------------
NOTE 1 - ORGANIZATION
- ---------------------
Organization -- Diagnostic Health Services, Inc. ("DHS") and its subsidiaries
(collectively, with DHS, the "Company") is an outsource provider of medical
services to hospitals, physicians offices and other healthcare facilities in the
Midwest, South Central and Western United States. Headquartered in Dallas,
Texas, DHS primarily provides radiology and cardiology diagnostics services and
equipment, and related management services to a broad range of healthcare
providers. The company also provides temporary placement with allied healthcare
professionals throughout the U.S. and in the Federal District of Mexico.
Acquisitions are discussed in Note 11 of these Notes to Financial Statements.
The following chart sets forth the corporate structure of the Company and its
subsidiaries at December 31, 1996:
[FLOW CARE APPEARS HERE]
Diagnostic Health Services, Inc.
("DHS") or the "Company")
DHS Management Services, Inc.
("DHSMS")
HDI Acquistion Mobile Diagnostic Specialized Imaging
Corp. Systems, Inc. Services Inc.
("MDS") ("SIS")
Alpha Scanning Heart Institute
Service, Inc. of Tulsa, Inc.
("Alpha") ("HIT")
Mobil Diagnostic DHS de Mexico,
Imaging Inc. S.A. de C.V.
("Mobile") ("DHS-Mexico")
Advanced Diagnostic Pediatric Cardiac
Imaging, Inc. Echocardiographic Concepts, Inc.
("ADI") Diagnostic, Inc. ("CC")
("PEDI")
St. Louis Mobile HomeCare International
Ultrasound, Inc. de Mexico S.A de C.V.
("SLM")
In addition to the above, DHSMS has one inactive wholly-owned subsidiary,
HomeCare International, Inc.
F-8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Revenue Recognition -- Revenues are recognized when services are performed and
are recorded at published charges, net of discounts and contractual allowances.
Revenues received under the Medicare program are subject to audit and possible
adjustment by third party reimbursement agencies.
Prepaid Expenses -- Prepaid expenses represent advance payments made or
liabilities incurred on various contracts and agreements with initial terms of
one year or less. The carrying amount of prepaid expenses is determined by
comparing the remaining period of the agreement to its initial cost.
Property and Equipment -- Property and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the related assets or terms of leases, ranging from 3 to 7 years, whichever is
less.
Contracts Receivable -- Contracts receivable represents future payments due on
long-term equipment and service agreements. Expected profits or losses on
contracts are based on the Company's estimates of total revenue values and
related costs upon installation. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments resulting
from such revisions are recorded in the periods in which the revisions are made.
Losses on contracts will be recorded in full as they are identified.
Goodwill -- The excess of the aggregate purchase price over the fair market
value of net assets of businesses acquired is included in the accompanying
balance sheet as goodwill, and is amortized over a twenty-year period using the
straight-line method. The Company periodically evaluates whether changes have
occurred that would require revision of the remaining estimated useful life of
the assigned goodwill or impair the recoverability of the carrying value of the
goodwill. If such circumstances arise, the Company records an impairment loss as
the difference between the estimate of the related after-tax income
contribution, on a discounted basis, and the carrying value of the goodwill. Any
impairment loss would be reported as a component of income from continuing
operations before tax.
Noncompete Agreements -- Noncompete agreements are amortized over the life of
the agreements, which range from two to five years.
Cash Equivalents -- For purposes of the statement of cash flows, the Company
considers any short-term cash investment with a maturity of three months or less
to be a cash equivalent.
F-9
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
Long-Lived Assets -- In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), the Company records impairment loses on long-lived assets used in
operations, including goodwill and intangible assets, when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. The adoption of SFAS 121 has had no material impact on
the Company's financial condition or results of operations.
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires the use of the "liability method" of accounting for
income taxes. Deferred taxes are provided using the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. The Company files consolidated income tax returns.
Earnings Per Share -- Earnings per share has been computed by dividing net
income by the weighted average number of shares plus common stock equivalents
outstanding during the period. The primary weighted average common shares and
common share equivalents at December 31, 1996 and 1995 were 7,740,622 and
5,408,643, respectively.
Use of Estimates and Assumptions -- Management uses estimates and assumptions in
preparing its financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses. Actual
results may vary from the estimates that were used.
New Accounting Standards - In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"), was
issued. This statement requires the fair value of stock options and other
stock-based compensation issued to employees, to either be included as
compensation expense in the income statement or the pro forma effect on net
income and earnings per share of such compensation expense to be disclosed in
the footnotes to the Company's financial statements, commencing with the
Company's 1996 fiscal year. DHS adopted SFAS 123 on January 1, 1996. The Company
will continue to measure compensation costs using the "intrinsic value based
method" of accounting for stock issued to employees.
F-10
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 3 - PREPAID EXPENSES
- -------------------------
At December 31, 1996 and 1995, prepaid expenses consisted of the following:
December 31,
1996 1995
Prepaid insurance $ 171,907 $ 32,903
Prepaid supplies 509,471 191,411
Other 678,218 173,493
------------ -------------
$ 1,359,596 $ 397,807
============ =============
NOTE 4 - NOTES PAYABLE
Notes payable consists of the following obligations at December 31, 1996 and
1995:
December 31,
1996 1995
$1,000,000 line of credit with bank, with
interest at varying rates, due July 31, 1996.
Secured by substantially all of the assets of
the Company. $ -- $ 700,000
$2,500,000 line of credit with bank, with
interest at varying rates (9.25 % at
December 31, 1996), due June 30, 1998.
Secured by substantially all of the assets of
the Company. 1,572,000 --
------------ ----------
$ 1,572,000 $ 700,000
============ ===========
In July 1995, the Company entered in a one-year loan agreement with a bank
whereby the Company was permitted to borrow up to $1,000,000 under a revolving
credit note. This revolving note replaced the existing credit facility in place
at that time. The loan agreement (as amended) also provided for three separate
term notes totaling $5,350,000 in original principal amount, whose terms are
discussed in Note 5.
F-11
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 4 - NOTES PAYABLE (CONTINUED)
- ----------------------------------
In July 1996, the Company entered in a two-year loan agreement with a bank
whereby the Company is permitted to borrow up to $2,500,000 under a revolving
credit note. This revolving note replaced the existing credit facility in place
at that time. The loan agreement (as amended) also provides for a separate term
loan facility totaling $17,500,000 in original principal amount, whose terms are
discussed in Note 5.
The Company's revolving credit and term note agreements contain certain
restrictive covenants which, among other things, (1) require the maintenance of
a minimum current ratio, (2) provide for a maximum funded debt ratio (as defined
in the loan agreement), (3) require the maintenance of a minimum fixed charge
coverage ratio (as defined in the loan agreement), and (4) place certain
restrictions on the Company's ability to declare or pay dividends, make certain
loans, advances or investments, or incur, create or assume additional debt or
other obligations.
At December 31, 1995, the Company was not in compliance with one of these
restrictive covenants, namely the requirement to maintain a minimum current
ratio of 1.20 to 1.00. The Company's current ratio at December 31, 1995 was 1.12
to 1.00. However, the bank granted a waiver of such noncompliance as of December
31, 1995.
NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt at year-end consists of the following:
December 31,
-----------------------
1996 1995
---- ----
Note payable to bank in connection with
the ACT acquisition, maturing June
1998, due in monthly installments of
$142,826, plus interest at varying rates
(7.5, 7.51, and 8.75% at December 31,
1996); secured by substantially
all of the assets of the Company. $ 8,569,573 $ --
Term note payable to bank maturing July
1998, due in monthly installments of
$27,775 plus interest at varying rates
(10.75% at December 31, 1995); secured by
substantially all of the assets of the
Company. -- 888,900
F-12
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 5 - LONG-TERM DEBT (CONTINUED)
- -----------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
---------------- -------------
<S> <C> <C>
Note payable to bank in connection with the MICA acquisition, maturing
July 1998, due in monthly installments of $62,500 plus interest, from
March 5, 1996 through July 1998 with a balloon payment of $2,000,000 at
maturity, interest at varying rates (10.125% at December 31, 1995);
secured by substantially all of the assets of the Company. -- 3,750,000
Note payable to bank in connection with the ADI acquisition, maturing
December 1998, due in monthly installments of $16,667, plus interest at
varying rates (10.75% at December 31, 1995); secured by substantially
all of the assets of the Company. -- 600,000
Notes payable to financial institutions, with interest from 7.0% to 8.5%,
maturing through 1998, requiring monthly payments of $1,046, including
principal and interest. Secured by vehicles. -- 31,221
Notes payable to financial institutions, with interest from 7.0% to 10.0%,
maturing through 2000, requiring monthly payments of $2,440, including
principal and interest. Secured by vehicles. 51,917 --
Noncompete agreements, with monthly payments of $27,628 and $22,303,
receptively, including principal and interest of 6% to 9%,
maturing through 1998. 452,079 548,923
</TABLE>
F-13
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 5 - LONG-TERM DEBT (CONTINUED)
- -----------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
---------------------------------
<S> <C> <C>
Note payable to individual in connection
with HCI acquisition; interest at
6%; matured February 1996. -- 2,815
------------ -------------
9,073,569 5,821,859
Less current maturities (1,991,824) (1,403,463)
------------ ---------------
$ 7,081,745 $ 4,418,396
============ =============
Scheduled maturities of long-term debt are as follows:
For the Years Ending
December 31,
---------------------
1997 $ 1,991,824
1998 1,923,743
1999 1,726,262
2000 1,717,826
2001 1,713,914
------------
$ 9,073,569
============
</TABLE>
F-14
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 6 - LEASES
- ---------------
The Company, as lessee, has entered into and/or assumed various non-cancelable
leases for machinery, service equipment, vehicles, and office facilities. The
following assets, subject to capital leases, are included in the balance sheet
under the corresponding asset categories at December 31:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
--------------------------------
<S> <C> <C>
Office furniture & equipment $ 56,783 $ 325,399
Machinery & service equipment 7,045,440 3,402,505
------------ -------------
7,102,223 3,727,904
Less: accumulated amortization (695,199) (864,669)
------------ -------------
$ 6,407,024 $ 2,863,235
============ =============
</TABLE>
The Company leases its office space under operating lease agreements that
include a deferred rental period. In accordance with generally accepted
accounting principles, rent expense is computed by the straight-line
amortization of the total lease payments.
Future minimum lease payments under non-cancelable leases at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
For the Years Ending Capital Operating
December 31, Leases Leases
----------------------- -------------------------------------
<S> <C> <C>
1997 $ 2,718,094 $ 597,615
1998 2,439,875 496,552
1999 1,404,416 278,369
2000 1,084,011 205,871
2001 713,345 119,045
Thereafter -- 20,440
------------ ------------
Total minimum lease payments 8,359,741 $ 1,717,892
============
Less: amount representing interest (1,340,516)
Present value of minimum lease payments 7,019,225
------------
Less: current portion 2,154,035
Long-term capital lease obligation $ 4,865,190
============
</TABLE>
F-15
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 6 - LEASES (CONTINUED)
- --------------------------
Rent expense during the years ended December 31, 1996 and 1995 for all operating
leases was $758,351 and $727,371, respectively, and is included in operating
expenses.
NOTE 7 - EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, excluding corporate
executives, with certain employees from contracts established at the time a
corporation is acquired through purchase by the Company. Future minimum payments
under theses employment agreements are as follows:
For the Years Ending
December 31,
---------------------
1997 $ 653,332
1998 383,750
1999 75,000
------------
Total $ 1,112,082
============
NOTE 8 - INCOME TAXES
- ---------------------
The consolidated provision for income taxes included in the statement of
operations for the year ended December 31, 1996 and 1995 consisted of the
following:
1996 1995
------------ --------
Current taxes payable $ 195,000 $ 23,965
Deferred taxes payable:
Long term 869,413 205,961
Current (benefit) (2,853) (55,023)
------------ ------------
Provision for income taxes $ 1,061,560 $ 174,903
============ ============
F-16
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 8 - INCOME TAXES (CONTINUED)
- ---------------------------------
Net deferred tax assets and liabilities at December 31, 1996 and 1995 consisted
of the following:
<TABLE>
<CAPTION>
1996 1995
------------ --------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 977,060 $ 215,161
Goodwill 152,501 14,619
------------ ------------
Total deferred tax liabilities 1,129,561 229,780
------------ ------------
Deferred tax assets:
Receivable allowance -- 39,038
Accrued vacation 57,876 15,985
Noncompete agreements 71,782 23,819
------------ ------------
Total deferred tax assets 129,658 78,842
------------ ------------
Net deferred tax liability $ 999,903 $ 150,938
============ ============
</TABLE>
The difference between the federal statutory tax rate and the effective tax rate
on continuing operations for the year ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
------------ --------
<S> <C> <C>
Federal Statutory Rate 35% 35%
Premerger earnings of ADI -- (11)
Property and equipment -- 11
Intangible assets 2 --
Utilization of tax loss carryforwards (12) (16)
Other, net 5 (7)
------------ ------------
Effective tax rate 30% 12%
============= =============
</TABLE>
NOTE 9 - SECONDARY OFFERING
On June 12, 1996, the Company completed a public offering (the "Secondary
Offering") of 3,000,000 shares of common stock at an offering price to the
public of $6.75 per share. Of the shares sold, 2,555,000 were sold by the
Company, and 445,000 shares were sold by selling stockholders. Net proceeds to
the Company, after incurred expenses, were approximately $14,972,500.
F-17
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 9 - SECONDARY OFFERING (CONTINUED)
- ---------------------------------------
On July 5, 1996, the investment banking firm of Rodman & Renshaw, Inc., as
representative of the several underwriters in the Secondary Offering, exercised
their over-allotment option to purchase from DHS an additional 400,000 shares of
common stock. The additional net proceeds to DHS were $2,524,500.
DHS realized total net proceeds from the Secondary Offering of approximately
$17,497,000. The proceeds have been and will be used for acquisitions, capital
expenditures, working capital and retirement of outstanding debt.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Cash paid for the year ended December 31, 1996 and 1995 for interest was
approximately $921,512 and $442,000, respectively. Cash paid for Federal income
taxes for the year ended December 31, 1996 and 1995 amounted to zero.
The Company acquired assets in exchange for the issuance of common stock and the
assumption of various liabilities in connection with certain acquisitions. Cash
and noncash investing and financing activities related to acquisitions consisted
of the following for the years ended December 31, 1996 and 1995:
1996 1995
------------ --------
Assets acquired $ 19,904,468 $ 932,482
Liabilities assumed (6,032,525) (273,676)
Common stock issued (851,643) (200,001)
------------ -----------
Total cash paid 13,020,300 458,805
Fees and expenses -- (106,805)
Less cash acquired (16,564) (73,778)
------------ ------------
Net cash paid $ 13,003,736 $ 278,222
============ ============
The MICA acquisition was effected simultaneously with the refinancing of
existing debt and the MICA acquisition loan. The total amount of the transaction
was $5,034,133, which included conversion to long-term debt of $645,373 of
revolving lines of credit. The Company incurred $382,400 in acquisition costs
and expenses in connection with the transaction.
Property and equipment acquired under capital leases for the year ended December
31, 1996 and 1995, amounted to $5,285,069 and $1,134,878, respectively.
F-18
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
- --------------------------------------------------------
The Company issued 60,831 and 88,197 shares of common stock valued at $66,668
and $82,668, in 1996 and 1995, respectively, pursuant to contingent stock bonus
plans relating to various acquisitions.
NOTE 11 - ACQUISITIONS
- ----------------------
In February 1994, DHS-Mexico and DHSMS acquired 88% of the outstanding common
stock of HomeCare International de Mexico S.A. de C.V. ("HCIM") and DHSMS
acquired 100% of the outstanding common stock of HomeCare International, Inc.
("HCI"). HCIM and HCI are collectively referred to as "HomeCare." The purchase
price included the issuance of 140,711 shares of DHS common stock in exchange
for net liabilities valued at approximately $40,000. In addition, the Company
entered into a noncompete agreement and a consulting agreement with a previous
stockholder of HomeCare that extends through December 31, 1997. Pursuant to the
consulting agreement, the former stockholder was granted an option to purchase
up to 60,000 shares of DHS common stock at a price of $1.84 per share, of which
44,000 options failed to vest in accordance with the terms of such option; and
the former stockholder became entitled to receive, on January 1, 1996, a further
option to purchase up to an additional 60,000 shares of DHS common stock at a
price equal to fair market value at the close of business on December 31, 1995,
which option is subject to similar vesting requirements related to the
profitability of the Company's Mexico operations. The acquisition has been
accounted for under the purchase method of accounting with the purchase price
being allocated to assets and liabilities based upon their fair market value at
the date of acquisition. Goodwill of approximately $442,000, which includes
$204,000 of capitalized acquisition cost at December 31, 1994, was recorded as a
result of this transaction. In the fourth quarter of 1995, DHS-Mexico acquired
the remaining 12% minority interest in HCIM, in exchange for 9,622 shares of DHS
common stock.
On June 28, 1994, SIS acquired the net assets of Medmark Associates, Inc.
("Medmark"), an Illinois-based company providing services similar to those
provided by the Company. SIS acquired net assets of approximately $64,000 in
exchange for cash of $89,000 and a noncompete agreement with a present value of
approximately $67,000. The purchase includes a contingent share agreement
providing for the issuance of up to 71,427 shares of DHS common stock, subject
to the acquired business achieving certain revenue goals. The Company recognized
goodwill of approximately $92,000 in connection with the acquisition.
F-19
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 11 - ACQUISITIONS (CONTINUED)
- ----------------------------------
On August 20, 1994, effective August 1, 1994, Heart Institute of Tulsa, Inc.
("HIT", a wholly-owned subsidiary of DHSMS) acquired the net assets of Reliascan
Mobile Imaging, Inc. ("Reliascan"), a Tulsa, Oklahoma-based company engaged in
services similar to those provided by the Company. The Company acquired net
assets of approximately $40,000 in exchange for $150,000 and a contingent
payment agreement. The contingent payment agreement provides for three annual
payments, each in the maximum amount of $70,000 in cash and $25,000 in shares of
DHS common stock (valued at $1.9375 per share), subject to the acquired business
achieving certain revenue goals. The agreement also provides for reduction or
elimination of the cash payments and stock issuance if the specified revenue
goals are not met. The Company recognized goodwill of approximately $136,000 in
connection with the acquisition. Concurrent with the acquisition, the Company
entered into a non-competition and non-disclosure agreement with the former
owner of Reliascan valued at approximately $80,000.
On September 6, 1994, through a reverse triangular merger between MDI
Acquisition Corp. (a wholly-owned subsidiary of DHSMS) and Mobile Diagnostic
Imaging, Inc. ("Mobile"), DHSMS acquired 100% of the issued and outstanding
capital stock of Mobile and, indirectly, of its wholly-owned subsidiary, St.
Louis Mobile Ultrasound, Inc. (collectively, with Mobile, "MDI"). The business
of MDI consists primarily of performing and rendering sonographic and
neurodiagnostic testing services for various medical applications, primarily on
a mobile basis to hospitals, clinics and other healthcare facilities in the
greater St. Louis, Chicago and Indianapolis metropolitan areas.
The Company acquired net assets of approximately $497,000 in exchange for
488,889 shares of DHS common stock and three-year warrants (expiring September
6, 1997) for the purchase of 75,000 additional shares of DHS common stock at an
exercise price of $3.00 per share. Simultaneous with the closing of the
acquisition, the Company entered into an employment agreement with James R.
Angelica (formerly the principal stockholder and President of Mobile) pursuant
to which he has agreed to serve as Vice President-Sales of the Company through
August 31, 1997, at a base salary of $85,000 per annum plus customary benefits.
Also simultaneous with the closing of the acquisition, Mobile entered into a
non-competition and non-disclosure agreement with Mr. Angelica pursuant to
which, among other things, Mr. Angelica has agreed not to compete with Mobile or
the Company for a period of five years, in consideration of which Mobile has
agreed to pay Mr. Angelica a total of $90,000 in equal monthly installments from
September 30, 1994 through August 31, 1997. The Company recognized goodwill of
approximately $1,011,000 in connection with the acquisition.
F-20
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 11 - ACQUISITIONS (CONTINUED)
- ----------------------------------
Upon closing of the acquisition, Mr. Angelica was elected to the Board of
Directors of the Company for a term expiring on or about November 15, 1994.
Additionally, Mr. Angelica and his spouse have granted to Max W. Batzer (the
Chairman and Chief Executive Officer of the Company) a three-year proxy
(expiring September 5, 1997) to vote the 370,252 shares of common stock of the
Company acquired by them in the transaction. Such proxy directs that the subject
shares be voted (a) with respect to election of directors of the Company, in
such manner as Mr. Batzer may determine in his discretion, and (b) as to all
other matters, in the same manner as the greatest plurality of votes, consents
or ratifications otherwise cast or given with respect to the particular matter.
Mr. Batzer voted such shares, as well as his own shares, in favor of Mr.
Angelica's reelection as a Director at the 1994 annual meeting of stockholders
held on November 23, 1994.
On March 9, 1995, effective as of January 1, 1995, DHSMS (through a new wholly-
owned subsidiary, HDI Acquisition Corp.) acquired the businesses of three San
Antonio, Texas-based companies which are in similar lines of business as the
Company. The acquisitions of Sector-Echos Inc. ("SEI"), Cardio-Graphic
Consultants, Inc. ("CGCI") and Heart Diagnostic Institutes, Inc. ("HDII") were
made for a combination of $352,000 in cash and 84,211 shares of DHS common
stock. The Company acquired net assets of approximately $659,000 including
goodwill of approximately $399,000 in connection with the acquisitions. The
Company merged the acquired businesses into another wholly-owned subsidiary of
DHSMS in 1996.
On July 31, 1995, the Company, through DHSMS' wholly-owned subsidiary SIS,
purchased substantially all of the operating assets (exclusive of cash and
accounts receivable) of the mobile ultrasound and nuclear imaging division of
MICA Imaging, Inc. The purchase included approximately $5,034,000 of various
assets including goodwill of approximately $2,528,000. The purchase price was
approximately $3,746,000 in cash, and SIS assumed liabilities of approximately
$1,288,000.
Simultaneous with the closing of the acquisition, the Company and its
subsidiaries entered into a loan agreement with Texas Commerce Bank National
Association, providing for an acquisition loan in the principal amount of
$3,750,000, a term loan in the principal amount of $1,000,000, and a revolving
credit facility of up to $1,000,000 (or, if less, 75% of the Company's and its
subsidiaries' eligible accounts receivable from time to time). In connection
with the ADI acquisition (see Note 12 below), the Company obtained an additional
$600,000 term loan under the loan agreement. All of the loans under this loan
agreement were refinanced with the same lender in June 1996, as described in
Note 4 above.
F-21
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 11 - ACQUISITIONS (CONTINUED)
- ----------------------------------
In January 1996, Mobile Diagnostic Systems, Inc. ("MDS", a wholly-owned
subsidiary of DHSMS) acquired all of the outstanding capital stock of two
affiliated Dallas, Texas-based businesses, Neonatal Pediatric Echocardiography,
Inc. ("NPE") and Pediatric Echocardiagraphic Diagnostic Imaging, Inc. ("PEDI"),
in exchange for an aggregate of 85,200 shares of DHS common stock. The Company
acquired net assets of approximately $426,000 including goodwill of
approximately $248,000 in connection with the acquisitions. In December 1996,
NPE was merged into MDS.
On June 28, 1996, MDS acquired all of the outstanding capital stock of Cardiac
Concepts, Inc. ("CCI"). The purchase price consisted of 22,785 shares of the
Company's common stock, in consideration of which the Company received net
assets valued at approximately $150,000, including goodwill of approximately
$657,000. On the date of the acquisition, the Company also issued 26,861 shares
of common stock in payment of approximately $177,000 of the debt and liabilities
of CCI. The acquisition of CCI has been accounted for under the purchase method
of accounting with the purchase price being allocated to assets and liabilities
based upon their fair market value at the date of acquisition.
Effective October 31, 1996, MDS acquired by merger all of the outstanding
capital stock of Dysrythmic Data, Inc. ("DDI), a Texas-based provider of
ambulatory electrocardiographic monitoring services. The consideration paid for
DDI consisted of 39,521 shares of common stock of the Company.
On November 13, 1996, DHSMS purchased substantially all of the operating assets
(exclusive of cash and mobile x-ray assets) of Advanced Clinical Technology,
Inc. and Horizon/MDS Corporation (collectively "ACT"). The consideration paid
for ACT consisted of approximately $12,620,000 in cash and $4,500,000 in the
form of 642,857 shares of Series A Convertible Redeemable Preferred Stock of the
Company, with an aggregate liquidation preference of $4,500,000. The Company
also assumed approximately $4,727,000 of liabilities.
F-22
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 12 - POOLING OF INTERESTS
- ------------------------------
On December 7, 1995, the Company issued 240,000 shares of its common stock in
exchange for all of the outstanding common stock of ADI. The transaction has
been accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of ADI for all periods presented prior to the consummation of the
transaction.
ADI was a Subchapter S corporation for income tax purposes and, therefore, did
not pay federal income taxes. ADI is included in the Company's federal income
tax return effective November 30, 1995. Deferred income taxes related to
acquired net taxable temporary differences were not material.
For the eleven months ended November 30, 1995, ADI reported gross revenues and
net income of $1,421,273 and $493,294, respectively. Adjustments to the accounts
of ADI to adopt accounting practices of the Company resulted in adjusted gross
revenues of $1,391,902 and adjusted net income of $463,923 for the year ended
December 31, 1995. Substantially all of the required adjustments related to the
conversion to the accrual basis of accounting. During 1995, ADI distributed
$350,000 to its sole shareholder.
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
A stockholder of the Company is a principal in a firm that provides financial
consulting services to the Company. Fees paid to the firm in 1996 and 1995 were
$63,740 and $51,432, respectively.
The accounts receivable from stockholders consist of $13,543 of other advances
made to three of the Company's stockholders as of December 31, 1996 and 1995,
and $26,910 and $20,700, respectively, of accrued interest on the stockholder
receivables.
F-23
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 14 - STOCK OPTION PLANS
- ----------------------------
On April 15, 1992, DHS adopted a stock option plan (the "1992 Plan") that
authorizes the granting of options to officers, directors and selected key
employees and/or consultants to acquire shares of DHS common stock. The
aggregate number of shares with respect to which qualified incentive options may
be granted shall not exceed 180,702 shares, with the exercise price being not
less than the fair market value at the date of grant. The aggregate number of
shares with respect to which non-qualified options may be granted shall not
exceed 722,807 shares. The exercise price for the non-qualified options shall
not be less than 85% of the fair market value at the date of grant.
Substantially all of the available options under the 1992 Plan have been
granted, and 659,935 of such awarded options contain optional price reduction
provisions in connection with any change in control of the Company.
In April 1995, in response to the substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Non-Qualified Stock Option Plan ( the "1995
Non-Qualified Plan"), pursuant to which officers, directors, and/or key
employees and/or consultants of the Company can receive non-qualified stock
options to purchase up to an aggregate of 500,000 shares of the Company's common
stock. The exercise price, expiration date and other terms of any options
granted under the 1995 Non-Qualified Plan are substantially similar to the
requirements applicable to non-qualified options under the 1992 Plan. Through
December 31, 1995, the Company's Board of Directors had awarded, under the 1995
Non-qualified Plan, (a) stock options for an aggregate of 133,000 shares, all of
which provide for an exercise price of $1.9375 per share, are currently
exercisable and expire on April 4, 2003 (subject to prior termination in
accordance with the application stock option agreements), and (b) additional
stock options for an aggregate of 36,000 shares, all of which provide for an
exercise price of $4.25 per share, are currently exercisable and expire on
August 20, 2003 (subject to prior termination in accordance with applicable
stock option agreements). 98,000 of such awarded options contain optional price
reduction provisions in connection with any change in control of the Company.
In November 1995, the stockholders of DHS approved the Company's 1995 Incentive
Stock Option Plan (the "1995 Incentive Plan") as previously adopted by DHS'
Board of Directors. A total of 500,000 incentive stock options may be issued
from time to time to key employees of the Company under the 1995 Incentive Plan,
on terms and conditions (including an exercise price not less than fair market
value on the date of grant) satisfying the requirements of the Internal Revenue
Code with respect to incentive stock options. Through December 31, 1995, no
options had been granted under the 1995 Incentive Plan.
F-24
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 14 - STOCK OPTION PLANS (CONTINUED)
- ----------------------------------------
A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
---------------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 1,215,401 $2.55 869,930 $1.91
Granted 234,500 $6.30 364,750 $3.00
Exercised (1,125) $3.65 (500) $0.94
Forfeited/expired (73,316) $2.96 (18,779) $2.17
---------- -----------
Outstanding, end of period 1,375,460 $3.81 1,215,401 $2.55
=========== ===========
Options exercisable, end of period 1,358,960 $3.75 1,207,401 $2.53
=========== ===========
Weighted average fair value of
options granted during the year $ 6.30 $ 3.00
=========== ===========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Range of Outstanding Contractual Exercise Exercisable at Exercise
Exercise Prices at 12/31/98 Life Price 12/31/96 Price
- ------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
$0.9375 to $3.00 987,085 4.12 $1.91 987,085 $1.91
$3.01 to $5.50 225,875 6.91 $4.60 224,875 $4.60
$5.51 to $7.50 162,500 6.50 $6.30 147,000 $6.30
============== ==================
1,375,460 5.15 $3.81 1,358,960 $3.75
============== ==================
</TABLE>
Vesting varies by agreement ranging from zero to three years. Compensation costs
will be recognized as an expense over the periods of employment attributable to
the options at an amount equal to the excess of the fair market value of the
stock at the date of measurement over the amount the employee must pay. The
measurement date is generally the grant date. As of December 31, 1996 and 1995,
no compensation cost was recognized as expense. Had compensation cost for the
Company's stock-based compensation been determined on the fair value at the
grant dates for awards with the method of FASB Statement 123, the Company's net
income would have been $2,410,489 for the year ended December 31, 1996.
Accordingly, primary and fully-diluted earnings per share would have amounted to
$0.31 per share and $0.30 per share respectively, as of December 31, 1996.
F-25
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1996 and 1995
--------------------------
NOTE 15 - SUBSEQUENT EVENTS
- ---------------------------
In January 1997, the Company, through its Heart Institute of Tulsa, Inc.
subsidiary, acquired Ultrasound Diagnostic Services, Ltd. ("UDS"), an Arizona-
based provider of non-invasive diagnostic ultrasound testing services. The
consideration paid for UDS consisted of 86,520 shares of DHS's common stock and
a $400,000 cash payment to the former stockholders of UDS.
Effective March 1, 1997, the Company, through its SoCal Diagnostic Services,
Inc. subsidiary, purchased substantially all of the operating assets of the
ultrasound division of Diagnostic Imaging Services, Inc. ("DISI"). The acquired
business includes a mobile/fixed ultrasound business serving clients in San
Diego, Orange and Los Angeles counties. The acquisition of DISI will provide DHS
with a firm foundation in the southern California market, which is contiguous
with the Company's existing operations in Arizona and Nevada, as well as
departmental access to leading hospitals in this market. Pursuant to long-term
contracts, DISI provides ultrasound services to 26 facilities and numerous
shared service accounts. Simultaneous with such acquisition, DHSMS received an
option to purchase four hospital-based MRI centers from the same seller.
On February 14, 1997, the SEC declared effective the Company's Form S-3
Registration Statement relating to an offering of 1,791,150 Warrant Shares,
which are issuable upon exercise of (i) 1,375,000 Redeemable Common Stock
Purchase Warrants (the "Public Warrants") issued in connection with the
company's 1993 initial public offering (the "IPO"), (ii) 316,150 underwriter
warrants issued in connection with the IPO (the "Underwriters' Warrants"), and
(iii) 100,000 warrants issued in connection with DHS's equity private placement
in April 1996 (the "Bridge Warrants") of which 2,500 had been exercised prior to
the effectiveness of the registration. On February 18, 1997, the Company called
all of the Public Warrants for redemption.
The Warrants are exercisable at prices ranging from $7.50 per share to $5.48 per
share. On February 25, 1997, the last sale price quoted on NASDAQ for a share of
DHS's common stock was $9.375. The Company will not receive any proceeds from
the sale of the Warrant Shares, although it has received, and will continue to
receive, proceeds from the exercise of the Warrants, if and to the extent
exercised. In the event that all of the unexercised Warrants are exercised, the
maximum aggregate net proceeds to the Company would be approximately $11.2
million. To the extent received, such proceeds may be utilized to repay a
portion of existing indebtedness for working capital, for general corporate
purposes and for possible acquisitions (none of which have been identified) at
the discretion of the Company's management.
F-26
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
PROXY - 1997 ANNUAL MEETING OF STOCKHOLDERS
MAY 30, 1997
THIS PROXY STATEMENT IS SOLICITED BY THE BOARD OF DIRECTORS IN
CONNECTION WITH THE 1997 ANNUAL MEETING OF STOCKHOLDERS OF DIAGNOSTIC HEALTH
SERVICES, INC., TO BE HELD ON MAY 30, 1997. THE STOCKHOLDER HAS THE RIGHT TO
APPOINT AS HIS PROXY A PERSON (WHO NEED NOT BE A STOCKHOLDER) OTHER THAN A
PERSON DESIGNATED BELOW, BY INSERTING THE NAME OF SUCH OTHER PERSON IN THE BLANK
SPACE PROVIDED OR BY COMPLETING ANOTHER PROPER FORM OF PROXY.
The undersigned, a stockholder of Diagnostic Health Services, Inc. (the
"Company"), hereby revoking any proxy heretofore given, does hereby appoint Max
W. Batzer and Brad A. Hummel or either of them [or _________________________],
as his proxy with full power of substitution, for and in the name of the
undersigned to attend the 1997 Annual Meeting of Stockholders to be held on
Friday, May 30, 1997, at the Company's offices located at 2777 Stemmons Freeway,
Suite 1525, Dallas, Texas, commencing at 8:00 a.m. local time, and at any
adjournment(s) thereof, and there to vote upon all matters specified in the
notice of said meeting, as set forth herein, and upon such other business as may
properly come before the meeting, all shares of stock of the Company which the
undersigned would be entitled to vote if personally present at the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES
WILL BE VOTED FOR ALL PROPOSALS.
To authorize and approve an amendment of the Company's certificate
of incorporation to increase the number of common shares
authorized for issuance from 15,000,000 shares, $.001 par value
per share, to 50,000,000 shares, $.001 par value per share, and
to increase the number of preferred shares authorized for
issuance from 3,000,000 shares, $.001 par value per share, to
10,000,000 shares, $.001 par value per share (such preferred
shares to be issuable in one or more series, having such relative
rights, preferences, limitations and other attributes as may be
fixed by the Board of Directors of the Company from time to
time).
( ) FOR ( ) WITHHOLD ( ) ABSTAIN
Election of the following proposed Class II Director to hold office
until the 2000 Annual Meeting of Stockholders or until his
successor shall be elected and shall qualify:
Nominee FOR WITHHOLD ABSTAIN
------- ----- ---------- --------
Brad A. Hummel ( ) ( ) ( )
Ratify the appointment of Simonton, Kutac & Barnidge, L.L.P., as
independent auditors for the Company for the fiscal year ending
December 31, 1997.
( ) FOR ( ) WITHHOLD ( ) ABSTAIN
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
( ) GRANT AUTHORITY ( ) WITHHOLD AUTHORITY
Dated _____________, 1997
-----------------------------
Signature Print Name
-----------------------------
<PAGE>
Signature, if jointly held Print Name
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREIN. IF SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, INDICATE SUCH CAPACITY. ALL JOINT
TENANTS MUST SIGN. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED PERSON.
THE BOARD OF DIRECTORS REQUESTS THAT YOU FILL IN, DATE AND SIGN THE
PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
IF THE PROXY IS NOT DATED IN THE ABOVE SPACE, IT IS DEEMED TO BE DATED
ON THE DAY ON WHICH IT WAS MAILED TO THE COMPANY.
