<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 June 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)
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 June 30, 1997, there were 9,884,314 issued and 9,651,055 shares
outstanding of Registrant's common stock, $.001 per value.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet - June 30, 1997 2-3
Consolidated Statements of Operations
Six months ended June 30, 1997 and 1996 4
Consolidated Statements of Operations
Three months ended June 30, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity
June 30, 1997 6
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996 7
Consolidated Statements of Cash Flows
Three months ended June 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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
June 30, 1997
ASSETS
------
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 10,091,518
Short term investments --
Accounts receivable:
Trade, net of allowance for doubtful
accounts 14,632,750
Accrued interest and other 609,263
Stockholders 43,558
Employees 305,101
Contract receivables - current 1,382,154
Deferred federal income taxes 57,876
Prepaid expenses and other 1,984,375
-----------
TOTAL CURRENT ASSETS 29,106,595
-----------
PROPERTY & EQUIPMENT:
Office furniture & equipment 1,535,470
Machinery & service equipment 33,522,827
Leasehold improvements 80,733
Less: Accumulated depreciation and amortization (7,117,736)
-----------
TOTAL PROPERTY & EQUIPMENT 28,021,294
-----------
OTHER ASSETS:
Deposits and other assets 3,487,556
Deferred offering/acquisition 470,774
Contract receivables - long-term 2,709,084
Goodwill 29,513,229
Noncompete agreements 3,746,818
Less: Accumulated amortization (2,193,490)
-----------
TOTAL OTHER ASSETS 37,733,971
-----------
TOTAL ASSETS $94,861,860
===========
</TABLE>
2
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Accounts payable $ 2,122,989
Accrued liabilities 1,644,969
Current lease obligations 4,067,028
Current portion of long-term debt 1,658,297
Deferred liability 500,000
Notes payable --
Current income taxes 1,422,622
-----------
TOTAL CURRENT LIABILITIES 11,415,905
Long-term lease obligations 12,222,971
Long-term debt 4,893,200
Sr. Subordinated notes 20,000,000
Deferred rent 152,627
Deferred liability 1,000,000
Other liabilities 2,402,002
Deferred income taxes 1,057,779
-----------
TOTAL LIABILITIES 53,144,484
-----------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, authorized
15,000,000 shares; issued 9,884,314
shares and outstanding 9,651,055 shares 9,884
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 36,971,336
Retained earnings 4,950,225
Foreign currency translation (3,567)
Stockholder receivable (103,500)
Treasury stock (at cost) (107,651)
-----------
TOTAL STOCKHOLDERS' EQUITY 41,717,376
-----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $94,861,860
===========
</TABLE>
3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
REVENUES:
Gross revenues $23,042,652 $10,573,587
----------- -----------
EXPENSES:
General & administrative 986,890 593,308
Salaries & employee benefits 10,493,117 5,370,342
Legal & professional 113,154 51,635
Rent & utilities 515,108 158,906
Taxes & insurance 215,986 179,967
Technical operating expenses 3,062,121 1,429,844
Provision for doubtful accounts 275,519 (3,068)
Depreciation and amortization 2,590,231 982,827
----------- -----------
TOTAL OPERATING EXPENSES 18,252,126 8,763,761
----------- -----------
INCOME FROM OPERATIONS 4,790,526 1,809,826
----------- -----------
OTHER INCOME (EXPENSE):
Other income 224,333 161,271
Interest expense (1,404,206) (520,859)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (1,179,873) (359,588)
----------- -----------
INCOME BEFORE INCOME TAXES 3,610,653 1,450,238
PROVISION FOR FEDERAL INCOME TAXES 1,227,622 459,276
----------- -----------
NET INCOME $ 2,383,031 $ 990,962
=========== ===========
EARNINGS PER SHARE :
Primary $ 0.23 $ 0.16
=========== ===========
Fully diluted $ 0.21 $ 0.15
=========== ===========
Weighted average common shares -
primary 10,336,096 6,197,175
=========== ===========
Weighted average common shares -
fully diluted 11,125,739 6,480,446
=========== ===========
</TABLE>
4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES:
Gross revenues $12,532,676 $5,352,106
----------- ----------
EXPENSES:
General & administrative 439,616 275,705
Salaries & employee benefits 5,444,905 2,736,861
Legal & professional 62,147 17,848
Rent & utilities 315,836 82,258
Taxes & insurance 109,725 101,759
Technical operating expenses 1,632,034 659,322
Provision for doubtful accounts 173,778 2,651
Depreciation and amortization 1,428,099 481,355
----------- ----------
TOTAL OPERATING EXPENSES 9,606,140 4,357,759
----------- ----------
INCOME FROM OPERATIONS 2,926,536 994,347
----------- ----------
OTHER INCOME (EXPENSE):
Other income 150,455 81,919
Interest expense (1,012,750) (301,404)
----------- ----------
TOTAL OTHER INCOME (EXPENSE) (862,295) (219,485)
----------- ----------
INCOME BEFORE INCOME TAXES 2,064,241 774,862
PROVISION FOR FEDERAL INCOME TAXES 701,842 242,735
----------- ----------
NET INCOME $ 1,362,399 $ 532,127
=========== ==========
EARNINGS PER SHARE :
Primary $ 0.13 $ 0.08
=========== ==========
Fully diluted $ 0.12 $ 0.08
=========== ==========
Weighted average common shares -
primary 10,804,493 6,551,889
=========== ==========
Weighted average common shares -
fully diluted 11,594,136 6,733,704
=========== ==========
</TABLE>
5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Six Months Ended June 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 2,383,030 2,383,030
Warrants exercised 1,392 8,661,177 8,662,569
Foreign currency translation 2,333 2,333
Shares issued in connection
with the UDS acquisition: 87 689,913 690,000
Stock options exercised 4 2,821 2,825
---------------------------------------------------------------------------------------------
Balance, June 30, 1997 $9,884 $649 $36,971,336 $4,950,225 ($3,567) ($103,500) ($107,651) $41,717,376
=============================================================================================
</TABLE>
6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Cash Flows from Operations:
Net income $ 2,383,031 $ 990,962
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 2,590,231 982,826
Deferred federal income taxes -- --
Increase (decrease) in deferred rent expense (2,799) 11,151
Foreign currency translation adjustments 2,333 (96)
Increase in trade receivable (3,904,982) (609,119)
Increase in contracts receivable (1,034,505) (1,340,159)
Increase in prepaid expenses (624,779) (411,102)
Increase in other assets (1,775,515) (192,186)
Increase (decrease) in accounts payable 127,294 (533,075)
Increase in accrued liabilities 108,334 208,897
Increase in income taxes payable 1,227,622 459,276
Increase in other liabilities 1,623,556 274,452
------------ ------------
NET CASH PROVIDED BY OPERATIONS 719,821 (158,173)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Decrease in cash investments 5,000,000 --
Cash payments for the purchase of property (910,015) (337,659)
Acquisition of businesses net of cash acquired (14,357,147) (114,575)
Additional subsidiary acquisition costs (828,667) (62,778)
(Increase) decrease in other receivables 92,175 (78,296)
Increase in employee receivables (119,209) (70,149)
Increase in stockholder receivable (3,105) (3,105)
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (11,125,968) (666,562)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 8,665,394 15,429,332
Proceeds from stock subscription receivable -- 7,259
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) (700,000)
Net paydown on line of credit -- (6,024,929)
Proceeds from bank loans -- --
Principal payments on long term-debt (4,712,664) --
Principal payments on capital lease obligations (1,367,552) (464,524)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES 20,268,118 10,247,138
------------ ------------
NET INCREASE (DECREASE) IN CASH 9,861,971 9,422,403
CASH BALANCE, BEGINNING OF PERIOD 229,547 705,179
------------ ------------
CASH BALANCE, END OF PERIOD $ 10,091,518 $ 10,127,582
============ ============
</TABLE>
7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 1,362,399 $ 532,127
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 1,428,099 481,355
Deferred rent expense (1,687) (913)
Foreign currency translation (17) (45)
Increase in trade receivable (3,639,038) (61,061)
Increase in contracts receivable (623,072) (655,056)
(Increase) decrease in prepaid expenses 56,634 (216,591)
(Increase) decrease in other assets (669,463) 171,393
Decrease in accounts payable (37,546) (867,230)
Decrease in accrued liabilities (4,980,004) (403,165)
Increase in income taxes payable 701,842 242,735
Increase in other liabilities 1,008,786 47,923
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS (5,393,067) (728,528)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payments for the purchase of property (560,229) (245,186)
Acquisition of businesses net of cash acquired -- (85,181)
Additional subsidiary acquisition costs (679,715) (36,699)
Increase in other receivables (45,681) (88,580)
Increase in employee receivables (80,092) (67,429)
Increase in stockholder receivable (1,553) (1,552)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (1,367,270) (524,627)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,825 15,429,332
Proceeds from stock subscription receivable -- 7,259
Proceeds from issuance of bridge loans -- 2,000,000
Net paydown on line of credit (2,287,000) (910,000)
Proceeds from issuance of sr. subordinated debt 20,000,000 --
Deferred finance costs (745,060) --
Principal payments on long-term debt (8,110,504) (5,721,637)
Principal payments on capital lease obligations (876,397) (254,361)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 7,983,864 10,550,593
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,223,527 9,297,438
CASH BALANCE, BEGINNING OF PERIOD 8,867,991 830,144
----------- -----------
CASH BALANCE, END OF PERIOD $10,091,518 $10,127,582
=========== ===========
</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.
[ORGANIZATIONAL 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 six months ended June 30, 1997, an aggregate of 1,353,032
Public Warrants and 40,000 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
$250,000 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 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.
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 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 this
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.
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)
11
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
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 six months ended June 30, 1997 for interest was approximately
$1,404 ,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 six months ended June 30, 1997.
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
June 30,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Gross revenues 100.0 % 100.0 %
Operating expenses 76.6 81.4
----- -----
Income from operations 23.4 18.6
Interest expense 8.1 5.6
Other expense (income) (1.2) (1.5)
----- -----
Income before provision for income taxes 16.5 14.5
Income tax expense 5.6 4.5
----- -----
Net income 10.9 % 9.9 %
===== =====
</TABLE>
Note: Numbers may not add due to rounding.
Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996
Gross revenues increased by 134% to approximately $12,532,000 for the three
months ended June 30, 1997 from approximately $5,352,000 for the three months
ended June 30, 1996. Excluding revenues attributable to acquired businesses,
gross revenues increased by 15.9% to approximately $6,203,000 for the three
months ended June 30, 1997 from approximately $5,352,000 for the three months
ended June 30, 1996.
Operating expenses increased by 120% to approximately $9,606,000 for the three
months ended June 30, 1997 from approximately $4,358,000 for the three months
ended June 30, 1996, due to the Company's expanded operations through its
acquisitions. As a percentage of gross revenues, total operating expenses
decreased to 77% from 81%. 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% to approximately $2,926,000 for the
three months ended June 30, 1997 from approximately $994,000 for the three
months ended June 30, 1996. As a percentage of gross revenues, income from
operations increased to 23% for the three months ended June 30, 1997 from 19% in
the comparable prior year period. Interest expense increased by 236% to
approximately $1,013,000 for the three months ended June 30, 1997 from
approximately $301,000 for the three months ended June 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 debt 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 156% to approximately $1,362,000 for the three months
ended June 30, 1997 from approximately $532,000 for the comparable prior year
period. This increase is due primarily to increased revenues and continued
consolidation resulting in efficient utilization of personnel and equipment.
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
The following table sets forth operating data of the Company as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Gross revenues 100.0 % 100.0 %
Operating expenses 79.2 82.9
----- -----
Income from operations 20.8 17.1
Interest expense 6.1 4.9
Other expense (income) (1.0) (1.5)
----- -----
Income before provision for income taxes 15.7 13.7
Income tax expense 5.3 4.3
----- -----
Net income 10.3 % 9.4 %
===== =====
</TABLE>
Note: Numbers may not add due to rounding.
Gross revenues increased by 118% to approximately $23,043,000 for the six months
ended June 30, 1997 from approximately $10,574,000 for the six months ended June
30, 1996. Excluding revenues attributable to acquired businesses, gross
revenues increased by 14.3% to approximately $12,083,000 for the six months
ended June 30, 1997 from approximately $10,574,000 for the six months ended June
30, 1996.
Operating expenses increased by 108% to approximately $18,252,000 for the six
months ended June 30, 1997 from approximately $8,764,000 for the six months
ended June 30, 1996, due to the Company's expanded operations. As a percentage
of gross revenues, total operating expenses decreased to 79% from 83%. 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 165% to approximately $4,791,000 for the six
months ended June 30, 1997 from approximately $1,810,000 for the six months
ended June 30, 1996. As a percentage of
14
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
gross revenues, income from operations increased to 21% for the six months ended
June 30, 1997 from 17% for the six months ended June 30, 1996.
Interest expense increased by 170% to approximately $1,404,000 for the six
months ended June 30, 1997 from approximately $521,000 for the six months ended
June 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 debt in the second quarter of 1997.
Other income is primarily interest earned on liquid investments.
The Company's federal income tax net operating loss carryforwards were fully
utilized subsequent to the second quarter of 1995, and the Company recorded a
provision for federal income taxes of approximately $1,228,000 for the six
months ended June 30, 1997.
Net income increased by 140% to approximately $2,383,000 for the six months
ended June 30, 1997 from approximately $991,000 for the six months ended June
30, 1996. This increase is due primarily to increased revenues and continued
consolidation resulting in efficient utilization of personnel and equipment and
internal growth of approximately 14.3%.
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 $14,972,500.
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 $17,504,500. 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
15
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
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.
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 six months ended June 30, 1997, an aggregate of 1,353,032 Public
Warrants and 40,000 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 $250,000
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,
1997.
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 1: Computation re: Computation of Earnings Per Share
(b) The Company filed the following reports on Form 8-K during the quarterly
period ended June 30, 1997.
1. On April 4, 1997, the Company filed a current report on Form 8-K
relating to the acquisition of the ultrasound division of DIS; and
the Company filed an amendment to such report on June 20, 1997.
2. On May 2, 1997, the Company filed a current report on Form 8-K
relating to the acquisition of the capital stock of DIS; and the
Company filed an amendment to such report on July 1, 1997.
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: August 13, 1997
18
<PAGE>
EXHIBIT 1
---------
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Total IssueD 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) 1,393,032 924,723
Warrants (Post-MDI) Exercised 6/26/97 4,000 88
- ------------------------------------------------------------------------------------------------------------
Shares Outstanding 6/30/97 9,651,055 9,178,834 9,178,834
Common Stock Equivalents (See Schedule) 1,157,262 1,238,984
----------- -----------
Primary weighted average shares 10,336,096 10,417,818
===========
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 11,125,739
===========
June 30, 1997 Net Income $2,383,031 $2,383,031
=========== ===========
Earnings Per Share $0.23 $0.21
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Closing price at end of period 9.1250 Primary Fully D.
Average share price during period 8.5559 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 866,251 101,246 94,932 56,829 63,143
Warrants included in Underwriter's
Warrants 158,075 7.5000 1,185,563 138,567 129,925 19,508 28,150
Private Option (Grossman) 49,693 2.2100 109,822 12,836 12,035 36,857 37,658
ISO's Round #1 71,150 2.2100 157,242 18,378 17,232 52,772 53,918
Non-Qual. Round #1 304,935 2.2100 673,906 78,765 73,853 226,170 231,082
Kirker Non-Qual. #1 3,000 2.6250 7,875 920 863 2,080 2,137
Pena Non-Qual. #2 2,000 2.6250 5,250 614 575 1,386 1,425
Nosnik #1 Non-Qual. 8,000 1.8400 14,720 1,720 1,613 6,280 6,387
ISO's Round #2 31,500 0.9375 29,531 3,452 3,236 28,048 28,264
Non-Qual. Round #2 173,000 0.9375 162,188 18,956 17,774 154,044 155,226
Warrants (MDI Purchase) 63,229 3.0000 189,687 22,170 20,788 41,059 42,441
Warrants (Post-MDI) 18,000 3.0000 54,000 6,311 5,918 11,689 12,082
Non-Qual. Round #3 200,000 1.6875 337,500 39,447 36,986 160,553 163,014
ISO's Round #3 60,000 1.9375 116,250 13,587 12,740 46,413 47,260
Non-Qual. Round #4 133,000 1.9375 257,688 30,118 28,240 102,882 104,760
Non-Qual Round #5 28,875 4.2500 122,719 14,343 13,449 14,532 15,426
Non-Qual Round #6 130,000 4.2500 552,500 64,576 60,548 65,424 69,452
Nosnik #2 Non-Qual. 24,000 5.2500 126,000 14,727 13,808 9,273 10,192
Non-Qual Round #7 7,000 5.3750 37,625 4,398 4,123 2,602 2,877
Non-Qual Round #8 48,000 6.2500 300,000 35,064 32,877 12,936 15,123
Bridge Warrants/Bank Warrants 60,000 6.2500 375,000 43,830 41,096 16,170 18,904
ISO's Round #4 61,750 6.2500 385,938 45,108 42,295 16,642 19,455
Non-Qual Round #9 47,750 6.2500 298,438 34,881 32,705 12,869 15,045
Bondurant & Dennis ISOs 5,000 7.5000 37,500 4,383 4,110 617 890
Non-Qual Round #10 345,000 7.4375 2,565,938 299,904 281,199 45,096 63,801
Coito & Olson ISOs 3,000 8.6250 0 0 0 0 0
Prudential Warrants 60,000 12.2500 0 0 0 0 0
ISO's Round #5 79,550 8.0000 636,400 74,382 69,742 5,168 9,808
Non-Qual Round #11 36,950 8.0000 295,600 34,549 32,395 2,401 4,555
Foley Non-Qual 10,000 8.1250 81,250 9,496 8,904 504 1,096
Turner Non-Qual 150,000 8.1875 1,228,125 143,542 134,589 6,458 15,411
============================================================================================================
Total Common Stock Equivalents 2,530,532 1,157,262 1,238,984
============================================================================================================
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
QUARTERLY PERIOD ENDING JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 0 10,091,518
<SECURITIES> 0 0
<RECEIVABLES> 0 16,133,009
<ALLOWANCES> 0 (542,337)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 29,106,595
<PP&E> 0 35,139,030
<DEPRECIATION> 0 (7,117,736)
<TOTAL-ASSETS> 0 94,861,860
<CURRENT-LIABILITIES> 0 11,415,905
<BONDS> 0 37,116,171
0 649
0 0
<COMMON> 0 9,884
<OTHER-SE> 0 41,706,843
<TOTAL-LIABILITY-AND-EQUITY> 0 94,861,860
<SALES> 12,532,676 23,042,652
<TOTAL-REVENUES> 12,532,676 23,042,652
<CGS> 0 0
<TOTAL-COSTS> 9,432,362 17,976,607
<OTHER-EXPENSES> (150,455) (224,333)
<LOSS-PROVISION> 173,778 275,519
<INTEREST-EXPENSE> 1,012,750 1,404,206
<INCOME-PRETAX> 2,064,241 3,610,653
<INCOME-TAX> 701,842 1,227,622
<INCOME-CONTINUING> 1,362,399 2,383,031
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,362,399 2,383,031
<EPS-PRIMARY> 0.13 0.23
<EPS-DILUTED> 0.12 0.21
</TABLE>
