<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
[ X ] Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____ to ____
COMMISSION FILE NUMBER 0-21758
----------------------------------------
DIAGNOSTIC HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2960048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 Stemmons Freeway, Suite 1525, Dallas, Texas 75207
(Address of principal executive offices, including zip code)
(214)634-0403
(Registrant's telephone number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------ -----
As of September 30, 1998, there were 11,643,342 issued and 11,410,083 shares
outstanding of Registrant's common stock, $.001 par value.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets 2-3
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations
Nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Operations
Three months ended September 30, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity
September 30, 1998 6
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 7
Consolidated Statements of Cash Flows
Three months ended September 30, 1998 and 1997 8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis or
Plan of Operation 14-21
PART II. Other Information 22
Signatures 23
Item 6. Exhibits and Reports on Form 8-K 24
Exhibit 11 - Statement re: computation of per share earnings 25
Exhibit 27 - Financial Data Schedule (EDGAR filing only)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
------
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,031,045 $ 5,126,114
Accounts receivable: Trade, net of
allowance for doubtful accounts 15,517,697 17,294,128
Accrued interest and other 1,085,966 793,369
Contract receivables - current 6,453,563 2,167,265
Deferred federal income taxes 138,592 87,876
Prepaid expenses and other 1,184,143 1,528,931
------------ -----------
Total Current Assets 26,411,006 26,997,683
------------ -----------
PROPERTY & EQUIPMENT:
Office furniture & equipment 2,240,196 2,015,749
Machinery & service equipment 31,050,300 35,286,844
Leasehold improvements 1,645,198 273,968
Less: Accumulated depreciation and amortization (11,072,507) (8,876,887)
------------ -----------
Total Property & Equipment 23,863,187 28,699,674
------------ -----------
OTHER ASSETS:
Deposits and other assets 2,992,003 2,999,701
Deferred acquisition costs 3,671 122,536
Contract receivables - long-term 19,209,573 10,058,674
Equity in unconsolidated partnership 1,181,812 --
Goodwill 41,059,834 38,793,903
Noncompete agreements 3,450,270 3,428,270
Less: Accumulated amortization (5,141,194) (3,246,266)
------------ -----------
Total Other Assets 62,755,969 52,156,818
------------ -----------
TOTAL ASSETS $113,030,162 $107,854,175
============ ============
</TABLE>
2
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,040,074 $ 2,626,978
Accrued liabilities 3,470,206 3,774,969
Current lease obligations 4,263,770 4,663,279
Current portion of long-term debt 450,785 1,485,113
Deferred liability -- 2,362,554
Notes payable -- 1,500,000
Current income taxes 739,866 1,363,543
------------ ------------
Total Current Liabilities 11,964,701 17,776,436
Long-term lease obligations 7,963,906 10,348,496
Long-term debt 7,560,145 4,961,570
Senior subordinated debt 20,000,000 20,000,000
Deferred rent 145,880 149,253
Other liabilities 6,616,784 2,647,277
Deferred income taxes 2,018,480 2,018,480
------------ ------------
Total Liabilities 56,269,896 57,901,512
------------ ------------
Stockholders' Equity:
Common stock, $.001 par value, authorized
50,000,000 shares; issued 11,643,342 and
10,718,867 shares and outstanding 11,410,083
and 10,485,608 shares at September 30, 1998
and December 31, 1997, respectively 11,639 10,719
Preferred stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
695,593 shares at September 30, 1998 and at
December 31, 1997; $4,869,154
liquidation preference 696 696
Additional paid-in capital 48,381,025 42,151,656
Retained earnings 8,578,057 8,000,743
Stockholder receivable (103,500) (103,500)
Treasury stock (at cost) (107,651) (107,651)
------------ ------------
Total Stockholders' Equity 56,760,266 49,952,663
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $113,030,162 $107,854,175
============ ============
</TABLE>
3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- -----------
REVENUES:
Gross revenues $43,861,302 $37,932,629
----------- -----------
<S> <C> <C>
EXPENSES:
General & administrative 2,581,337 1,622,878
Salaries & employee benefits 19,416,449 17,159,775
Legal & professional 320,911 183,707
Rent & utilities 1,168,095 855,535
Taxes & insurance 919,085 377,983
Technical operating expenses 4,465,178 4,914,974
Provision for doubtful accounts 295,296 458,420
Depreciation and amortization 5,259,873 4,219,391
Restructuring and impairment expense 5,518,489 --
---------- ----------
TOTAL OPERATING EXPENSES 39,944,713 29,792,663
---------- ----------
Equity in earnings of
unconsolidated partnership 225,728 --
---------- ----------
INCOME FROM OPERATIONS 4,142,317 8,139,966
OTHER INCOME (EXPENSE):
Other income 104,635 304,293
Interest expense (3,342,463) (2,550,911)
---------- ----------
TOTAL OTHER INCOME (EXPENSE) (3,237,828) (2,246,618)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 904,489 5,893,348
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES 327,175 2,005,400
---------- ----------
NET INCOME (LOSS) $577,314 $3,887,948
========== ==========
EARNINGS (LOSS) PER SHARE :
Basic $0.05 $0.42
========== ==========
Diluted $0.05 $0.35
========== ==========
Weighted average common shares outstanding:
Basic 11,174,841 9,316,439
========== =========
Diluted 12,590,496 11,128,638
========== ==========
</TABLE>
4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Gross revenues $14,292,919 $14,889,977
----------- -----------
EXPENSES:
General & administrative 900,945 635,988
Salaries & employee benefits 6,391,880 6,666,658
Legal & professional 127,096 70,553
Rent & utilities 412,799 340,427
Taxes & insurance 325,610 161,997
Technical operating expenses 1,335,902 1,852,853
Provision for doubtful accounts 37,521 182,901
Depreciation and amortization 1,765,430 1,629,160
----------- -----------
TOTAL OPERATING EXPENSES 11,297,183 11,540,537
----------- -----------
Equity in earnings of
unconsolidated partnership 45,885 --
----------- -----------
INCOME (LOSS) FROM OPERATIONS 3,041,621 3,349,440
OTHER INCOME (EXPENSE):
Other income 12,343 79,960
Interest expense (1,167,257) (1,146,705)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (1,154,914) (1,066,745)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,886,707 2,282,695
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES 641,567 777,778
----------- -----------
NET INCOME (LOSS) $1,245,140 $1,504,917
=========== ===========
EARNINGS (LOSS) PER SHARE :
Basic $0.11 $0.15
=========== ===========
Diluted $0.10 $0.13
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,407,466 9,743,681
=========== ===========
Diluted 12,641,469 11,727,962
=========== ===========
</TABLE>
5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Additional
Common Preferred Paid-in Retained Stockholder Treasury
Stock Stock Capital Earnings Receivable Stock Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $10,719 $696 $42,151,656 $8,000,743 ($103,500) ($107,651) $49,952,663
Net income 577,314 577,314
Warrants exercised 251 2,189,480 2,189,731
Conversion of deferred liability 200 1,499,800 1,500,000
Shares issued in connection
with the following acquisitions:
ICM 36 289,178 289,214
Sonomed 15 169,985 170,000
Chula Vista Partnership 127 1,606,404 1,606,531
DRMU 13 124,987 125,000
Stock options exercised 278 349,535 349,813
---------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $11,639 $696 $48,381,025 $8,578,057 ($103,500) ($107,651) $56,760,266
===================================================================================================
</TABLE>
6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash Flows from Operations:
Net income $ 577,314 $ 3,887,948
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 5,259,873 4,219,391
Deferred federal income taxes (50,716) --
Decrease in deferred rent expense (3,373) (4,486)
Foreign currency translation adjustments -- 1,757
Restructuring and impairment expense 4,593,808 --
(Increase) decrease in trade receivable 963,034 (6,022,356)
Increase in contracts receivable (13,437,197) (3,536,442)
Increase in prepaid expenses (225,914) (879,249)
Increase in other assets (93,567) (2,528,330)
Increase in equity in unconsolidated partnership 190,764 --
Increase in accounts payable 370,406 258,918
Increase (decrease) in accrued liabilities (306,867) 1,475,310
Increase (decrease) in income taxes payable (623,677) 1,982,378
Increase in other liabilities 3,085,139 2,290,763
------------ -----------
Net Cash Provided by Operations 299,027 1,145,602
------------ -----------
Cash Flows Used in Investing Activities:
Decrease in cash investments -- 5,000,000
Cash payments for the purchase of property (1,352,418) (662,530)
Acquisition of businesses net of cash acquired (11,352) (14,573,101)
Additional subsidiary acquisition costs (176,160) (2,056,266)
(Increase) decrease in other receivables (360,100) 149,644
(Increase) decrease in employee receivables 71,621 (80,121)
Increase in stockholder receivable (4,118) (4,658)
------------ -----------
Net Cash (Used In) Investing
Activities (1,832,527) (12,227,032)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,539,544 9,538,614
Proceeds from issuance of sr. subordinated debt -- 20,000,000
Deferred financing costs -- (745,060)
Net borrowings (payments) on line of credit 137,446 (1,572,000)
Principal payments on long-term debt (1,149,860) (4,780,858)
Principal payments on capital lease obligations (3,088,699) (3,318,526)
------------ -----------
Net Cash provided by (used in) Financing
Activities (1,561,569) 19,122,170
------------ -----------
Net increase (decrease)in cash (3,095,069) 8,040,740
Cash and cash equivalents balance,
BEGINNING OF PERIOD 5,126,114 229,547
------------ -----------
Cash and cash equivalents balance,
END OF PERIOD $ 2,031,045 $ 8,270,287
============ ===========
</TABLE>
7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 1,245,140 $ 1,504,917
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 1,765,430 1,629,160
Decrease in deferred rent expense -- (1,687)
Foreign currency translation adjustments -- (576)
Increase in trade receivable (638,766) (2,117,374)
Increase in contracts receivable (8,265,042) (2,501,937)
(Increase) decrease in prepaid expenses 11,196 (254,470)
(Increase) decrease in other assets 34,769 (752,815)
Decrease in equity in unconsolidated partnership 246,257 --
Increase in accounts payable 1,199,446 131,624
Increase in accrued liabilities 121,126 1,366,976
Increase in income taxes payable 1,041,022 754,756
Increase in other liabilities 1,363,015 667,207
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS (1,876,407) 425,781
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Cash payments for the purchase of property (362,164) 247,485
Acquisition of businesses net of cash acquired -- (215,954)
Additional subsidiary acquisition costs (994) (1,227,599)
(Increase) decrease in other receivables (329,199) 57,469
Decrease in employee receivables 13,139 39,088
Increase in stockholder receivable (1,553) (1,553)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (680,771) (1,101,064)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 11,812 873,220
Principal payments on long-term debt (102,348) (68,194)
Principal payments on capital lease obligations (1,053,213) (1,950,974)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (1,143,749) (1,145,948)
----------- -----------
NET DECREASE IN CASH (3,700,927) (1,821,231)
CASH AND CASH EQUIVALENTS BALANCE,
BEGINNING OF PERIOD 5,731,972 10,091,518
----------- -----------
CASH AND CASH EQUIVALENTS BALANCE,
END OF PERIOD $ 2,031,045 $ 8,270,287
=========== ===========
</TABLE>
8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTE 1. GENERAL
The unaudited consolidated financial statements included herein for Diagnostic
Health Services, Inc. and subsidiaries ("DHS" or the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and include all adjustments which are, in the opinion of management,
necessary for a fair presentation. Certain information and footnote disclosures
required by generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Certain 1997 balances have been
reclassified to conform to the 1998 presentation. These financial statements
include the accounts of the Company and its subsidiaries, which are set forth in
the following table.
<TABLE>
<CAPTION>
-----------------------------
Diagnostic Health
Services, Inc.
("DHS" or the "Company")
-----------------------------
|
-----------------------------
DHS Management
Services, Inc.
("DHSMS")
-----------------------------
|
_________________________________________________________________________________________________________________________
| | | | | | |
<S> <C> <C> <C> <C> <C> <C>
- - ---------------- ----------------- --------------- ------------------- ----------------- ------------------- --------------
Alpha Scanning Mobile Diagnostic Specialized Heart Institute of SoCal Diagnostic Mobile Diagnostic Sonomed, Inc.
Service, Inc. Systems, Inc. Imaging Tulsa, Inc. Services, Inc, Imaging, Inc. ("Sonomed")
("Alpha") ("MDS") Services Inc. ("HIT") ("SoCal") ("Mobile")
("SIS")
- - ---------------- ----------------- --------------- ------------------- ----------------- ------------------- --------------
| | | |
_________________________________________ | | |
| | | | | |
- - ---------------- ----------------- --------------- ------------------- ----------------- -------------------
Advanced Pediatric Cardiac Ultrasound SoCal St. Louis Mobile
Diagnostic Echocardiographic Concepts, Diagnostic Subsidiary I, Inc. Ultrasound Inc.
Imaging, Inc. Diagnostic Inc. ("CCI") Services, ("SLM")
("ADI") Imaging, Inc. Ltd.
("PEDI") ("UDS")
- - ---------------- ----------------- --------------- ------------------- ----------------- -------------------
|
_____________________
| |
------------------- ---------------------
SoCal Santa Monica
Subsidiary II, Imaging Center
Inc. Limited Partnership
------------------- ---------------------
</TABLE>
In addition, DHS and DHSMS have two inactive wholly-owned subsidiaries,
Diagnostic Health Services de Mexico, S.A. de C.V and HomeCare International,
Inc. SoCal owns a 50% partnership interest in Scripps Chula Vista Imaging
Center, L.P., which is accounted for on the equity method.
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.
9
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTE 2. 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.
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
September 30, 1998, no warrants under this agreement had been exercised. At
September 30, 1998, stock warrants outstanding amounted to 108,514 at exercise
prices ranging from $5.48 to $12.25 per common share.
NOTE 3. ACQUISITIONS
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.
10
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTE 3 - ACQUISITIONS (Continued)
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 was to be 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. On April 8, 1998 all three of the annual installments were paid by the
issuance of a total of 200,000 DHS common shares. In addition, the DIS Companies
were acquired subject to capital lease obligations, financing agreements and
other commitments in respect of fixed assets of the business in the aggregate
principal amount of $6,046,755.
The funds utilized to pay the cash portion of the purchase price in the 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 Chase Bank of Texas, N.A. ("Chase") (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.
Effective 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.
11
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTE 3 - 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.
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,
together with certain additional shares issued in satisfaction of the post-
closing payment obligations under the April 17, 1997 transaction relating to
DIS, were subsequently registered pursuant to a registration statement on Form
S-3.
Effective as of March 2, 1998, the Company acquired Sonomed, Inc. ("Sonomed"), a
Birmingham, Alabama-based provider of non-invasive diagnostic ultrasound testing
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.
On May 11, 1998, HIT acquired Diagnostic Radiology Mobile Ultrasound, Inc.
("DRMU"), an Edmond, Oklahoma-based provider of non-invasive diagnostic
ultrasound testing services. The consideration paid to the former owners of DRMU
consisted of 13,484 shares of DHS common stock.
On May 22, 1998, MDS purchased the assets of the ultrasound business segment of
Advanced Respiratory Care Services, Inc. ("ARCS"), which provides non-invasive
diagnostic ultrasound testing services in Abilene, Texas and Nashville,
Tennessee. The consideration paid to ARCS consisted of a cash payment of
$13,556.
In May 1998, the Company announced the execution of a letter of intent to
acquire the southwestern operations of WorldCare Imaging, Inc. ("WCI"), for
which closing was subject to the completion of the Company's due diligence
review and definitive documents. Upon conclusion of due diligence, the Company
elected not to go forward with the transaction.
12
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the nine months ended September 30, 1998 and 1997 for interest was
approximately $3,163,000 and $2,113,000, respectively.
The Company paid $1,007,977 in cash for income tax payments for the nine months
ended September 30, 1998. No cash payments for income taxes were made for the
nine months ended September 30, 1997.
The Company acquired assets in exchange for the issuance of common stock and the
assumption of various liabilities in connection with the acquired businesses.
Cash and noncash investing and financing activities related to the acquisitions
through September 30, consisted of the following:
1998 1997
----------------- ------------------
Assets acquired $960,768 $24,536,692
Liabilities assumed (332,997) (9,343,352)
Common stock issued (584,214) (690,000)
----------------- ------------------
Total cash paid 43,557 14,503,340
Fees and expenses - -
Less cash acquired (32,205) (146,192)
----------------- ------------------
Net cash paid $11,352 $14,357,148
================= ==================
The Company also recognized assets and obligations under noncompete agreements
of approximately $22,000 and approximately $2,160,000 for the nine months ended
September 30, 1998 and 1997, respectively.
The Company acquired property and equipment under capital leases, excluding
leases in connection with business acquisitions, of approximately $212,000 and
approximately $3,841,000 for the nine months ended September 30, 1998 and 1997,
respectively.
During the nine months ended September 30, 1998, the Company made an adjustment
of approximately $1,753,000 to goodwill, related to the SoCal and ICM
acquisitions, due to the revaluation of the property and equipment acquired. No
material adjustments to goodwill were made during the nine months ended
September 30, 1997.
During the nine months ended September 30, 1998, the Company converted
$1,500,000 of deferred liabilities related to the DIS acquisition by the
issuance of 200,000 DHS common shares. No conversion of liabilities to DHS
common shares occurred during the nine months ended September 30, 1997.
NOTE 5. RESTRUCTURING AND IMPAIRMENT OF ASSETS
During the second quarter of 1998, the Company commenced a restructuring of
certain of its operations and recorded a restructuring and impairment charge of
approximately $5,518,000. The restructuring and impairment charge relates to a
reduction in staff ($684,000), the write-down of partially impaired assets
(principally acquired equipment) to their fair market value ($3,246,000), the
write-off of accounts receivable acquired through acquisition ($982,000); and
divisional office closings and other ($606,000). After the related income tax
benefit of approximately $1,766,000, this charge reduced fiscal year 1998
earnings by approximately $3,752,000.
13
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operations
RESULTS OF OPERATIONS
The following table sets forth operating data of the Company as a percentage of
net sales for the periods indicated:
Three Months
Ended
September 30,
--------------
1998 1997
------ ------
Gross revenues 100.0 % 100.0 %
Operating expenses 79.0 77.5
Equity in earnings of unconsolidated partnership 0.3 -
----- -----
Income from operations 21.3 22.5
Interest expense 8.2 7.7
Other expense (income) (0.1) (0.5)
----- -----
Income before provision for income taxes 13.2 15.3
Provision for federal income taxes 4.5 5.2
----- -----
Net income 8.7 % 10.1 %
===== =====
Note: Numbers may not add due to rounding.
Three Months Ended September 30, 1998 Compared with Three Months Ended September
30, 1997
Gross revenues decreased by 4.0% to approximately $14,293,000 for the three
months ended September 30, 1998 from approximately $14,890,000 for the three
months ended September 30, 1997. This decline in revenues was due, in part, to
the fact that certain long term contracts that the Company expected to record in
the third quarter of 1998 (which would have been consistent with 1997 events)
did not close. The Company recognizes net revenues on its long term contracts
based on the ratio of costs incurred to total expected costs, subject to
guaranteed minimum payments included in the long term contract. Accordingly, the
Company's ability to accurately predict its earnings is based in part on the
timing, size, and estimated costs to be incurred on new long term contracts in
any given quarter. As the Company's long term contracts have increased in recent
quarters, both in length and dollar amount, the impact of long term contract
revenue recognition has become greater. Also, because of uncertainties inherent
in the estimation process as it relates to long term contracts, it is reasonably
possible that actual earnings will differ from estimates. Effective October 1,
1998, the Company will change its accounting method for long term contracts to a
deferral method, whereby long term contract revenues and expenses will be
recognized ratably over the life of the contract. Although this change will
result in lower revenues and earnings (due to the deferral aspect of the new
method), the change will have no impact on cash flows. Management believes that
this change will make the Company's revenues, expenses, and earnings more
predictable.
Excluding revenues attributable to acquired businesses, gross revenues decreased
by 13.6% to approximately $12,865,000 for the three months ended September 30,
1998 from approximately $14,890,000 for the three months ended September 30,
1997.
14
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Operating expenses decreased by 2.1% to approximately $11,297,000 for the three
months ended September 30, 1998 from approximately $11,541,000 for the three
months ended September 30, 1997. This decrease is attributable to substantial
reductions in salaries, employee benefits and technical operating expenses from
the efficient utilization of personnel and resources resulting from the
Company's integration of acquired business and from the cost reductions
implemented during the second quarter of 1998 in the restructuring of certain
operations. However, these reductions were offset by an increase in general and
administrative expenses associated with additional travel expenses as a direct
result of an increase in sales personnel in the last quarter of 1997, and by
increases in legal and professional fees, rents, utilities, property taxes,
insurance, depreciation and amortization as a result of additional expenses
associated with the expansion of operations through prior acquisitions. As a
percentage of gross revenues, total operating expenses increased to 79.0% for
the three months ended September 30, 1998 from 77.5% for the three months ended
September 30, 1997.
Income from operations decreased by 9.2% to approximately $3,042,000 for the
three months ended September 30, 1998 from approximately $3,349,000 for the
three months ended September 30, 1997. This decrease is due to the fact that
certain long term contracts that the company expected to record in the third
quarter of 1998 did not close. These contracts typically generate higher profit
margins than the other services provided by the Company. As a percentage of
gross revenues, income from operations decreased to 21.3% for the three months
ended September 30, 1998 from 22.5% in the comparable prior year period.
Interest expense increased by 1.8% to approximately $1,167,000 for the three
months ended September 30, 1998 from approximately $1,147,000 for the three
months ended September 30, 1997. This increase was attributable primarily to the
new debt obligations acquired in connection with business acquisitions. As a
percentage of gross revenues, interest expense increased to 8.2% for the three
months ended September 30, 1998 from 7.7% for the three months ended September
30, 1997.
Other income is primarily gain realized upon disposition of equipment at the end
of its lease term, and interest earned on liquid investments.
Net income decreased by 17.3% to approximately $1,245,000 for the three months
ended September 30, 1998 from approximately $1,505,000 for the comparable prior
year period. The Company's decline in net income was due to the fact that, as
noted above, certain long term contracts that the company expected to record in
the third quarter of 1998 did not close.
15
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
The following table sets forth operating data of the Company as a percentage of
net sales for the periods indicated:
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
Gross revenues 100.0 % 100.0 %
Operating expenses 91.1 78.5
Equity in earnings of unconsolidated partnership 0.5 -
----- -----
Income from operations 9.4 21.5
Interest expense 7.6 6.7
Other expense (income) (0.2) (0.8)
----- -----
Income before provision for income taxes 2.0 15.6
Provision for federal income taxes 0.7 5.3
----- -----
Net income 1.3 % 10.3 %
===== =====
Note: Numbers may not add due to rounding.
Gross revenues increased by 15.6% to approximately $43,861,000 for the nine
months ended September 30, 1998 from approximately $37,933,000 for the nine
months ended September 30, 1997. This increase is primarily due to revenues
attributable to acquired businesses, offset by the fact that certain long term
contracts that the Company expected to record in the third quarter of 1998
(which would have been consistent with 1997 events) did not close. The Company
recognizes net revenues on its long term contracts based on the ratio of costs
incurred to total expected costs, subject to guaranteed minimum payments
included in the long term contract. Accordingly, the Company's ability to
accurately predict its earnings is based in part on the timing, size, and
estimated costs to be incurred on new long term contracts in any given quarter.
As the Company's long term contracts have increased in recent quarters, both in
length and dollar amount, the impact of long term contract revenue recognition
has become greater. Also, because of uncertainties inherent in the estimation
process as it relates to long term contracts, it is reasonably possible that
actual earnings will differ from estimates. Effective October 1, 1998, the
Company will change its accounting method for long term contracts to a deferral
method, whereby long term contract revenues and expenses will be recognized
ratably over the life of the contract. Although this change will result in lower
revenues and earnings (due to the deferral aspect of the new method), the change
will have no impact on cash flows. Management believes that this change will
make the Company's revenues, expenses, and earnings more predictable.
Excluding revenues attributable to acquired businesses, gross revenues increased
by 0.3% to approximately $38,050,000 for the nine months ended September 30,
1998 from approximately $37,932,000 for the nine months ended September 30,
1997.
16
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Operating expenses increased by 34.1% to approximately $39,945,000 for the nine
months ended September 30, 1998 from approximately $29,793,000 for the nine
months ended September 30, 1997, due primarily to a restructuring and impairment
charge of approximately $5,518,000 in the second quarter of 1998, and to the
Company's expanded operations through its acquisitions. The restructuring and
impairment charge relates to a reduction in staff ($684,000), the write-down of
partially impaired assets (principally acquired equipment) to their fair market
value ($3,246,000), the write-off of accounts receivable acquired through
acquisition ($982,000); and divisional office closings and other ($606,000). As
a percentage of gross revenues, total operating expenses increased to 91.1% for
the nine months ended September 30, 1998 from 78.5% for the nine months ended
September 30, 1997. This increase is attributable primarily to the
restructuring and impairment expense and by additional general and
administrative expenses, offset in part by the efficient utilization of
personnel and resources, resulting from the Company's integration of acquired
businesses. As a percentage of gross revenues, operating expenses, excluding
the restructuring and impairment expense, remained unchanged at 78.5% for the
nine months ended September 30, 1998 and 1997.
Income from operations decreased by 49.1% to approximately $4,142,000 for the
nine months ended September 30, 1998 from approximately $8,140,000 for the nine
months ended September 30, 1997. Substantially all of this decrease is due to
the restructuring and impairment expense and the fact that certain long term
contracts that the Company expected to record in the third quarter of 1998 did
not close. These contracts typically generate higher profit margins than the
other services provided by the Company. As a percentage of gross revenues,
income from operations decreased to 9.4% for the nine months ended September
30, 1998 from 21.5% in the comparable prior year period. Income from
operations, excluding the restructuring and impairment expense, increased by
18.7% to approximately $9,661,000 for the nine months ended September 30, 1998.
As a percentage of gross revenues, income from operations, excluding the
restructuring and impairment expense, increased to 22.0% for the nine months
ended September 30, 1998 from 21.5% for the nine months ended September 30,
1997.
Interest expense increased by 31.0% to approximately $3,342,000 for the nine
months ended September 30, 1998 from approximately $2,551,000 for the nine
months ended September 30, 1997. This increase was attributable primarily to the
$20,000,000 in subordinated debt obligations incurred 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 to 7.6% for the nine months ended September
30, 1998 from 6.7% for the nine months ended September 30, 1997.
Other income is primarily gain realized upon disposition of equipment at the end
of its lease term, and interest earned on liquid investments.
17
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Net income decreased by 85.2% to approximately $577,000 for the nine months
ended September 30, 1998 from income of approximately $3,888,000 for the
comparable prior year period. This decrease is due primarily to the
restructuring and impairment expense, net of the related income tax benefit, and
to the fact that certain long term contracts that the Company expected to record
in the third quarter of 1998 (which would have been consistent with 1997 events)
did not close. Net income, excluding the restructuring and impairment expense
(net of the related tax effect) of approximately $3,753,000, increased by 11.4%
to approximately $4,330,000.
LIQUIDITY AND CAPITAL RESOURCES
In May 1998, the Company and its subsidiaries entered in to an amendment of the
revolving credit and term loan facility with their senior lender, Chase Bank of
Texas, N.A. ("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. Pursuant to the amendment, the
Company rolled over the outstanding borrowings of $2,500,000 on the revolving
credit facility into the term loan facility. At September 30, 1998, the Company
had no outstanding borrowings under the revolving credit facility and $7,952,930
in principal amount of outstanding borrowings under the term loan facility.
These loans bear interest at varying rates, depending on the Company's relative
leverage from time to time.
In June 1998, the Company and its subsidiaries entered into a further amendment
of the revolving credit and term loan facility with Chase, whereby the revolving
credit facility was extended. In connection with the amendment, Chase waived
certain prior financial covenant defaults.
At September 30, 1998, the Company was not in compliance with certain covenants
required by its senior and subordinated lenders. The Company subsequently
received an approved commitment from Chase to amend and restate its loan
agreement subject to completion of necessary legal documentation, and receipt of
an acceptable waiver from Prudential (the Company's subordinated lender). This
commitment provides for permanent waiver of all defaults outstanding through and
including September 30, 1998, and implementation of a new covenant structure.
The Company has also received an approved commitment from Prudential, agreeing
to waivers and amendments in a manner consistent with the commitments made by
Chase.
Under the new proposal, the outstanding balance of the Company's term facility
would begin a five-year amortization program to commence July 15, 1999, and
remaining availability under that facility would be cancelled. The revolving
facility would be reduced to $2 million with a shortened maturity of December
31, 1998 and availability subject to an asset audit report and an advance rate
acceptable to Chase.
The new financial covenant structure would temporarily suspend the Fixed Charge
Coverage Ratio, Funded Debt to EBITDA Ratio, and Senior Debt to EBITDA Ratio,
and would require the Company to maintain minimum EBITDA levels. In addition,
the new structure would limit unleveraged capital expenditures, and would
prohibit the Company from incurring additional debt or selling assets.
18
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Although the Company believes that legal documents described in the commitments
will be executed and delivered, the Company's continuation as a going concern is
dependent on completion of such documents, and its ability to comply with the
revised terms of its financing agreements, to obtain additional financing or
refinancing as may be required, and to increase cash flow from operations.
These financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
On April 17, 1998, the Company filed an S-3 Registration Statement (which was
declared effective on April 24) of 501,163 shares of common stock in connection
with the proposed WCI transaction, the SCVIC transaction described in Note 3,
and the debt conversion associated with the DIS-Delaware transaction, as
described in the following paragraph. Of the 501,163 shares registered, 327,250
of these shares have been issued to DIS-Delaware, and the remaining 173,913
shares are being held in reserve.
In March 1998, DIS-Delaware agreed to convert into DHS common stock certain
deferred liabilities owed in accordance with the DIS transactions described in
Note 3; therefore, $1,500,000 of deferred liabilities were recorded as current
liabilities at March 31, 1998 and December 31, 1997. On April 8, 1998, the
deferred liabilities were converted to 200,000 DHS common shares.
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.
The Company received net proceeds of approximately $1,298,000 in the nine months
ended September 30, 1998 from the exercise of underwriter's warrants,
approximately $8,424,000 in fiscal year 1997 from the exercise of its previously
outstanding publicly traded warrants (which were called for redemption in the
first quarter of 1997), $562,500 in fiscal year 1997 from the exercise of other
warrants, and $891,731 in the nine months ended September 30, 1998 and
$1,492,801 in fiscal year 1997 from the exercise of options under the Company's
various stock option plans.
At September 30, 1998, the Company had approximately $2,031,000 in cash and cash
equivalents. Based on the Company's operating plan, management believes that
available resources and funds generated from operations will be sufficient to
meet the Company's operating requirements through the close of the Company's
fiscal year ending December 31, 1998. Operations thereafter may be
substantially dependent on the Company's ability to comply with amended loan
agreements and/or obtain additional or alternate sources of financing as stated
above.
19
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
EXPLORATION OF STRATEGIC ALTERNATIVES
The Company has engaged Prudential Securities Incorporated to provide strategic
consultation to the Company, and to explore various alternatives to maximize
stockholder value. The Company continues to consider various possible
transactions, including possible alignment with appropriate strategic and/or
financial partners, and bringing other companies into the DHS corporate group.
There can be no assurance, however, that any transactions will result from such
engagement.
EFFECTS OF INFLATION
Inflation is not a material factor affecting the Company's business. General
operating expenses such as salaries and employee benefits are, however, subject
to normal inflationary pressures.
SEASONALITY
The Company's results of operations, have, in some years, varied significantly
from quarter to quarter, for reasons particular to each quarter. For instance,
hospital admissions and doctor visits (and, therefore, the Company's imaging
revenues) are typically lower during holiday periods, and at other times when
physicians traditionally take their own vacations. Conversely, prior to the
sale of such business in the fourth quarter of 1997, revenues from the Company's
allied healthcare services business have generally increased in holiday periods,
due to increased demand for temporary personnel when regular staff is away.
TRENDS AND UNCERTAINTIES
The Company's future revenues and results of operations may be substantially
affected by proposed reforms of the nation's healthcare system and by potential
reductions in reimbursement rates and policies imposed by Medicare and other
third-party reimbursement programs (from which the Company derives a material
portion of its receipts). Continuing pressures on pricing structures applicable
to the Company's services, 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 changes and/or the
effects thereof on the Company.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 issue failures. Year 2000 failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems, and
has established processes for evaluating and managing the risks and costs
associated with this problem. The computing portfolio has been identified and an
initial assessment has been completed. The cost to the Company of achieving this
element of Year 2000 compliance is estimated to be approximately $40,000 over
the cost of normal upgrades and replacements, and will be incurred through
fiscal 1999.
The Company believes that its financial reporting and billing systems are
substantially compliant with Year 2000 requirements. The Company has consulted
with its diagnostic equipment vendors and has been advised that certain items
will be supported at no cost, and that older items will be supported on a fee
basis. The cost of making the Company's diagnostic equipment Year 2000
compliant is not known at this time.
20
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Certain of the Company's customers and vendors may be dependent on computer or
other embedded information systems to conduct business transactions, although
the Company has not yet undertaken any investigation, other than its diagnostic
equipment vendors, to determine the nature or extent of any Year 2000 issues
that may be posed by customer or vendor unpreparedness. The Company expects to
discuss with its key customers and vendors the status of their Year 2000
readiness in the fourth quarter of 1998, and to promptly thereafter identify
possible alternative suppliers to the extent that such action may be called for
based on any relative lack of Year 2000 readiness by existing suppliers. The
Company does not expect the costs of this investigation to be material.
21
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Part II
OTHER INFORMATION
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits to this report:
Exhibit 11: Computation re: Computation of Earnings Per Share
Exhibit 27: Financial Data Schedule (EDGAR filing only)
(b) The Company did not file any reports on Form 8-K during the quarterly period
ended September 30, 1998.
22
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAGNOSTIC HEALTH SERVICES, INC.
/S/ MAX W. BATZER
---------------------------------------------------
Max W. Batzer
Chairman, Chief Executive Officer
and Director
/S/ BRAD A. HUMMEL
---------------------------------------------------
Brad A. Hummel
President, Chief Operating Officer
and Director
/S/ CHRISTOPHER L. TURNER
---------------------------------------------------
Christopher L. Turner
Chief Financial Officer
and Principal Accounting Officer
/S/ BO W. LYCKE
---------------------------------------------------
Bo W. Lycke
Director
Date: November 16, 1998
23
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Total Issued Basic Diluted
Date # Shares Wtd. Avg. Wtd. Avg.
-----------------------------------------------------------------------
<S> <C> <C> <C>
Shares issued January 1, 1998 1/1/98 10,718,867 10,718,867
Treasury Shares 1/1/98 (233,259) (233,259)
Shares issued 1/1/98 9/30/98 Various 924,475 689,233
- - -------------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares 9/30/98 11,410,083 11,174,841 11,174,841
Diluted:
- - -------
Common stock equivalents (scheduled below) 720,063
Convertible Preferred original issuance 642,857
Convertible Preferred 12/31/96 dividend 6,129
Convertible Preferred 12/31/97 dividend 46,607
--------------
1,415,656
--------------
Diluted weighted average shares 12,590,496
--------------
Net Income for the Nine Months Ended September 30, 1998 $577,314 $577,314
=================================
Earnings Per Share $ 0.05 $ 0.05
=================================
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Diluted
Average share price during period $9.4305 Diluted Net
Exercise Assumed Treas. Shs. Add'l
Stock options & warrants: Number Price Proceeds Acquired Shares
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bridge Warrants/Bank Warrants 10,000 6.2500 62,500 6,627 3,373
Prudential Warrants 60,000 12.2500 0 0 0
Stock options - Plan Year
1992 290,001 2.2100 640,902 67,960 222,041
1992 2,000 2.6250 5,250 557 1,443
1992 79,500 0.9375 74,531 7,903 71,597
1992 176,800 1.6875 298,350 31,637 145,163
1992 7,800 1.9375 15,113 1,603 6,197
1992 2,500 7.5000 18,750 1,988 512
1992 1,500 8.6250 12,938 1,372 128
1992 9,000 8.1250 73,125 7,754 1,246
1995 22,000 6.2500 137,500 14,580 7,420
1995 49,900 8.0000 399,200 42,331 7,569
1995 59,939 10.6875 0 0 0
1995 113,700 8.6250 980,663 103,988 9,712
1995 97,000 1.9375 187,938 19,929 77,071
1995 116,000 4.2500 493,000 52,277 63,723
1995 6,000 5.3750 32,250 3,420 2,580
1995 33,500 6.2500 209,375 22,202 11,298
1995 16,000 8.0000 128,000 13,573 2,427
1995 2,500 10.2500 0 0 0
1997 256,100 7.4375 1,904,744 201,977 54,123
1997 150,000 8.1875 1,228,125 130,229 19,771
1997 220,061 10.6875 0 0 0
1997 148,450 8.6250 1,280,500 135,783 12,667
- - -------------------------------------------------------------------------------------------------------------------------------
Total Common Stock Equivalents 1,930,251 720,063
===============================================================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000895659
<NAME> DIAGNOSTIC HEALTH SERVICES
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 0 2,031,045
<SECURITIES> 0 0
<RECEIVABLES> 0 17,006,958
<ALLOWANCES> 0 (403,295)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 26,411,006
<PP&E> 0 34,935,694
<DEPRECIATION> 0 (11,072,507)
<TOTAL-ASSETS> 0 113,030,162
<CURRENT-LIABILITIES> 0 11,964,701
<BONDS> 0 35,524,051
0 696
0 0
<COMMON> 0 11,639
<OTHER-SE> 0 56,747,931
<TOTAL-LIABILITY-AND-EQUITY> 0 113,030,162
<SALES> 14,292,919 43,861,302
<TOTAL-REVENUES> 14,292,919 43,861,302
<CGS> 0 0
<TOTAL-COSTS> 11,213,777 39,423,689
<OTHER-EXPENSES> (12,343) (104,635)
<LOSS-PROVISION> 37,521 295,296
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<INCOME-TAX> 641,567 327,175
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<CHANGES> 0 0
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<EPS-PRIMARY> .11 .05
<EPS-DILUTED> .10 .05
</TABLE>
