<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:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)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.
1. Title of each class of securities to which transaction applies:
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2. Aggregate number of securities to which transaction applies:
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3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
----------------------------------------------------------------------
4. Proposed maximum aggregate value of transaction:
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5. 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.:
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3. Filing Party:
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4. Date Filed:
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<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
2777 STEMMONS FREEWAY
DALLAS, TEXAS 75207
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
TO BE HELD JULY 15, 1998
To the Stockholders of
DIAGNOSTIC HEALTH SERVICES, INC.:
NOTICE IS HEREBY GIVEN that the 1998 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 Wednesday, July 15, 1998, commencing at 8:00 a.m. local time,
for the following purposes:
1. To elect two (2) Class III Directors to hold office until the 2001
Annual Meeting;
2. 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, 1998; and
3. 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 June 17, 1998 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
June 17, 1998 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 1998 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 Wednesday, July 15, 1998, 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 June 17, 1998 record date) on or about
June 24, 1998. 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 June 17, 1998 (the "Record Date"), the following stockholders, holding
an aggregate of 839,227 shares of common stock of the Company (constituting
approximately 7.4% of the total votes entitled to vote at the Annual Meeting),
have indicated their intention to vote in favor of the nominees for director and
all other matters to be submitted for consideration at the Annual Meeting: Max
W. Batzer (154,750 shares), Thomas M. Sestak (126,421 shares), Brad A. Hummel
(8,593 shares), James R. Angelica and Janet L. Angelica (315,052 shares), Bo W.
Lycke (1,000 shares), Carol J. Gannon (200,500 shares), and Bonnie G. Lankford
(32,911 shares).
1
<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 was incorporated in Texas in 1983 and was reincorporated in
Delaware in 1992. The Company is headquartered in Dallas, Texas, and provides
services in Texas, Oklahoma, Illinois, Indiana, Louisiana, Mississippi,
Missouri, Iowa, Ohio, Michigan, Arkansas, Georgia, Alabama, Virginia, Kentucky,
Tennessee, Kansas, New Mexico, Arizona, Nevada and California. Until the sale of
such operations in December 1997, the Company also provided services in the
greater Mexico City area.
In addition to significant internal growth, the Company has expanded its
business through numerous acquisitions. Information regarding acquisitions in
the past two fiscal years is included in the footnotes to the audited financial
statements appearing at the back of this Proxy Statement.
BUSINESS OPERATIONS
In-House Services (also referred to as Fixed Site Services)
- -------------------------------------------------------------
In addition to the shared services, the Company provides diagnostic
services within hospitals and clinical radiology or cardiology departments.
These services include the provision of the allied healthcare professionals
(technologists) who staff the equipment and are 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 departments; 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, 1997, the Company provided in-house services at 131
hospitals throughout its operational markets.
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 delivery 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 December 31, 1997, the Company provided shared services to 448 of its
approximately 579 hospital customers, and to approximately 957 additional
clients across the healthcare spectrum, including physicians' offices, sub acute
and long-term care facilities, managed care systems, and government facilities.
2
<PAGE>
Ancillary Services
- ------------------
At various of its service sites, the Company provides cardiac monitoring
services, such as Holter monitoring, pacemaker monitoring and event recording
for patients of the Company's customers. In addition, until the sale of such
operations in December 1997, the Company maintained an operating unit providing
contract occupational and physical therapists on a long or short term basis to
healthcare facilities throughout the United States, and provided (through a
separate subsidiary) therapists and nurses in a home healthcare setting in the
Mexico City and surrounding areas. The Company currently has no plans to re-
enter the therapist placement business or the Mexican market.
CUSTOMERS
Each of the Company's customers, irrespective of the method by which they
are served, has an agreement or contract specifying the terms of service,
including the nature of services, pricing, payment and other material terms.
The Company's agreements for in-house services typically have a duration of
three to five years and specify equipment and personnel requirements, the scope
and types of services to be provided, and the pricing and payment structure. In
addition to longer term contracts, the Company performs a material portion of
its work under one-year contracts, or on a month to month basis. Non-renewal of
such contracts, or renewal on less favorable terms, could have a material
adverse effect on the Company's revenues, operating margins, and net income. If
the affected accounts were obtained in one of the Company's acquisitions, the
goodwill related to that acquisition could also become materially impaired. 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.
In 1996 and 1997, no single customer of the Company accounted for more than
10% of the Company's total revenues, and the three largest customers of the
Company accounted in the aggregate for approximately 6% of the Company's
revenues in 1996 and approximately 3% of the Company's revenues in 1997. In
most cases, the hospital or healthcare facility (which is the Company's
customer) is the responsible payment party. Third party payors accounted for
approximately 15% and 9% of the Company's revenues in 1996 and 1997,
respectively. Although the Company is not substantially reliant upon third-
party payment mechanisms, many of the Company's customers are reliant on third-
party payment, and delays or difficulties in third-party payments could thereby
adversely affect the receipt and timing of payments to the Company.
From 1991 to 1997, the Company's customer base increased from 323
(including seven in-house agreements) to approximately 1,536. Customers in 1997
included 579 hospitals (which includes 131 in-house agreements) and 957
physicians' offices, clinics and healthcare facilities in 21 states.
In 1997, the Company's revenues were attributable to in-house services,
shared services and ancillary services, in the following approximate
proportions:
In-House/Fixed Base 56%
Shared 39%
Ancillary 5%
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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, 1997 and 1996. 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 1997 and 1996
fiscal years.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands except per share data)
1997 1996
---- ----
<S> <C> <C> <C> <C>
Gross revenues $ 52,921 100% $ 24,171 100.0%
Operating expenses (41,258) 78.0 (20,268) (83.9)
-------- ---- -------- -----
Income from operations 11,663 22.0 3,904 16.1
Interest expense (4,056) (7.7) (870) (3.6)
Other income 369 0.7 487 2.0
--- --- ------- -----
Income from continuing operations 7,976 15.1 3,521 14.6
before income taxes
Income tax expense (2,216) (4.2) (1,062) (4.4)
------- ----
Net loss from disposed of operations (327) (0.6) -- --
----- ---- -- --
Net income 5,434 10.3% 2,459 10.2%
Earnings per share(1) .48 .29
Adjusted weighted average common shares 11,221 8,446
and equivalents outstanding (1)
</TABLE>
Note: Numbers may not add due to rounding
(1) Outstanding common shares and equivalents, and per share data, are on a
fully diluted basis.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Gross revenues increased by 118.9% to approximately $52,921,000 in 1997
from approximately $24,171,00 in 1996, primarily as a result of a full year of
operations in 1997 from the business acquired from Advanced Cardiovascular
Technology, Inc. ("ACT") in November 1996, and the two acquisitions from
Diagnostic Imaging Services, Inc. ("DIS") effective in the first quarter of
1997. Excluding revenues attributable to acquired businesses, gross revenues
increased by 15.3% to approximately $27,869,000 for 1997 from approximately
$24,171,000 for 1996.
4
<PAGE>
The Company's operating expenses increased from approximately $20,268,000
in 1996 to approximately $41,258,000 in 1997. As a percentage of gross
revenues, operating expenses decreased from 83.9% to 78.0%. 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 continuing operations increased by 126.6% to approximately
$7,976,000 in 1997 from approximately $3,521,000 in 1996. As a percentage of
gross revenues, income from continuing operations increased from 14.5% in 1996
to 22.0% in 1997.
Interest expense increased by 366.5% from approximately $870,000 in 1996 to
approximately $4,056,000 in 1997, primarily as a result of the $20,000,000 in
subordinated debt obligations incurred with The Prudential Insurance Company of
America ("Prudential") in connection with the Company's 1997 acquisitions from
DIS, and new debt obligations acquired in connection with those and other
business acquisitions. As a percentage of gross revenues, interest expense
increased from 3.6% in 1996 to 7.7% in 1997.
"Other income" is primarily interest earned on liquid investments.
Results for 1997 reflect a net loss (net of income tax benefit) of
approximately $327,000, arising from the dispositions of the Company's therapist
placement division and Mexican subsidiary.
Net income from continuing operations increased by 121.0% from
approximately $2,459,000 in 1996 to approximately $5,434,000 in 1997. This
increase is primarily due to the two DIS and other business acquisitions, and
continued consolidation of the Company's administrative functions.
COMPETITION
Radiology and cardiology diagnostic services 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.
LIQUIDITY AND CAPITAL RESOURCES
In July 1996, the Company and its subsidiaries entered in to an amended and
restated revolving credit and term loan facility with Chase Bank of Texas,
N.A., formerly Texas Commerce Bank National Association ("Chase"), 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 maximum principal
amount. At December 31, 1997, the Company's outstanding borrowings under
the loan agreement were $2,362,554 under the revolving credit facility, and
$6,121,094 under the term loan facility.
5
<PAGE>
These loans bear interest at varying rates, depending on the Company's relative
leverage from time to time. The Company's right to make additional borrowings
under the acquisition term loan facility will terminate on December 31, 1998,
and the revolving credit facility is scheduled to expire on June 30, 1999. At
December 31, 1997, the Company had approximately $5,126,000 in cash and cash
equivalents, and additional unused availability of $137,446 under its revolving
credit facility. Since September 30, 1997, the Company has not been in
compliance with certain financial covenants under the Chase loan agreement.
Chase has granted waivers or forbearance with respect to such noncompliance
through April 30, 1998. In May 1998, the Company entered into an amendment to
the Chase loan agreement pursuant to which, among other things, all outstanding
borrowings under the revolving credit facility were converted into borrowings
under the term loan facility (resulting in a balance of approximately $8,009,000
outstanding under the term loan facility as of May 7, 1998), all prior
noncompliance under the loan agreement was waived, and the financial covenants
contained in the loan agreement were prospectively modified.
In April 1997, the Company issued and sold to Prudential $20,000,000 in
principal amount of senior subordinated promissory notes (the "Subordinated
Notes"). The Subordinated Notes bear interest at a fixed rate of 10.5% per
annum, and mature as to principal in equal one-third installments on April 17 of
each of 2003, 2004 and 2005. The Subordinated Notes may be prepaid by the
Company under certain circumstances (including the requirement of certain "make-
whole" prepayment premiums), and the Company may be required (at the option of
the holders of the Subordinated Notes) to purchase the Subordinated Notes in the
event of a change in control of the Company. The Subordinated Notes also
require the Company and its subsidiaries to comply with certain financial
covenants, including limitations on certain other indebtedness.
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 1997, the Company received net proceeds of approximately $8,423,993 from
the exercise of its previously outstanding publicly traded warrants (which were
called for redemption in the first quarter of 1997), $562,500 from the exercise
of other warrants, and $1,492,801 from the exercise of options under the
Company's various stock option plans.
Based on the Company's operating plan, and subject to the Company achieving
appropriate amendments of or replacements for its current financing arrangements
with Chase, management believes that available 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, 1998.
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 directly or
indirectly derives a material portion of its receipts). Continuing pressures on
pricing structures applicable to the Company's services, or inability to renew
existing contracts, 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
11,400,633 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
6
<PAGE>
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 III directorships
which are 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.
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.
<TABLE>
<CAPTION>
Beneficially
Name and Address of Beneficial Owner Owned Percentage
- ------------------------------------ ------------ ----------
<S> <C> <C>
Max W. Batzer 635,255(1) 5.3%
2777 Stemmons
Dallas, Texas 75207
Thomas M. Sestak 308,066(2) 2.7%
1226 Ninth Avenue
San Francisco, California 94122
Brad A. Hummel 336,238(3) 2.9%
2777 Stemmons
Dallas, Texas 75207
Bo W. Lycke 84,800(4) 0.7%
2777 Stemmons
Dallas, Texas 75207
James R. Angelica 335,052(5) 2.9%
9717 Landmark Parkway Drive
St. Louis, Missouri 63127
All directors and executive officers
as a group (ten persons) 2,236,822(6) 17.5%
</TABLE>
________________
(1) Includes 480,505 shares which are subject to currently exercisable stock
options.
(2 Includes 452 shares held by Mr. Sestak as custodian for his minor children,
and 181,645 shares which are subject to currently exercisable stock options.
(3) Includes 327,645 shares which are subject to currently exercisable stock
options.
(4) Includes 83,800 shares which are subject to currently exercisable stock
options.
(5) Includes 20,000 shares which are subject to currently exercisable stock
options. Of the 315,052 outstanding shares, 277,052 are held jointly by Mr.
Angelica and his spouse and/or by trusts under their control.
(6) Includes 1,397,595 shares which are subject to currently exercisable stock
options.
7
<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>
Max W. Batzer (1) 54 Director, Chairman of the Board of Directors, and Chief
Executive Officer
Brad A. Hummel(2) 41 Director, President, Chief Operating Officer, Chief Financial
Officer and Nominee for Director
Thomas M. Sestak (1)(2) 55 Director
Bo W. Lycke (1)(2) 52 Director
James R. Angelica 50 Director and Senior Vice President
Bonnie G. Lankford 42 Senior Vice President-Operations
Don W. Caughron 42 Vice President-Finance
Carol J. Gannon 38 Senior Vice President - Clinical Services
Christopher L. Turner 37 Chief Financial Officer
Mark J. Foley 35 Vice President - Sales and Marketing
</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. Batzer's and Mr. Angelica's seats (Class
III directorships) are up for election at the Annual Meeting, Mr. Sestak's and
Mr. Lycke's seats (Class I directorships) next come up for election on or about
May 31, 1999, and Mr. Hummel's seat next comes up for election on or about May
31, 2000.
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.
8
<PAGE>
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 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 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.
Christopher L. Turner has been Chief Financial Officer of the Company since
April 1997. Prior to joining the Company, Mr. Turner was a self-employed
certified public accountant from 1992 to 1997, and shareholder in the Dallas,
Texas firm of Turner & Turner, P.C. Mr. Turner began his career as an internal
auditor for Interfirst Bank, and also worked for the Texas firm of Philip Vogel
& Co., and the national public accounting firm Grant Thornton. He is a member of
the American Institute of Certified Public Accountants (AICPA) and the Texas
Society of Certified Public Accountants (TSCPA) where he has been active on
various committees. Mr. Turner
9
<PAGE>
received his BSBA from Missouri Southern State College in 1983, Master of
Accountancy from the University of Missouri in 1984, and was granted his CPA
license in 1985.
Mark J. Foley has been Vice President - Sales and Marketing of the Company
since April 1997. Prior to joining the Company, Mr. Foley was General Manager
(Midwest Region) of the Diagnostic Services Division of National Medical Care,
Inc. (and its predecessor company, Mediq Imaging Services) from 1989 to 1997,
where he was responsible for one of that company's largest geographic
territories. He received a B.S. in Business Administration from Fitchburg State
College in 1984, and a M.B.A., Concentration in Marketing from the University of
Massachusetts, Boston, in 1994.
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by
the Company to its Chief Executive Officer and its four most highly compensated
executive officers (the "Named Officers") during the past three calendar years:
<TABLE>
<CAPTION>
Other Restricted
Annual Stock Options/ LTIP All Other
Name & Principal Position Year Salary Bonus Compensation(1) Awards SAR's (#) Payouts Compensation(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Max W. Batzer 1997 345,000 15,000 0 0 210,000 0 0
Chairman and CEO 1996 305,900 20,000 0 0 0 0 0
1995 231,000 7,500 0 0 75,000 0 0
Brad A. Hummel 1997 260,000 10,000 0 0 183,000 0 269,389
President and COO 1996 225,570 15,000 0 0 0 0 0
1995 173,133 7,500 0 0 30,000 0 0
Christopher L. Turner (3) 1997 103,125 0 0 0 150,000 0 24,640
Chief Financial Officer 1996 -- -- 0 0 0 0 0
1995 -- -- 0 0 3,000 0 0
Carol J. Gannon 1997 133,750 0 0 0 35,000 0 0
Sr. V.P. - Clinical Services 1996 85,102 0 65,000 0 0 0 0
1995 7,433 0 0 0 0 0 0
Bonnie G. Lankford 1997 135,000 16,000 0 0 45,000 0 121,585
Sr. V.P. - Operations 1996 99,420 0 0 0 0 0 0
1995 103,750 0 0 0 34,000 0 0
</TABLE>
_______________
(1) 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.
(2) Represents compensation arising from the exercise of non-qualified stock
options.
(3) Represents compensation from commencement of such individual's employment
in 1997.
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
10
<PAGE>
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, 2002. The employment agreement
provides for a minimum base salary of $414,000 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, 2002. The employment agreement provides for a
minimum base salary of $310,500 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, Carol J. Gannon, Christopher L. Turner and Mark J. Foley. Mr.
Angelica's employment agreement (as amended) calls for him to serve as a Senior
Vice President of the Company through August 31, 1998, at a base salary of
$160,000 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 $150,000 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 $150,000
per annum, and benefits comparable to those provided to other Company employees.
Mr. Turner's employment agreement calls for him to serve as Chief Financial
Officer of the Company through March 31, 1999, and provides for a fixed annual
salary of $165,000 per annum and benefits comparable to those provided to other
Company employees. Mr. Foley's employment agreement calls for him to serve as
Vice President - Sales and Marketing of the Company through May 31, 1999, and
provides for a fixed annual salary of $135,000 per annum, commissions on certain
new account revenues in excess of business development budgets, 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.
11
<PAGE>
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). As of April 13, 1998, there
were outstanding, under the 1992 Plan, stock options for an aggregate of 602,535
shares of Common Stock at exercise prices ranging from $.94 to $8.625 per share,
and expiring at various times from January 1999 through April 2005. The weighted
average exercise price under such options was approximately $1.98 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 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). As of April 13, 1998, substantially all of the 570,735
outstanding non-qualified options under the 1992 Plan contained 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.
12
<PAGE>
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 April 13, 1998, there were
outstanding, under the 1995 Non-Qualified Plan, stock options for an aggregate
of 290,850 shares of Common Stock at exercise prices ranging from $1.94 to
$10.25 per share, and expiring at various times from December 2000 through
January 2006. The weighted average exercise price under such options was $4.06
per share. Approximately 75% of such options contained 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 April 13, 1998, there were outstanding, under the 1995 Incentive
Plan, stock options for an aggregate of 145,039 shares of common stock at
exercise prices ranging from $6.25 to $10.69 per share, and expiring at various
times from July 2001 through December 2002. The weighted average exercise price
under such options was $8.74 per share.
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-Qualified Plan
are substantially similar to the requirements applicable to non-qualified
options under the 1992 Plan. As of April 13, 1998, there were outstanding, under
the 1997 Non-Qualified Plan, options for an aggregate of 641,661 shares of
Common Stock at exercise prices ranging from $7.44 to $10.69 per share and
expiring at various times from January 2005 through December 2005. The weighted
average exercise price under such options was $8.73 per share. Approximately
one-third of such options contained price reduction provisions similar to those
described above.
The following table lists information on stock options granted to each of
the Company's Named Officers and directors during the year ended December 31,
1997.
13
<PAGE>
<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 Non-qualified 100,000 16.0% $ 7.44 January 2, 2005
Qualified 10,000 1.6% $ 8.00 May 1, 2002
Qualified 11,221 1.8% $10.69 December 21, 2002
Non-qualified 88,779 14.2% $10.69 December 21, 2005
Brad A. Hummel Non-qualified 75,000 12.0% $ 7.44 January 2, 2005
Qualified 8,000 1.3% $ 8.00 May 1, 2002
Qualified 12,718 2.0% $10.69 December 21, 2002
Non-qualified 87,282 13.9% $10.69 December 21, 2005
Thomas M. Sestak Non-qualified 5,000 N/A $ 7.44 May 1, 2005
Non-qualified 10,000 N/A $10.69 December 21, 2005
Bo W. Lycke Non-qualified 5,000 N/A $ 7.44 January 2, 2005
Non-qualified 10,000 N/A $10.69 December 21, 2005
James R. Angelica Non-qualified 10,000 1.6% $ 7.44 January 2, 2005
Qualified 1,000 0.2% $ 8.00 May 1, 2002
Qualified 12,000 1.9% $10.69 December 21, 2002
Non-qualified 8,000 1.3% $10.69 December 21, 2005
Christopher L. Non-qualified 150,000 24.0% $ 8.19 April 3, 2005
Turner
Carol J. Gannon Non-qualified 15,000 2.4% $ 7.44 January 2, 2005
Qualified 5,000 0.8% $ 8.00 May 1, 2002
Qualified 9,000 1.4% $10.69 December 21, 2002
Non-qualified 6,000 1.0% $10.69 December 21, 2005
Bonnie G. Non-qualified 25,000 4.0% $ 7.44 January 2, 2005
Lankford Qualified 5,000 0.8% $ 8.00 May 1, 2002
Qualified 9,000 1.4% $10.69 December 21, 2002
Non-qualified 6,000 1.0% $10.69 December 21, 2005
</TABLE>
Through December 31, 1997, a total of 399,452 stock options granted under
the Plans had been exercised (214,875 by executive officers and directors).
14
<PAGE>
The following table sets forth all stock option exercises by Named Officers
and directors of the Company during the fiscal year ended December 31, 1997, the
"value" (i.e., the amount by which the fair market value of the underlying
common stock exceeded the option exercise price on the date of exercise)
realized upon such exercises, the number of remaining options held by Named
Officers and directors of the Company as of December 31, 1997, and the "value"
(i.e., the amount by which the fair market value of the underlying common stock
exceeded the option exercise price) as of December 31, 1997 of all unexercised
stock options then held by Named Officers and directors of the Company. Except
for certain options exercised in 1998, all of such stock options were then and
now are currently exercisable.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Acquired Unexercised In-The-Money
Name on Exercise Value Realized Options at Fiscal Year End Options at Fiscal Year End
- ---- --------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
Max W. Batzer 13,582 $138,784 505,505 $3,518,649
Brad A. Hummel 70,582 $778,574 352,645 $2,058,796
Thomas M. Sestak 15,000 $127,163 181,645 $1,637,946
Bo W. Lycke 8,200 $ 87,088 83,800 $ 688,788
James R. Angelica 38,000 $298,500 20,000 $ 22,500
Christopher L. Turner 3,000 $ 25,188 150,000 $ 543,750
Carol J. Gannon 0 -- 35,000 $ 101,563
Bonnie G. Lankford 44,702 $525,375 82,209 $ 678,750
</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 and January 1,
15
<PAGE>
1998, 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, 2000. 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 Chase, to redeem or purchase any shares of Common
Stock without Chase'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, 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 (a) 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), and (b) Christopher L. Turner and Mark
J. Foley were late in filing their respective Form 3s upon their becoming
executive officers of the Company (both of which filings have since been made).
16
<PAGE>
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, 1996 through January 19, 1996, and the high and low daily
last sale price on a quarterly basis from January 22, 1996 through the Record
Date, 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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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 $ 7.438
2nd Quarter $ 9.125 $ 7.25
3rd Quarter $15.125 $ 9.00
4th Quarter $ 14.75 $10.375
1998
- ----
1st Quarter $13.938 $10.063
2nd Quarter $ 12.50 $ 8.625
(to June 17, 1998)
</TABLE>
On the Record Date, the last reported sale price for the Common Stock was
$9.00, and the Company had 232 stockholders of record as of that date. The
Company believes that there are more than 3,000 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 Chase prohibits the payment of dividends
without Chase'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.
17
<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 reelection of Max W. Batzer and James R. Angelica as Class III Directors of
the Company; (b) 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, 1998; and (c) 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. ELECTION OF DIRECTORS
Nominees
At the Annual Meeting, two Class III Directors are to be elected, to
hold office until the 2001 Annual Meeting of Stockholders or until their
respective successors shall be elected and shall qualify. Max W. Batzer and
James R. Angelica, who currently serve as Class III Directors of the Company,
have been nominated by management for reelection; and biographical information
regarding Messrs. Batzer and Angelica can be found under the heading "Directors,
Nominees for Director, and Executive Officers of the Company" starting at page 8
above. Unless authority to vote for such nominees is withheld, it is intended
that shares represented by proxies in the accompanying form will be voted for
the election of such nominees. If either or both of such nominees 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 or persons as the
Board of Directors may recommend, but the Board does not know of any reason why
either of such nominees will be unable or unwilling to serve if elected.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS
VOTE IN FAVOR OF THE NOMINEES 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 the Compensation Committee consist of Max W. Batzer, Thomas M. Sestak and Bo
W. Lycke, and the members of the Audit Committee consist of Brad A. Hummel,
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, 1997, the Board of
Directors met a total of 12 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, 1997, the Compensation
Committee met a total of two 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.
18
<PAGE>
II. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1998
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, 1998. 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.
III. 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
1999 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, 1998. 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.
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,
1997. 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
_________________________________________________________________
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996.. F-3
Consolidated Statement of Operations for the years ended
December 31, 1997 and December 31, 1996............................... F-5
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997 and December 31, 1996............................... F-6
Consolidated Statement of Cash Flows for the years ended
December 31, 1997 and December 31, 1996............................... F-7
Notes to the Consolidated Financial Statements............................ F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
March 12, 1998
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, 1997 and 1996, 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 audits.
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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diagnostic Health
Services, Inc. and Subsidiaries at December 31, 1997 and 1996, 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
F-2
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,126,114 $ 229,547
Investment securities -- 5,000,000
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $612,437 and $1,413,168, respectively 17,294,128 10,530,807
Accrued interest and other 793,369 927,783
Contracts receivable - current 2,167,265 1,317,146
Prepaid expenses 1,528,931 1,359,596
Deferred tax asset 87,876 57,876
------------- ------------
Total Current Assets 26,997,683 19,422,755
------------- ------------
Property & Equipment:
Office furniture & equipment 2,015,749 1,139,535
Machinery & service equipment 35,286,844 20,089,559
Leasehold improvements 273,968 45,526
Less: accumulated depreciation and amortization (8,876,887) (5,425,437)
------------- ------------
Total Property & Equipment 28,699,674 15,849,183
------------- ------------
Other Assets:
Deposits and other 2,999,701 958,391
Deferred acquisition costs 122,536 164,199
Contracts receivable - long-term 10,058,674 1,739,587
Goodwill 38,793,903 15,022,858
Noncompete agreements 3,428,270 1,586,818
Less: accumulated amortization (3,246,266) (1,423,418)
------------- ------------
Total Other Assets 52,156,818 18,048,435
------------- ------------
Total Assets $ 107,854,175 $ 53,320,373
============= ============
</TABLE>
The following notes are an integral part of these financial statements.
F-3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC, & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
---------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 2,626,978 $ 1,957,758
Accrued liabilities 3,774,969 1,534,551
Current lease obligations 4,663,279 2,154,035
Current portion of long-term debt 1,485,113 1,991,824
Notes payable 2,362,554 1,572,000
Accrued acquisition cost 1,500,000 --
Current income taxes 1,363,543 195,000
------------- -------------
Total Current Liabilities 17,776,436 9,405,168
Long-term lease obligations 10,348,496 4,865,190
Long-term debt 24,961,570 7,081,745
Deferred rent 149,253 155,426
Other liabilities 2,647,277 778,446
Deferred income taxes 2,018,480 1,057,779
------------- -------------
Total Liabilities 57,901,512 23,343,754
------------- -------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value; authorized 15,000,000
shares; issued 10,718,867 shares in 1997 and 8,400,762
shares in 1996; outstanding 10,485,608 shares in 1997
and 8,167,503 shares in 1996 10,719 8,401
Preferred stock, $.001 par value; authorized 3,000,000
shares; issued and outstanding 695,593 shares in
1997 and 648,986 shares in 1996 696 649
Additional paid-in capital 42,151,656 27,617,425
Retained earnings 8,000,743 2,567,195
Foreign currency translation -- (5,900)
Stockholder receivable (103,500) (103,500)
Treasury stock at cost; 233,259 common shares (107,651) (107,651)
------------- -------------
Total Stockholders' Equity 49,952,663 29,976,619
------------- -------------
Total Liabilities & Stockholders' Equity $ 107,854,175 $ 53,320,373
============= =============
</TABLE>
The following 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,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Gross revenues $52,920,804 $24,171,286
----------- -----------
Expenses:
General & administrative 2,232,032 1,385,305
Salaries & employee benefits 23,658,464 11,898,905
Legal & professional 344,029 177,756
Rent & utilities 1,192,449 389,533
Taxes & insurance 1,103,643 420,375
Technical operating expenses 5,994,195 3,158,037
Provision for doubtful accounts 890,161 40,970
Depreciation and amortization 5,842,678 2,796,865
----------- -----------
Total operating expenses 41,257,651 20,267,746
----------- -----------
Income from operations 11,663,153 3,903,540
----------- -----------
Other income (expense):
Other income 369,403 486,704
Interest expense (4,056,301) (869,601)
----------- -----------
Total other income (expense) (3,686,898) (382,897)
----------- -----------
Income from continuing operations
before provision for income taxes 7,976,255 3,520,643
Provision for income taxes 2,215,726 1,061,560
----------- -----------
Income from continuing operations 5,760,529 2,459,083
Loss from disposal of operations,
net of income tax benefit of $160,952 (326,934) --
----------- -----------
Net income $ 5,433,595 $ 2,459,083
=========== ===========
Net income per share:
Basic $ 0.57 $ 0.37
=========== ===========
Diluted $ 0.48 $ 0.29
=========== ===========
Weighted average common shares outstanding
Basic 9,527,736 6,709,795
=========== ===========
Diluted 11,221,358 8,446,335
=========== ===========
</TABLE>
The following notes are an integral part of these financial statements.
F-5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Additional Retained Foreign Currency
Common Stock Stock Paid-In Capital Earnings Translation
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 5,206 $ -- $ 9,018,442 $ 108,118 $(6,171)
Shares issued in connection
with secondary offering 2,955 17,494,019
Common shares issued in
connection with acquisitions 209 917,459
Preferred shares issued in
connection with acquisitions 643
Stock options exercised 1 1,468
MDI warrants exercised 3 9,231
Foreign currency translations 271
Stock subscription collection
Shares issued in payment of debt 27 176,806
Preferred stock dividend 6 (6)
Net income 2,459,083
-----------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,401 649 27,617,425 2,567,195 (5,900)
Common shares issued in
connection with acquisitions 350 3,548,946
Stock options exercised 399 1,382,403
Warrants exercised 1,569 9,602,882
Disposition of Mexico Operations 5,900
Preferred stock dividend 47 (47)
Net income 5,433,595
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 $10,719 $696 $42,151,656 $8,000,743 $ --
===============================================================================================
<CAPTION>
Stock Subscription Treasury
Receivable Stockholder Receivable Stock Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ (8,250) $ (103,500) $ (107,651) $ 8,906,194
Shares issued in connection
with secondary offering 17,496,974
Common shares issued in
connection with acquisitions 917,668
Preferred shares issued in
connection with acquisitions 643
Stock options exercised 1,469
MDI warrants exercised 9,234
Foreign currency translations 271
Stock subscription collection 8,250 8,250
Shares issued in payment of debt 176,833
Preferred stock dividend --
Net income 2,459,083
-------------------------------------------------------------------------------------
Balance, December 31, 1996 -- (103,500) (107,651) 29,976,619
Common shares issued in
connection with acquisitions
Stock options exercised 1,382,802
Warrants exercised 9,604,451
Disposition of Mexico Operations 5,900
Preferred stock dividend --
Net income 5,433,595
-------------------------------------------------------------------------------------
Balance, December 31, 1997 $ -- $ (103,500) $ (107,651) $49,952,663
=====================================================================================
</TABLE>
The following notes are an integral part of these financial statements.
F-6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash Flows from Operations:
Net income $ 5,433,595 $ 2,459,083
Adjustments to Reconcile Net Income to
Net Cash (Used in) Provided by Operations:
Depreciation and amortization 5,842,678 2,796,865
Deferred federal income taxes 930,701 848,965
Deferred rent expense (6,172) 155,426
Foreign currency translation 5,900 271
Provision for doubtful accounts 890,161 --
Net chargeoffs for bad debt (2,488,470) --
Increase in trade receivable (4,792,489) (4,331,129)
Increase in contracts receivable (9,169,206) (1,164,244)
Increase in prepaid expenses (93,686) (701,492)
Increase in other assets (1,279,409) (590,986)
Increase in accounts payable 336,490 14,404
Increase in accrued liabilities 716,231 655,716
Increase in income taxes payable 1,168,543 171,035
Increase in other liabilities 1,786,249 279,411
------------ ------------
Net Cash (Used in) Provided by Operations (718,884) 593,325
------------ ------------
Cash Flows From Investing Activities:
(Increase) decrease in cash investments 5,000,000 (5,000,000)
Cash payments for the purchase of property (3,550,845) (1,487,178)
Acquisition of businesses, net of cash acquired (15,962,847) (13,003,736)
Additional subsidiary acquisition costs (1,389,671) (449,829)
(Increase) decrease in other receivables 91,691 (524,384)
(Increase) decrease in employee receivables 49,473 (87,587)
Increase in stockholder receivable (6,750) (6,210)
------------ ------------
Net Cash Used in Investing Activities (15,768,949) (20,558,924)
------------ ------------
</TABLE>
The following notes are an integral part of these financial statements
F-7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 10,987,254 17,751,177
Net borrowings on line of credit 790,554 872,000
Proceeds from issuance of loans 7,980,000 8,569,573
Proceeds from senior subordinated lender 20,000,000 --
Proceeds from stock subscription receivable -- 8,250
Deferred financing charge (800,000) --
Principal payments on long-term debt (13,902,001) (6,315,642)
Principal payments on capital lease obligations (3,671,407) (1,395,391)
------------ -----------
Net Cash Provided by Financing Activities 21,384,400 19,489,967
------------ -----------
Net increase (decrease) in cash and cash equivalents 4,896,567 (475,632)
Cash and cash equivalents, beginning of year 229,547 705,179
------------ -----------
Cash and cash equivalents, end of year $ 5,126,114 $ 229,547
============ ===========
</TABLE>
The following notes are an integral part of these financial statements
F-8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1997 and 1996
--------------------------
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.
Acquisitions are discussed in Note 13 of these Notes to Financial Statements.
The following chart sets forth the corporate structure of the Company and its
100% owned subsidiaries at December 31, 1997:
<TABLE>
<CAPTION>
----------------------------------
Diagnostic Health Services, Inc.
("DHS" or the "Company")
----------------------------------
----------------------------------
DHS Management
Services, Inc.
("DHSMS")
----------------------------------
<S> <C> <C> <C> <C> <C>
------------- ----------------- --------------- ---------------- ----------------- ------------------
Alpha Scanning Mobile Diagnostic Specialized Heart Institute of SoCal Diagnostic Mobile Diagnostic
service inc. Systems, Inc. Imaging Tulsa, Inc. Imaging, Inc, Imaging, Inc.
("Alpha") ("MDS") Services, Inc. ("HIT") ("SDS") ("Mobile")
("SIS")
------------- ----------------- --------------- ---------------- ----------------- ------------------
- ----------------------- ----------------- ----------------- ------------------------- ------------------ -----------------
Advanced Pediatric Cardiac Concepts Ultrasound SoCal St. Louis Mobile
Diagnostic Imaging Inc. Echocardiographic Inc. ("CCI") Diagnostic Services, Ltd. Subsidiary I, Inc. Ultrasound Inc.
("ADI") Diagnostic ("UDS") ("SLM")
Imaging Inc.
("PEDI")
- ----------------------- ------------------ ----------------- -------------------------- ------------------ -----------------
---------------- ---------------------
SoCal Santa Monica
Subsidiary II, Imaging Center
Inc. Limited Partnership
---------------- ----------------------
</TABLE>
In addition to the above, DHS and DHSMS have two inactive wholly-owned
subsidiaries, Diagnostic Health Services de Mexico, S.A. de C.V. and HomeCare
International, Inc.
F-9
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Diagnostic Health Services, Inc. and its subsidiaries. All
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
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.
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.
INVESTMENT SECURITIES - Investment securities consist of commercial paper with a
maturity of 180 days. All of the Company's investments are carried at cost and
classified as held-to-maturity securities. As of December 31, 1996, cost
approximates market; hence, there were no unrealized gains or losses on
investment securities. No realized gains or losses were recognized during the
years ended December 31, 1997 and 1996 since all securities were held to
maturity.
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.
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.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Property and equipment are
stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets, ranging from 3 to 10 years.
Depreciation expense amounted to $3,535,037 and $2,090,648 for the years ended
December 31, 1997 and 1996, respectively.
F-10
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------
DEPOSITS AND OTHER ASSETS - Deposits and other assets include deferred finance
costs associated with the senior subordinated indebtedness which is amortized
over the life of the indebtedness.
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.
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,"
the Company records impairment losses 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 SFAS 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.
F-11
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------
STOCK-BASED COMPENSATION - In October 1995, SFAS No. 123, "Accounting for Stock-
based Compensation" 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. The Company 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.
NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income." This statement,
which is effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting and displaying comprehensive income and its
components in the financial statements. Under this statement, the Company is
required to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings in the stockholders' equity section of
the balance sheet.
F-12
<PAGE>
NOTE 3 - PREPAID EXPENSES
- -------------------------
At December 31, 1997 and 1996, prepaid expenses consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Prepaid insurance $ 176,708 $ 171,907
Prepaid supplies 860,279 509,471
Other 493,538 678,218
---------- ----------
$1,530,525 $1,359,596
========== ==========
</TABLE>
NOTE 4 - NOTES PAYABLE
- ----------------------
At December 31, 1997 and 1996, notes payable consisted of the following
obligations:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
$2,500,000 line of credit with bank, with
interest at varying rates (9.0 % at
December 31, 1997), due June 30, 1998.
Secured by substantially all of the assets of
the Company.
$2,362,554 $1,572,000
---------- ----------
$2,362,554 $1,572,000
========== ==========
</TABLE>
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.
F-13
<PAGE>
NOTE 4 - NOTES PAYABLE (CONTINUED)
- ---------------------------------
At December 31, 1997, the Company was not in compliance with certain covenants
in its loan agreement with Chase Bank of Texas, N.A. ("Chase"). The Company did
not timely comply with the financial statement reporting and compliance
certificate covenants for two reporting periods. Additionally, the Company was
not in compliance with certain debt ratio and fixed charge coverage ratio
covenants. Chase has granted waivers or forbearance with respect to such non-
compliance at December 31, 1997, and has granted an extension of the deadlines.
NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt at year-end consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Note payable to bank in connection with acquisitions,
maturing June 1998, due in monthly installments of
$142,826, plus interest at varying rates (9.0% at
December 31, 1997); secured by substantially all of
the assets of the Company. $ 6,121,094 $ 8,569,573
Senior subordinated promissory notes payable in
connection with DIS acquisitions, maturing April 17,
2005, interest at 10.50% due in quarterly installments
and principal of $6,666,667 due on April 17, 2003,
2004, and 2005; unsecured. 20,000,000 --
Notes payable to financial institutions, maturing through
2000, due in monthly installments of $2,440 including
principal and interest from 7.0% to 10.0%; secured by
vehicles. 31,200 51,917
Note payable to corporation, maturing May 15, 2001,
due in monthly installments of $1,825 including principal
and interest at 7.25%; secured by equipment. 66,132 -
Noncompete agreements, maturing through 1998, due
in monthly payments of $17,083 and $27,628, respectively,
including principal and interest of 6% to 9%; unsecured. 228,257 452,079
----------- -----------
26,446,683 9,073,569
Less current maturities (1,485,113) (1,991,824)
----------- -----------
$24,961,570 $ 7,081,745
=========== ===========
</TABLE>
F-14
<PAGE>
NOTE 5 - LONG-TERM DEBT (CONTINUED)
- ----------------------------------
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31,
------------------------
<S> <C>
1998 $ 1,485,113
1999 1,255,588
2000 1,248,578
2001 2,457,404
2002 --
Thereafter 20,000,000
-----------
$26,446,683
===========
</TABLE>
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,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Office furniture & equipment $ 56,783 $ 56,783
Machinery & service equipment 20,089,761 7,045,440
------------ ------------
20,146,544 7,102,223
Less: accumulated amortization (2,687,782) (695,199)
------------ ------------
$ 17,458,762 $ 6,407,024
============ ============
</TABLE>
Depreciation expense includes the amortization of assets acquired through
capital leases.
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.
F-15
<PAGE>
NOTE 6 - LEASES (CONTINUED)
- --------------------------
Future minimum lease payments under non-cancelable leases at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
For the Years Ending Capital Operating
December 31, Leases Leases
-------------------- ------------ ------------
<S> <C> <C>
1998 $ 5,966,316 1,013,443
1999 4,830,555 799,704
2000 4,142,080 899,681
2001 2,471,338 387,681
2002 306,274 198,738
Thereafter -- 4,258
----------- -----------
Total minimum lease payments 17,716,563 $ 3,303,505
===========
Less: amount representing interest 2,704,788
-----------
Present value of minimum lease payments 15,011,775
Less: current portion 4,663,279
------------
Long-term capital lease obligation $ 10,348,496
============
</TABLE>
Rent expense during the years ended December 31, 1997 and 1996 for all operating
leases was $1,084,054 and $758,351, respectively, and is included in operating
expenses.
NOTE 7 - PREFERRED STOCK
- ------------------------
The preferred stockholder is entitled to receive preferential and cumulative
annual preferred stock dividends at a rate 7.25% of liquidation preference value
of $4,500,000 and is entitled to a preference, in liquidation, in the amount of
$7 per share plus accrued and unpaid dividends. As of December 31, 1997, there
were no cumulative preferred stock dividends in arrears. Preferred shares are
not entitled to vote except in certain circumstances.
F-16
<PAGE>
NOTE 8 - 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 these employment agreements are as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31,
------------------------------
<S> <C>
1998 $ 717,683
1999 370,333
2000 66,367
-----------
$ 1,154,383
===========
</TABLE>
NOTE 9 - INCOME TAXES
- ---------------------
The consolidated provision for income taxes included in the statement of
operations for the years ended December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current taxes payable $ 1,363,543 $ 195,000
Deferred taxes payable:
Long term 882,183 869,413
Current (benefit) (30,000) (2,853)
----------- -----------
Provision for income taxes $ 2,215,726 $ 1,061,560
=========== ===========
</TABLE>
F-17
<PAGE>
NOTE 9 - INCOME TAXES (CONTINUED)
- --------------------------------
Net deferred tax assets and liabilities at December 31, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $2,013,838 $ 977,060
Goodwill 176,403 152,501
---------- ----------
Total deferred tax liabilities 2,190,241 1,129,561
---------- ----------
Deferred tax assets:
Receivable allowance 85,229 --
Accrued vacation 2,647 57,876
Noncompete agreements 171,761 71,782
---------- ----------
Total deferred tax assets 259,637 129,658
---------- ----------
Net deferred tax liability $1,930,604 $ 999,903
========== ==========
</TABLE>
The difference between the federal statutory tax rate and the effective tax rate
on continuing operations for the years ended December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Federal Statutory Rate 35% 35%
Property and equipment 5 --
Benefit of net loss on discontinued operations (2) --
Intangible assets (1) 2
Utilization of tax loss carryforwards -- (12)
Allowance for doubtful accounts (9) --
Other, net 1 5
------ ------
Effective tax rate 29% 30%
====== ======
</TABLE>
NOTE 10 - 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-18
<PAGE>
NOTE 10 - 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 for acquisitions, capital expenditures,
working capital and retirement of outstanding debt.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Cash paid for the years ended December 31, 1997 and 1996 for interest was
approximately $3,520,340 and $921,512, respectively. Cash paid for Federal
income taxes for the years ended December 31, 1997 and 1996 amounted to $23,022
and $0, respectively.
The Company acquired assets in exchange for the issuance of common stock and the
assumption of various liabilities in connection with certain acquisitions. Cash
of the following for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Assets acquired $ 30,628,401 $ 19,904,468
Liabilities assumed (11,000,061) (6,032,525)
Common stock issued (3,351,000) (851,643)
------------ ------------
Total cash paid 16,277,340 13,020,300
Less cash acquired (314,493) (16,564)
------------ ------------
Net cash paid $ 15,962,847 $ 13,003,736
============ ============
</TABLE>
Property and equipment acquired under capital leases for the years ended
December 31, 1997 and 1996 amounted to $14,642,967 and $5,285,069, respectively.
The Company issued 26,215 and 60,831 shares of common stock valued at $48,296
and $66,668, in 1997 and 1996, respectively, pursuant to contingent stock
issuance agreements relating to various acquisitions.
F-19
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company is involved in certain lawsuits arising in the ordinary course of
business. In the opinion of the Company's legal counsel and management, any
liability resulting from such litigation would not be material in relation to
the Company's financial position.
NOTE 13 - 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 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 the ultrasound business 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-20
<PAGE>
NOTE 13 - ACQUISITIONS (CONTINUED)
- ---------------------------------
In January 1997, the Company, through its Heart Institute of Tulsa, Inc.
subsidiary ("HIT"), 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.
On March 21, 1997 (effective as of March 1, 1997), the Company, through its
second-tier wholly-owned subsidiary, SoCal Diagnostic Services, Inc. ("SoCal"),
purchased substantially all of the operating assets (exclusive of cash) of the
ultrasound division of Diagnostic Imaging Services, Inc. ("DIS"), which business
consists primarily of providing hospital-based and mobile non-invasive
ultrasound and other diagnostic testing services to the acute and post-acute
care industry and primary care physicians in the greater Los Angeles and San
Diego, California metropolitan areas and in counties adjacent thereto. The
purchase included $6,519,475 of various assets (including goodwill), including
approximately $2,579,158 of equipment, furniture and fixtures, $8,590 of
security deposits, and $3,931,721 of goodwill. The purchase price paid to DIS
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 in respect of fixed assets in the aggregate
principal amount of $1,519,261. The Company also agreed that it would,
subsequent to the closing, in the event of certain business developments, issue
certain common stock purchase warrants to DIS, and the Company and SoCal
obtained a 10-year non-competition agreement from DIS in consideration of the
cash sum of $1,000,000 paid to DIS and its ultimate corporate parent at the time
of closing.
On April 17,1997 (effective March 1, 1997), SoCal 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.
F-21
<PAGE>
NOTE 13 - ACQUISITIONS (CONTINUED)
- ---------------------------------
The funds utilized to pay the cash portion of the purchase price in the second
DIS 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) 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.
Effect as of October 17, 1997, HIT acquired CardioVision, Inc. ("CVI"), a Las
Vegas, Nevada-based provider of non-invasive diagnostic ultrasound testing
services. The consideration paid for CVI consisted of 29,728 shares of DHS
common stock and a $340,000 cash payment to the former stockholders of CVI.
On November 19, 1997, SoCal acquired the assets and business of Valley
Diagnostic Services ("Valley"), a proprietorship providing mobile diagnostic
ultrasound testing services in southern California. The consideration paid by
SoCal in this transaction consisted of 13,309 shares of DHS common stock and a
$100,000 cash payment to the former owner of Valley.
Effective as of December 2, 1997, HIT acquired Medical Diagnostic Imaging, Inc.
("MDII"), a Huntsville, Alabama-based provider of non-invasive diagnostic
ultrasound testing services. The consideration for MDII consisted of 100,524
shares of DHS common stock and a $900,000 cash payment to the former
stockholders of MDII.
F-22
<PAGE>
NOTE 13 - ACQUISITIONS (CONTINUED)
- ---------------------------------
Effective as of December 9, 1997, SoCal acquired Mobil Diagnostics, Inc.
("Mobil"), a southern California-based provider of mobile non-invasive
diagnostic ultrasound testing services. The consideration for Mobil consisted
of 39,720 shares of DHS common stock and a cash payment of $150,000 to the
former stockholder of Mobil. In addition, SoCal agreed to cause DHS to issue
certain additional shares of DHS common stock to the former stockholder within
15 days after the first anniversary of the closing date, and to make cash
payments to the former stockholder of $50,000 and $28,000, respectively, within
15 days after the first and second anniversaries of the closing date.
Effective as of December 30, 1997, the Company's second-tier wholly-owned
subsidiary Mobile Diagnostic Systems, Inc. ("MDS") acquired Medical Ancillary
Services, Inc. ("MASI"), a Fort Worth-based provider of non-invasive diagnostic
ultrasound and nuclear imaging testing services. The consideration paid for
MASI consisted of 53,582 shares of DHS common stock and a cash payment of
$384,000 to the former stockholders of MASI.
F-23
<PAGE>
NOTE 14 - 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 1997 and 1996 were
$49,652 and $63,740, 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, 1997 and 1996,
and $33,660 and $26,910, respectively, of accrued interest on the stockholder
receivables.
NOTE 15 - 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. As of
December 31, 1997, substantially all of the available options under the 1992
Plan have been granted at exercise prices ranging from $0.9375 to $8.625 per
common share, and approximately 94% of such awarded options contain optional
price reduction provisions in connection with any change in control of the
Company. Stock options outstanding under the 1992 Plan amounted to 639,308 and
793,585 as of the years ended December 31, 1997 and 1996, respectively.
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,
1997, the Company's Board of Directors had awarded substantially all of the
available options under the 1995 Non-Qualified Plan at exercise prices ranging
from $1.9375 to $10.25 per common share. Stock options outstanding under the
1995 Non-Qualified Plan amounted to 350,200 and 454,625 as of the years ended
December 31, 1997 and 1996, respectively. At December 31, 1997, approximately
75% of such awarded options contain optional price reduction provisions in
connection with any change in control of the Company.
F-24
<PAGE>
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
- ---------------------------------------
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, 1997, the
Company's Board of Directors had awarded 298,800 options under the 1995
Incentive Plan at exercise prices ranging from $6.25 to $10.6875 per common
share. Stock options outstanding under the 1995 Incentive Plan amounted to
159,789 and 127,250 as of the years ended December 31, 1997 and 1996,
respectively.
In January 1997, the Board of Directors of the Company adopted and approved 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 the Company's common stock. The exercise price,
expiration date and other terms of any options granted under the 1997 Non-
Qualified Plan are substantially similar to the requirements applicable to non-
qualified options under the 1992 Plan. Through December 31, 1997, the Company's
Board of Directors had awarded, under the 1997 Non-Qualified Plan, stock options
for an aggregate of 696,061 common shares at exercise prices ranging from
$7.4375 to $10.6875 per common share. Stock options outstanding under the 1997
Non-Qualified Plan amounted to 657,161 as of the December 31, 1997. At December
31, 1997, approximately one-third of such awarded options contain optional price
reduction provisions in connection with any change in control of the Company.
F-25
<PAGE>
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
- ---------------------------------------
A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 1,375,460 $3.81 1,215,401 $2.55
Granted 897,890 $8.88 234,500 $6.30
Exercised (399,452) $4.67 (1,125) $3.65
Forfeited/expired (67,440) $5.70 (73,316) $2.96
---------- ----------
Outstanding, end of period 1,806,458 $7.53 1,375,460 $3.81
========== ==========
Options exercisable, end of period 1,806,458 $7.53 1,358,960 $3.75
========== ==========
Weighted average fair value of
options granted during the year $ 8.88 $ 6.30
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Range of Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
----------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
$0.9375 to $3.00 737,308 3.67 $ 1.94 737,308 $ 1.94
$3.01 to $5.50 157,000 5.91 $ 4.48 157,000 $ 4.48
$5.51 to $7.50 383,350 5.87 $ 7.18 383,350 $ 7.18
$7.51 to $10.00 248,800 5.96 $ 8.12 248,800 $ 8.12
$10.01 to $13.00 280,000 6.03 $10.69 280,000 $10.69
---------- ----------
1,806,458 5.26 $ 7.48 1,806,458 $ 7.48
========== ==========
</TABLE>
F-26
<PAGE>
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
- ---------------------------------------
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, 1997 and 1996,
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 $4,545,538 and $2,410,489 for the years ended December
31, 1997 and 1996, respectively. Accordingly, basic and diluted earnings per
share would have amounted to $0.36 per share and $0.31 per share, respectively,
as of December 31, 1996. Accordingly, basic and diluted earnings per share would
have amounted to $0.48 per share and $0.47 per share, respectively, as of
December 31, 1997.
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 held 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.
NOTE 16 - 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, at prices ranging from $5.48 to $7.50 per
share, 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.
F-27
<PAGE>
NOTE 16 - WARRANTS (CONTINUED)
- -----------------------------
On April 17, 1997, the Company issued 60,000 common stock purchase warrants to
Prudential Insurance Company of America in connection with the sale of
$20,000,000 in principal amount of senior subordinated promissory notes. As of
December 31, 1997, no warrants under this agreement had been exercised. At
December 31, 1997, stock warrants outstanding amounted to 386,150, at exercise
prices ranging from $5.48 to $12.25 per common share.
NOTE 17 - EARNINGS PER SHARE
- ----------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the year ended December 31, 1997
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income before extraordinary item $ 5,433,595
Less: preferred stock dividend (47)
-----------
Basic earnings per share
Income available to common stockholders $ 5,433,548 9,527,736 $ 0.57
=========
Effect of dilutive securities
Convertible preferred stock 47 695,593
Stock warrants -- 156,993
Employee stock options -- 841,036
----------- -------------
Diluted earnings per share
Income available to common stockholders
plus assumed conversions $ 5,433,595 11,221,358 $ 0.48
=========== ============= =========
</TABLE>
F-28
<PAGE>
NOTE 17 - EARNINGS PER SHARE (CONTINUED)
- ----------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1997
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income before extraordinary item $ 2,459,083
Less: preferred stock dividend (6)
-----------
Basic earnings per share
Income available to common stockholders $ 2,459,077 6,709,795 $ 0.37
=========
Effect of dilutive securities
Convertible preferred stock 6 648,986
Stock warrants -- 126,463
Contingent stock options -- 58,935
Employee stock options -- 902,156
----------- -------------
Diluted earnings per share
Income available to common stockholders
plus assumed conversions $ 2,459,083 8,446,335 $ 0.29
=========== ============= =========
</TABLE>
Options to purchase 5,000 shares of common stock at $7.50 per share were
outstanding at December 31, 1996, but were not included in the computation of
diluted earnings per share because the options had an antidilutive effect on
earnings per share. As of December 31, 1997, warrants to purchase 60,000 shares
of common stock at $12.25 per share were outstanding but were not included in
the computation of diluted earnings per share because the options had an
antidilutive effect on earnings per share.
NOTE 18 - EMPLOYEE BENEFIT PLAN
- -------------------------------
Effective March 31, 1997, the Company adopted a defined contribution pension
plan for all eligible employees. The plan provides for savings contributions by
employees of 1 to 15% of the their compensation, subject to limitations of the
Employee Retirement Income Security Act. The Company may, at its discretion,
make a matching contribution and/or discretionary contribution to the plan, both
of which shall be determined by the Board of Directors. Such contributions are
expenses and funded currently. The Company made no discretionary contributions
during the year ended December 31, 1997.
F-29
<PAGE>
NOTE 19 - DISCONTINUED OPERATIONS
- ---------------------------------
In December 1997, the Company's Board of Directors adopted a plan to discontinue
the operations of HomeCare International de Mexico S.A. de C.V. ("HomeCare.")
On December 30, 1997, the Company sold all of the outstanding stock of HomeCare
and terminated all operations within Mexico. Accordingly, the loss of $392,674,
net of tax benefit, from the disposal of a business segment has been segregated
from continuing operations and reported as separate line item on the statement
of operations. The net operating activity of HomeCare after the measurement
date through date of disposal on December 30, 1997, was not significant.
In November 1997, the Company's Board of Directors adopted a plan to discontinue
the operations of providing temporary placement with allied healthcare
professionals throughout the U.S. and Mexico. Effective as of December 1, 1997,
the Company sold certain assets associated with this business segment.
Accordingly, the gain of $65,738, net of tax expense, from the disposal of a
business segment has been segregated from continuing operations and reported as
separate line item on the statement of operations. The net operating activity
of this segment after the measurement date through date of disposal on December
1, 1997 was not significant.
NOTE 20 - SUBSEQUENT EVENTS
- ---------------------------
Effective as of January 30, 1998, MDS acquired International Cardiac Monitoring,
Inc. ("ICM"), a Houston-based provider of medical testing and monitoring
services. The consideration paid for ICM consisted of 26,946 shares of DHS
common stock.
On February 26, 1998, SoCal acquired from Diagnostic Imaging Services, Inc., a
Delaware corporation ("DIS-Delaware"), one-half of the outstanding general
partnership interests and one-half of the outstanding limited partnership
interests in Scripps Chula Vista Imaging Center, L.P. ("SCVIC"), whose business
consists of the operations of a magnetic resonance imaging center on the campus
of Scripps Hospital in Chula Vista, California. The consideration paid for such
partnership interests consisted of 127,250 shares of DHS common stock, which DHS
has committed to include in its next registration statement filed with the
Securities Exchange Commission (other than a registration statement in respect
of any acquisition, merger or consolidation relating to DHS or any employee
benefit plan of DHS).
In March, 1998, DIS-Delaware agreed, in principal, to convert $1,500,000
deferred liabilities owed in accordance with the acquisition of the MRI centers
to common stock; therefore, the deferred liabilities were recorded as current
liabilities at December 31, 1997.
F-30
<PAGE>
NOTE 20 - SUBSEQUENT EVENTS (CONTINUED)
- --------------------------------------
Effective as of March 2, 1998, the Company acquired Sonomed, Inc. ("Sonomed"), a
Birmingham, Alabama-based provider of medical testing and monitoring services.
The consideration paid for Sonomed consisted of 14,571 shares of DHS common
stock and a cash payment of $30,000 to the former stockholder of Sonomed.
F-31
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
PROXY - 1998 ANNUAL MEETING OF STOCKHOLDERS
JULY 15, 1998
THIS PROXY STATEMENT IS SOLICITED BY THE BOARD OF DIRECTORS IN CONNECTION
WITH THE 1998 ANNUAL MEETING OF STOCKHOLDERS OF DIAGNOSTIC HEALTH SERVICES,
INC., TO BE HELD ON JULY 15, 1998. 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 1998 Annual Meeting of Stockholders to be held on
Wednesday, July 15, 1998, 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.
<PAGE>
Election of the following proposed Class III Directors to hold office until
the 2001 Annual Meeting of Stockholders or until his successor shall
be elected and shall qualify:
<TABLE>
<CAPTION>
Nominee FOR WITHHOLD ABSTAIN
------- ------ ---------- ---------
<S> <C> <C> <C>
Max W. Batzer ( ) ( ) ( )
James R. Angelica ( ) ( ) ( )
</TABLE>
Ratify the appointment of Simonton, Kutac & Barnidge, L.L.P., as
independent auditors for the Company for the fiscal year ending
December 31, 1998.
( ) 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 _____________, 1998
______________________________ ___________________________
Signature Print Name
______________________________ ___________________________
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.
