<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-QSB
[ X ] Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
[ ] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
----------- ----------
Commission File Number 0-21758
--------------------------------
DIAGNOSTIC HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2960048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 Stemmons Freeway, Suite 1525, Dallas, Texas 75207
(Address of principal executive offices, including zip code)
(214)634-0403
(Registrant's telephone number, including area code)
--------------------------------
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Applicable only to issuers involved in bankruptcy proceedings
During the past five years.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
-------- --------
As of November 11, 1997, there were 10,236,828 issued and 10,003,569 shares
outstanding of Registrant's common stock, $.001 per value.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. Financial Information PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet - September 30, 1997 2-3
Consolidated Statements of Operations
Nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Operations
Three months ended September 30, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity
September 30, 1997 6
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 7
Consolidated Statements of Cash Flows
Three months ended September 30, 1997 and 1996 8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis or
Plan of Operation 13-16
PART II. Other Information 17
Signatures 18
Item 6. Exhibits and Reports on Form 8-K 19
Exhibit 1 - Statement re: computation of per share earnings 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
September 30, 1997
ASSETS
------
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents $ 8,270,287
Short term investments --
Accounts receivable:
Trade, net of allowance for doubtful accounts 16,750,124
Accrued interest and other 551,794
Stockholders 45,111
Employees 266,013
Contract receivables - current 1,759,306
Deferred federal income taxes 57,876
Prepaid expenses and other 2,238,845
-----------
Total Current Assets 29,939,356
-----------
PROPERTY & EQUIPMENT:
Office furniture & equipment 1,718,684
Machinery & service equipment 34,397,465
Leasehold improvements 104,363
Less: Accumulated depreciation and amortization (8,497,611)
-----------
Total Property & Equipment 27,722,901
-----------
OTHER ASSETS:
Deposits and other assets 4,240,371
Deferred offering/acquisition 598,362
Contract receivables - long-term 4,833,869
Goodwill 30,828,880
Noncompete agreements 3,746,818
Less: Accumulated amortization (2,795,878)
-----------
Total Other Assets 41,452,422
-----------
TOTAL ASSETS $99,114,679
===========
</TABLE>
2
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<S> <C>
Current Liabilities:
Accounts payable $ 2,254,613
Accrued liabilities 3,011,944
Current lease obligations 4,106,444
Current portion of long-term debt 1,632,897
Deferred liability 500,000
Notes payable --
Current income taxes 2,177,378
------------
Total Current Liabilities 13,683,276
Long-term lease obligations 11,208,131
Long-term debt 4,850,406
Sr. Subordinated notes 20,000,000
Deferred rent 150,940
Deferred liability 1,000,000
Other liabilities 3,069,209
Deferred income taxes 1,057,779
------------
TOTAL LIABILITIES 55,019,741
------------
Stockholders' Equity:
Common stock, $.001 par value, authorized
15,000,000 shares; issued 10,144,192
shares and outstanding 9,910,933 shares 10,144
Preferred stock, $.001 par value: authorized
3,000,000 shares; issued and outstanding 648,986 shares;
$4,542,903 liquidation preference 649
Additional paid-in capital 37,844,296
Retained earnings 6,455,143
Foreign currency translation (4,143)
Stockholder receivable (103,500)
Treasury stock (at cost) (107,651)
------------
TOTAL STOCKHOLDERS' EQUITY 44,094,938
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 99,114,679
============
</TABLE>
3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Revenues:
Gross revenues $ 37,932,629 $ 16,747,158
-------------- -------------
Expenses:
General & administrative 1,622,878 925,005
Salaries & employee benefits 17,159,775 8,264,697
Legal & professional 183,707 86,594
Rent & utilities 855,535 267,995
Taxes & insurance 377,983 301,887
Technical operating expenses 4,914,974 2,315,353
Provision for doubtful accounts 458,420 (1,458)
Depreciation and amortization 4,219,391 1,639,441
-------------- -------------
Total operating expenses 29,792,663 13,799,514
-------------- -------------
Income from operations 8,139,966 2,947,644
-------------- -------------
Other income (expense):
Other income 304,293 246,111
Interest expense (2,550,911) (663,785)
-------------- -------------
Total other income (expense) (2,246,618) (417,674)
-------------- -------------
INCOME BEFORE INCOME TAXES 5,893,348 2,529,970
Provision for Federal Income Taxes 2,005,400 809,590
-------------- -------------
NET INCOME $ 3,887,948 $ 1,720,380
============== =============
Earnings per share :
Primary $ 0.37 $ 0.24
============== =============
Fully diluted $ 0.34 $ 0.22
============== =============
Weighted average common shares - primary 10,420,717 7,165,006
============== =============
Weighted average common shares - fully diluted 11,523,265 7,777,781
============== =============
</TABLE>
4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1997 1996
----------------- ---------------
<S> <C> <C>
Revenues:
Gross revenues $14,889,977 $6,173,571
----------- ----------
Expenses:
General & administrative 635,988 331,697
Salaries & employee benefits 6,666,658 2,894,355
Legal & professional 70,553 34,959
Rent & utilities 340,427 109,089
Taxes & insurance 161,997 121,919
Technical operating expenses 1,852,853 885,509
Provision for doubtful accounts 182,901 1,610
Depreciation and amortization 1,629,160 656,615
----------- ----------
Total operating expenses 11,540,537 5,035,753
----------- ----------
Income from operations 3,349,440 1,137,818
----------- ----------
Other income (expense):
Other income 79,960 84,840
Interest expense (1,146,705) (142,926)
----------- ----------
Total other income (expense) (1,066,745) (58,086)
----------- ----------
INCOME BEFORE INCOME TAXES 2,282,695 1,079,732
Provision for Federal Income Taxes 777,778 350,314
----------- ----------
NET INCOME $ 1,504,917 $ 729,418
=========== ==========
Earnings per share:
Primary $0.14 $0.08
=========== ==========
Fully diluted $0.13 $0.08
=========== ==========
Weighted average common shares - primary 11,020,041 9,072,468
=========== ==========
Weighted average common shares - fully diluted 11,950,507 9,591,654
=========== ==========
</TABLE>
5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Additional Foreign
Common Preferred Paid-in Retained Currency Stockholder Treasury
Stock Stock Capital Earnings Translation Receivable Stock Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 8,401 $649 $27,617,425 $2,567,195 $(5,900) $(103,500) $(107,651) $29,976,619
Net Income 3,887,948 3,887,948
Warrants exercised 1,442 8,973,627 8,975,069
Foreign currency translation 1,757 1,757
Shares issued in connection
with the UDS acquisition: 87 689,913 690,000
Stock options exercised 214 563,331 563,545
---------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $10,144 $649 $37,844,296 $6,455,143 $(4,143) $(103,500) $(107,651) $44,094,938
===================================================================================================
</TABLE>
6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Cash Flows from Operations:
Net income $ 3,887,948 $ 1,720,380
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 4,219,391 1,639,442
Increase (decrease) in deferred rent expense (4,486) 10,238
Foreign currency translation adjustments 1,757 (85)
Increase in trade receivable (6,022,356) (920,137)
Increase in contracts receivable (3,536,442) (2,516,293)
Increase in prepaid expenses (879,249) (729,549)
Increase in other assets (2,528,330) (682,761)
Increase (decrease) in accounts payable 258,918 (459,016)
Increase (decrease) in accrued liabilities 1,475,310 (25,635)
Increase in income taxes payable 1,982,378 809,590
Increase in other liabilities 2,290,763 556,367
------------ -----------
Net Cash Provided by Operations 1,145,602 (597,459)
------------ -----------
Cash Flows Used In Investing Activities:
(Increase) decrease in cash investments 5,000,000 (5,000,000)
Cash payments for the purchase of property (662,530) (659,926)
Acquisition of businesses net of cash acquired (14,573,101) (28,141)
Additional subsidiary acquisition costs (2,056,266) (306,992)
(Increase) decrease in other receivables 149,644 (46,478)
Increase in employee receivables (80,121) (78,833)
Increase in stockholder receivable (4,658) (4,658)
------------ -----------
Net Cash (Used In) Provided by Investing
Activities (12,227,032) (6,125,028)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 9,538,614 17,703,946
Proceeds from stock subscription receivable -- 8,250
Proceeds from issuance of bridge loans -- 2,000,000
Proceeds from issuance of sr. subordinated debt 20,000,000 --
Deferred financing costs (745,060) --
Net (payments) on line of credit (1,572,000) (80,000)
Principal payments on long term-debt (4,780,858) (6,101,898)
Principal payments on capital lease obligations (3,318,526) (929,714)
------------ -----------
Net Cash (Used In) Provided By Financing
activities 19,122,170 12,600,584
------------ -----------
Net increase (decrease) in cash 8,040,740 5,878,097
Cash balance, beginning of period 229,547 705,179
------------ -----------
Cash balance, end of period $ 8,270,287 $ 6,583,276
============ ===========
</TABLE>
7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Cash Flows from Operations:
Net income $ 1,504,917 $ 729,418
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 1,629,160 656,616
Deferred rent expense (1,687) (913)
Foreign currency translation (576) 11
Increase in trade receivable (2,117,374) (311,018)
Increase in contracts receivable (2,501,937) (1,176,134)
Increase in prepaid expenses (254,470) (318,447)
Increase in other assets (752,815) (490,575)
Increase in accounts payable 131,624 74,057
Increase (decrease) in accrued liabilities 1,366,976 (233,540)
Increase in income taxes payable 754,756 350,314
Increase in other liabilities 667,207 281,916
----------- -----------
Net Cash Provided by (Used In) Operations 425,781 (438,295)
----------- -----------
Cash Flows FROM Investing Activities:
Increase in cash investments -- (5,000,000)
Cash payments for the purchase of property 247,485 (322,267)
Acquisition of businesses net of cash acquired (215,954) 86,434
Additional subsidiary acquisition costs (1,227,599) (244,214)
Decrease in other receivables 57,469 31,818
(Increase) decrease in employee receivables 39,088 (8,684)
Increase in stockholder receivable (1,553) (1,553)
----------- -----------
Net Cash Provided by (Used In) Investing
Activities (1,101,064) (5,458,466)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 873,220 2,274,614
Net borrowings on line of credit -- 620,000
Principal payments on long-term debt (68,194) (76,969)
Principal payments on capital lease obligations (1,950,974) (465,190)
----------- -----------
Net Cash Provided by (Used In) Financing
Activities (1,145,948) 2,352,455
----------- -----------
Net increase (decrease) in cash (1,821,231) (3,544,306)
Cash balance, beginning of period 10,091,518 10,127,582
----------- -----------
Cash balance, end of period $ 8,270,287 $ 6,583,276
=========== ===========
</TABLE>
8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTE 1. GENERAL
The unaudited consolidated financial statements included herein for Diagnostic
Health Services, Inc. and subsidiaries ("DHS" or the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and include all adjustments which are, in the opinion of management,
necessary for a fair presentation. Certain information and footnote disclosures
required by generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Certain 1996 balances have been
reclassified to conform to the 1997 presentation. These financial statements
include the accounts of the Company and its subsidiaries, which are set forth in
the following table.
[ORGANIZATION CHART APPEARS HERE]
In addition to the above, DHSMS has one inactive wholly-owned subsidiary,
HomeCare International, Inc. Through its ownership in DIS & DISI, the Company
owns all general partner and limited partner interests in Santa Monica Imaging
Center Limited Partnership.
The Company is a leading outsource provider of medical services to hospitals,
physicians' offices and other healthcare facilities in 20 midwestern, western
and southern states, as well as Mexico City. The Company 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.
9
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTE 2. 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.
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 the Company an additional 400,000
shares of common stock. The additional net proceeds to the Company were
$2,524,500.
The Company realized total net proceeds from the Secondary Offering of
approximately $17,497,000. Such net proceeds have been and will be used for
acquisitions, capital expenditures, working capital and retirement of
outstanding debt.
NOTE 3. WARRANTS
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 the Company's 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. In the nine months ended September 30, 1997, an aggregate of 1,353,032
Public Warrants and 90,000 Bridge Warrants were exercised. The Company will not
receive any proceeds from the sale of the Warrant Shares, although the Company
did receive proceeds from the exercise of the Warrants. Net proceeds to the
Company were approximately $8,423,993 from such exercise of Public Warrants and
$562,500 from such exercise of Bridge Warrants. The remaining 21,968 Public
Warrants have been redeemed by the Company for $.05 per Public Warrant.
NOTE 4. ACQUISITIONS
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 common stock of the Company.
The Company acquired net assets of approximately $426,000 including goodwill of
approximately $248,000 in connection with the acquisitions.
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
liabilities valued at approximately $430,000. 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. No goodwill was recognized with this
transaction.
10
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Effective October 31, 1996, MDS acquired by merger all of the outstanding
capital stock of Dysrhythmic 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.
In January 1997, the Company, through its Heart Institute of Tulsa, Inc.
subsidiary, acquired by merger 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 common stock of the
Company 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 ("SoCal"), purchased substantially all of the operating assets
of the ultrasound division of Diagnostic Imaging Services, Inc. ("DIS"). The
acquired business includes a mobile/fixed ultrasound business serving clients in
San Diego, Orange and Los Angeles Counties of California. The purchase price
paid was $6,519,475 (subject to post-closing adjustment), which was paid
entirely in cash. In addition, SoCal assumed capital lease obligations,
financing agreements and other commitments related to the fixed assets purchased
in the aggregate principal amount of $1,519,261.
On April 17, 1997 (effective as of March 1, 1997), the Company, through its
SoCal subsidiary, acquired all of the issued and outstanding capital stock of
DIS (which, together with its wholly-owned subsidiaries, Diagnostic Imaging
Services, Inc. I and Santa Monica Imaging Center Limited Partnership, are
collectively referred to herein as the "DIS Companies"), whose business consists
primarily of the ownership and operation of four (4) hospital-based magnetic
resonance imaging (MRI) centers located in southern California. The purchase
price for the stock of DIS was $9,083,865 (subject to post-closing adjustment),
of which $7,583,865 was paid in cash, and the remaining $1,500,000 of which is
payable either in cash or (at the seller's option) in common stock of the
Company (valued at $7.615 per share) in three equal annual installments of
$500,000 each on April 17 of each of 1998, 1999 and 2000. In addition, the DIS
Companies were acquired subject to capital lease obligations, financing
agreements and other commitments in respect of fixed assets of the business in
the aggregate principal amount of $6,046,755.
The funds utilized to pay the cash portion of the purchase price in the latter
transaction were obtained through the simultaneous issuance and sale by the
Company to The Prudential Insurance Company of America ("Prudential") of
$20,000,000 in principal amount of senior subordinated promissory notes of the
Company (the "Notes"). The Notes bear interest at a fixed rate of 10.5% per
annum (payable quarterly), and mature as to principal in equal one-third
installments on April 17 of each of 2003, 2004 and 2005. The notes may be
prepaid at the Company's option (subject to certain "make-whole" prepayment
premiums in respect of the remaining stated term of the Notes), and the Company
may be required (at the Noteholders' option) to purchase the Notes in the event
of a change in control of the Company. In addition to application to the
payment of the cash portion of the purchase price for the stock of DIS, the net
proceeds from the issuance and sale of the Notes were utilized to repay
$5,500,000 in borrowings obtained under the Company's senior credit facilities
with Texas Commerce Bank National Association (the "Bank") (utilized in
connection with the Company's March 1997 acquisition of the ultrasound business
of DIS), and for short-term investments pending other use of such net proceeds.
11
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
In connection with the issuance of the Notes, the Company paid Prudential a fee
in the amount of $54,590, and issued to Prudential a five-year redeemable common
stock purchase warrant (with piggyback registration rights) for 60,000 shares of
common stock of the Company at an exercise price of $12.25 per share. In
addition, the Company paid to Prudential Securities, Inc. (as placement agent) a
fee in the amount of $690,470.
NOTE 5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the nine months ended September 30, 1997 for interest was
approximately $2,026,000.
The Company acquired assets in exchange for the issuance of common stock and the
assumption of various liabilities in connection with the acquired businesses.
Cash and noncash investing and financing activities related to the acquisitions
consisted of the following:
<TABLE>
<S> <C>
Assets acquired $24,536,692
Liabilities assumed (9,343,352)
Common stock issued (690,000)
-----------
Total cash paid 14,503,340
Fees and expenses -
Less cash acquired (146,192)
-----------
Net cash paid $14,357,148
===========
</TABLE>
The Company also recognized assets and obligations under noncompete agreements
of approximately $2,160,000 for the nine months ended September 30, 1997.
NOTE 6. SUBSEQUENT EVENTS
Effective September 30, 1997, the Company, through its Heart Institute of Tulsa,
Inc. subsidiary, acquired by merger Cardiovision, Inc., a Nevada-based provider
of diagnostic ultrasound testing services. The consideration paid for
Cardiovision consisted of 29,728 shares of common stock of the Company and
$340,000 in cash.
On October 31, 1997, the Company filed an S-8 registration statement with the
Securities and Exchange Commission registering an aggregate of 2,867,509 shares
underlying the Company's stock option plans, for which options covering
1,789,660 shares were then outstanding. Executive officers and directors, who
collectively hold approximately 71% of the outstanding options and option
shares, agreed to certain restrictions on the resale of their option shares
during the one-year period following the effective date of the registration.
12
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operations
RESULTS OF OPERATIONS
The following table sets forth operating data of the Company as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Gross revenues 100.0 % 100.0 %
Operating expenses 77.5 81.6
------- -------
Income from operations 22.5 18.4
Interest expense 7.7 2.3
Other expense (income) (0.5) (1.4)
------- -------
Income before provision for income taxes 15.3 17.5
Income tax expense 5.2 5.7
------- -------
Net income 10.1 % 11.8 %
======= =======
</TABLE>
Note: Numbers may not add due to rounding.
Three Months Ended September 30, 1997 Compared with Three Months Ended September
30, 1996
Gross revenues increased by 141.1% to approximately $14,890,000 for the three
months ended September 30, 1997 from approximately $6,174,000 for the three
months ended September 30, 1996. Excluding revenues attributable to acquired
businesses, gross revenues increased by 28.1% to approximately $7,910,000 for
the three months ended September 30, 1997 from approximately $6,174,000 for the
three months ended September 30, 1996.
Operating expenses increased by 129.2% to approximately $11,541,000 for the
three months ended September 30, 1997 from approximately $5,036,000 for the
three months ended September 30, 1996, due to the Company's expanded operations
through its acquisitions. As a percentage of gross revenues, total operating
expenses decreased to 77.5% from 81.6%. This reduction is attributable
primarily to efficient utilization of personnel and resources, and absorption of
fixed costs over a broader revenue base, resulting from the Company's
integration of acquired businesses. The Company has also experienced an
increase in the number of in-house contracts for the provision of radiology and
cardiology services. These contracts typically generate higher profit margins
than the other services provided by the Company.
Income from operations increased by 194.4% to approximately $3,349,000 for the
three months ended September 30, 1997 from approximately $1,138,000 for the
three months ended September 30, 1996. As a percentage of gross revenues,
income from operations increased to 22.5% for the three months ended September
30, 1997 from 18.4% in the comparable prior year period. Interest expense
increased by 702.3% to approximately $1,147,000 for the three months ended
September 30, 1997 from approximately $143,000 for the three months ended
September 30, 1996. This increase was attributable primarily to additional loan
and lease liabilities assumed in connection with acquisitions in the fourth
quarter of 1996, and the issuance of $20 million in senior subordinated notes in
the second quarter of 1997.
13
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Other income is primarily gain realized upon disposition of equipment at the end
of its lease term, and interest earned on liquid investments.
Net income increased by 106.3% to approximately $1,505,000 for the three months
ended September 30, 1997 from approximately $729,000 for the comparable prior
year period. This increase is due primarily to the increase in revenues, which
was partially offset by the substantial increase in interest expense.
Nine Months Ended September 30, 1997 Compared with Nine Months Ended September
30, 1996
The following table sets forth operating data of the Company as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Gross revenues 100.0 % 100.0 %
Operating expenses 78.5 82.4
------- -------
Income from operations 21.5 17.6
Interest expense 6.7 4.0
Other expense (income) (0.8) (1.5)
------- -------
Income before provision for income taxes 15.5 15.1
Income tax expense 5.3 4.8
------- -------
Net income 10.2 % 10.3 %
======= =======
</TABLE>
Note: Numbers may not add due to rounding.
Gross revenues increased by 126.5% to approximately $37,933,000 for the nine
months ended September 30, 1997 from approximately $16,747,000 for the nine
months ended September 30, 1996. Excluding revenues attributable to acquired
businesses, gross revenues increased by 15.8% to approximately $19,393,000 for
the nine months ended September 30, 1997 from approximately $16,747,000 for the
nine months ended September 30, 1996.
Operating expenses increased by 115.9% to approximately $29,793,000 for the nine
months ended September 30, 1997 from approximately $13,800,000 for the nine
months ended September 30, 1996, due to the Company's expanded operations. As a
percentage of gross revenues, total operating expenses decreased to 78.5% from
82.4%. This reduction is attributable primarily to efficient utilization of
personnel and resources resulting from the Company's integration of acquired
businesses. The Company has also experienced an increase in the number of in-
house contracts for the provision of radiology and cardiology services. These
contracts typically generate higher profit margins than the other services
provided by the Company.
Income from operations increased by 176.2% to approximately $8,140,000 for the
nine months ended September 30, 1997 from approximately $2,948,000 for the nine
months ended September 30, 1996. As a percentage of gross revenues, income from
operations increased to 21.5% for the nine months ended September 30, 1997 from
17.6% for the nine months ended September 30, 1996.
14
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Interest expense increased by 284.3% to approximately $2,551,000 for the nine
months ended September 30, 1997 from approximately $664,000 for the nine months
ended September 30, 1996, which was attributable primarily to additional loan
and lease liabilities assumed in connection with acquisitions and the issuance
of $20 million in senior subordinated notes in the second quarter of 1997.
Other income is primarily interest earned on liquid investments.
Net income increased by 126% to approximately $3,888,000 for the nine months
ended September 30, 1997 from approximately $1,720,000 for the nine months ended
September 30, 1996. This increase is due primarily to increased revenues and
continued consolidation resulting in efficient utilization of personnel and
equipment, offset in part by the substantial increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
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 $14,972,000.
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 the Company an additional 400,000
shares of common stock. The additional net proceeds to the Company were
$2,524,500.
The Company realized total net proceeds from the Secondary Offering of
approximately $17,497,000. The net proceeds have been and will be used for
acquisitions, capital expenditures, working capital and retirement of
outstanding debt, including approximately $4,827,000 which was utilized to
retire a portion of the indebtedness therefore outstanding under the Company's
senior credit facilities with Texas Commerce Bank National Association (the
"Bank"), and $1,000,000 utilized to retire subordinated promissory notes issued
in a private placement in April 1996.
On July 24, 1996, the Company entered into an amended and increased credit
facility (the "Credit Facility") with the Bank which permits borrowings of up to
$20 million, including up to $17.5 million for acquisitions (the "Acquisition
Facility") and up to $2.5 million for working capital (the "Working Capital
Facility"). The Acquisition Facility will terminate on September 30, 2001 and
the Working Capital Facility will terminate on September 30, 1998. Borrowings
under the Credit Facility are secured by substantially all of the assets of the
Company (including the capital stock of the Company's subsidiaries) and bear
interest at one of two variable rates selected by the Company based upon (i) the
reserve adjusted LIBOR rate plus a margin ranging from 1.75% to 2.5%, or (ii)
the greater of the Bank's prime rate or the federal funds rate plus 0.50%, plus
a margin ranging from 0.25% to 1.00%. The Credit Facility requires ongoing
compliance with certain financial covenants, including a maximum ratio of funded
debt to adjusted earnings. As of August 13, 1997, the outstanding principal
borrowings under the Credit Facility were in the amount of $6,121,094, all of
which are deemed to be outstanding under the Acquisition Facility.
15
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
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 the Company's 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. In the nine months ended September 30, 1997, an aggregate of 1,353,032
Public Warrants and 90,000 Bridge Warrants were exercised. The Company will not
receive any proceeds from the sale of the Warrant Shares, although the Company
did receive proceeds from the exercise of the Warrants. Net proceeds to the
Company were approximately $8,423,993 from such exercise of Public Warrants and
$562,500 from such exercise of Bridge Warrants. The remaining 21,968 Public
Warrants have been redeemed by the Company for $.05 per Public Warrant.
Based on the Company's operating plan, management believes that available
resources and funds generated from operations will be sufficient to meet the
Company's operating requirements and to fund proposed expansion of the Company's
business through the close of the Company's fiscal year ending December 31,
1998.
EFFECTS OF INFLATION
Inflation is not a material factor affecting the Company's business. General
operating expenses such as salaries and employee benefits are, however, subject
to normal inflationary pressures.
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
the Company's allied healthcare services business have generally increased in
holiday periods, due to increased demand for temporary personnel when regular
staff is away.
16
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Part II
OTHER INFORMATION
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits to this report:
Exhibit 11: Computation re: Computation of Earnings Per Share
17
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAGNOSTIC HEALTH SERVICES, INC.
/s/ MAX W. BATZER
- ------------------------------------------------------
Max W. Batzer
Chairman, Chief Executive Officer and Director
/s/ BRAD A. HUMMEL
- ------------------------------------------------------
Brad A. Hummel
President, Chief Operating Officer and Director
/s/ CHRISTOPHER L. TURNER
- ------------------------------------------------------
Christopher L. Turner
Chief Financial Officer
Date: November 13, 1997
18
<PAGE>
EXHIBIT 11
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Total Issue Primary Fully Diluted
Date # Shares Wtd. Avg. Wtd. Avg.
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued January 1, 1997 1/1/97 8,400,762 8,400,762
Treasury Shares 1/1/97 (233,259) (233,259)
UDS Acquisition 1/1/97 86,520 86,520
Warrants Exercised (2/3/97 - 3/31/97) 1,393,032 1,029,794
Warrants (Post-MDI) Exercised 6/26/97 4,000 1,407
Warrants & Stock Options Exercised (7/1/97 - 9/30/97) 259,878 31,215
- -------------------------------------------------------------------------------------------------------------
Shares Outstanding 9/30/97 9,910,933 9,316,439 9,316,439
Common Stock Equivalents (See Schedule) 1,104,278 1,498,905
----------- -----------
Primary weighted average shares 10,420,717 10,815,344
===========
Fully diluted:
- -------------
Cardio/HDI contingent 22,222
Reliascan contingent ($1.9375/share) 12,903
Medmark contingent ($1.75/share) 23,810
Convertible Preferred - original issuance 642,857
Convertible Preferred - 12/31/96 dividend 6,129
---------
707,921 707,921
--------- -----------
Fully diluted weighted average shares 11,523,265
===========
Net Income - September 30, 1997 $ 3,887,948 $ 3,887,948
=========== ===========
Earnings Per Share $ 0.37 $ 0.34
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Closing price at end of period 15.1250 Primary Fully D.
Average share price during period 9.4976 Primary Fully D. Net Net
Exercise Assumed Treas. Shs. Treas. Shs. Add'l Add'l
Stock options & warrants: Number Price Proceeds Acquired Acquired Shares Shares
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares included in Underwriter's Warrants 158,075 5.4800 866,251 91,207 57,273 66,868 100,802
Warrants included in Underwriter's Warrants 158,075 7.5000 1,185,563 124,828 78,384 33,247 79,691
Private Option (Grossman) 49,693 2.2100 109,822 11,563 7,261 38,130 42,432
ISO's Round #1 40,657 2.2100 89,852 9,460 5,941 31,197 34,716
Non-Qual. Round #1 304,935 2.2100 673,906 70,955 44,556 233,980 260,379
Kirker Non-Qual. #1 3,000 2.6250 7,875 829 521 2,171 2,479
Pena Non-Qual. #2 2,000 2.6250 5,250 553 347 1,447 1,653
Nosnik #1 Non-Qual. 8,000 1.8400 14,720 1,550 973 6,450 7,027
ISO's Round #2 20,500 0.9375 19,219 2,024 1,271 18,476 19,229
Non-Qual. Round #2 138,000 0.9375 129,375 13,622 8,554 124,378 129,446
Non-Qual. Round #3 200,000 1.6875 337,500 35,535 22,314 164,465 177,686
ISO's Round #3 44,300 1.9375 85,831 9,037 5,675 35,263 38,625
Non-Qual. Round #4 122,500 1.9375 237,344 24,990 15,692 97,510 106,808
Non-Qual Round #5 23,700 4.2500 100,725 10,605 6,660 13,095 17,040
Non-Qual Round #6 115,000 4.2500 488,750 51,460 32,314 63,540 82,686
Nosnik #2 Non-Qual. 18,000 5.2500 94,500 9,950 6,248 8,050 11,752
Non-Qual Round #7 7,000 5.3750 37,625 3,962 2,488 3,038 4,512
Non-Qual Round #8 42,500 6.2500 265,625 27,968 17,562 14,532 24,938
Bridge Warrants/Bank Warrants 10,000 6.2500 62,500 6,581 4,132 3,419 5,868
ISO's Round #4 57,750 6.2500 360,938 38,003 23,864 19,747 33,886
Non-Qual Round #9 47,750 6.2500 298,438 31,422 19,731 16,328 28,019
Bondurant & Dennis ISOs 5,000 7.5000 37,500 3,948 2,479 1,052 2,521
Non-Qual Round #10 310,500 7.4375 2,309,344 243,150 152,684 67,350 157,816
Coito & Olson ISOs 3,000 8.6250 25,875 2,724 1,711 276 1,289
Prudential Warrants 60,000 12.2500 0 0 0 0 0
ISO's Round #5 77,150 8.0000 617,200 64,985 40,807 12,165 36,343
Non-Qual Round #11 37,850 8.0000 302,800 31,882 20,020 5,968 17,830
Foley Non-Qual 10,000 8.1250 81,250 8,555 5,372 1,445 4,628
Turner Non-Qual 150,000 8.1875 1,228,125 129,309 81,198 20,691 68,802
- --------------------------------------------------------------------------------------------------------------------
Total Common Stock Equivalents 2,224,935 1,104,278 1,498,905
====================================================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895659
<NAME> DIAGNOSTIC HEALTH SERVICES, INC.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 0 8,270,287
<SECURITIES> 0 0
<RECEIVABLES> 0 17,913,492
<ALLOWANCES> 0 (300,450)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 29,939,356
<PP&E> 0 36,220,512
<DEPRECIATION> 0 (8,497,611)
<TOTAL-ASSETS> 0 99,114,679
<CURRENT-LIABILITIES> 0 13,683,276
<BONDS> 0 36,058,537
0 649
0 0
<COMMON> 0 10,144
<OTHER-SE> 0 44,084,145
<TOTAL-LIABILITY-AND-EQUITY> 0 99,114,679
<SALES> 14,889,977 37,932,629
<TOTAL-REVENUES> 14,889,977 37,932,629
<CGS> 0 0
<TOTAL-COSTS> 11,357,636 29,334,243
<OTHER-EXPENSES> (79,960) (304,293)
<LOSS-PROVISION> 182,901 458,420
<INTEREST-EXPENSE> 1,146,705 2,550,911
<INCOME-PRETAX> 2,282,695 5,893,348
<INCOME-TAX> 777,778 2,005,400
<INCOME-CONTINUING> 1,504,917 3,887,948
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,504,917 3,887,948
<EPS-PRIMARY> 0.14 0.37
<EPS-DILUTED> 0.13 0.34
</TABLE>
