<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 March 31, 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 March 31, 1998, there were 11,299,799 issued and 11,066,540 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
March 31, 1998 and December 31, 1997
Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity
March 31, 1998 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis or
Plan of Operation 12-14
PART II. Other Information 15
Signatures 16
Item 6. Exhibits and Reports on Form 8-K 17
Exhibit 11.1 - Statement re: computation of per share earnings 18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
------
(Unaudited) (Audited)
March 31, 1998 December 31, 1997
---------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,664,014 $ 5,126,114
Accounts receivable: Trade, net of
allowance for doubtful accounts 16,207,993 17,294,128
Accrued interest and other 693,289 793,369
Contract receivables - current 2,230,576 2,167,265
Deferred federal income taxes 87,876 87,876
Prepaid expenses and other 1,440,721 1,528,931
------------- -------------
Total Current Assets 26,324,469 26,997,683
------------- -------------
PROPERTY & EQUIPMENT:
Office furniture & equipment 2,098,414 2,015,749
Machinery & service equipment 35,932,977 35,286,844
Leasehold improvements 289,299 273,968
Less: Accumulated depreciation and amortization (10,200,442) (8,876,887)
------------- -------------
TOTAL PROPERTY & EQUIPMENT 28,120,248 28,699,674
------------- -------------
OTHER ASSETS:
Deposits and other assets 3,443,707 2,999,701
Deferred acquisition costs 140,582 122,536
Contract receivables - long-term 10,980,847 10,058,674
Equity in unconsolidated partnership 1,692,206 --
Goodwill 39,064,547 38,793,903
Noncompete agreements 3,450,270 3,428,270
Less: Accumulated amortization (3,802,757) (3,240,266)
------------- -------------
Total Other Assets 54,969,402 52,156,818
------------- -------------
TOTAL ASSETS $ 109,414,119 $ 107,854,175
============= =============
</TABLE>
2
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,410,654 $ 2,626,978
Accrued liabilities 1,951,141 3,774,969
Current lease obligations 4,568,536 4,663,279
Current portion of long-term debt 1,361,559 1,485,113
Deferred liability 1,500,000 2,362,554
Notes payable 2,500,000 1,500,000
Current income taxes 1,654,582 1,363,543
------------- -------------
Total Current Liabilities 14,946,472 17,776,436
Long-term lease obligations 9,241,631 10,348,496
Long-term debt 4,640,871 4,961,570
Senior subordinated debt 20,000,000 20,000,000
Deferred rent 147,567 149,253
Other liabilities 2,742,500 2,647,277
Deferred income taxes 2,018,480 2,018,480
------------- -------------
Total Liabilities 53,737,521 57,901,512
------------- -------------
Stockholders' Equity:
Common stock, $.001 par value, authorized
15,000,000 shares; issued 11,299,799 and
10,718,867 shares and outstanding 11,066,540
and 10,485,608 shares at March 31, 1998 and
December 31, 1997, respectively 11,248 10,719
Preferred stock, $.001 par value; authorized
3,000,000 shares; issued and outstanding 695,593
shares at March 31, 1998 and at
December 31, 1997; $4.5 million
liquidation preference 696 696
Additional paid-in capital 46,406,603 42,151,656
Retained earnings 9,469,202 8,000,743
Stockholder receivable (103,500) (103,500)
Treasury stock (at cost) (107,651) (107,651)
------------- -------------
Total Stockholders' Equity 55,676,598 49,952,663
------------- -------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 109,414,119 $ 107,854,175
============= =============
</TABLE>
3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Gross revenues $ 14,414,390 $ 10,509,976
------------ ------------
EXPENSES:
General & administrative 810,245 547,274
Salaries & employee benefits 6,490,857 5,048,212
Legal & professional 60,090 51,007
Rent & utilities 367,908 199,272
Taxes & insurance 271,072 106,261
Technical operating expenses 1,310,870 1,430,087
Provision for doubtful accounts 144,144 101,741
Depreciation and amortization 1,924,177 1,162,132
------------ ------------
TOTAL OPERATING EXPENSES 11,379,363 8,645,986
------------ ------------
Equity in earnings of
unconsolidated partnership 85,675 --
------------ ------------
INCOME FROM OPERATIONS 3,120,702 1,863,990
OTHER INCOME (EXPENSE):
Other income 53,133 73,878
Interest expense (1,014,338) (391,456)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (961,205) (317,578)
------------ ------------
INCOME BEFORE INCOME TAXES 2,159,497 1,546,412
PROVISION FOR FEDERAL INCOME TAXES 691,038 525,780
------------ ------------
NET INCOME $ 1,468,459 $ 1,020,632
============ ============
EARNINGS PER SHARE:
Basic $ 0.14 $ 0.10
============ ============
Diluted $ 0.12 $ 0.10
============ ============
Weighted average common shares outstanding:
Basic 10,761,768 9,767,989
============ ============
Diluted 12,366,956 10,475,910
============ ============
</TABLE>
4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 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 1,468,459 1,468,459
Warrants exercised 200 1,297,800 1,298,000
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
Stock options exercised 151 891,580 891,731
------------------------------------------------------------------------------------------
Balance, March 31, 1998 $11,248 $696 $46,406,603 $9,469,202 ($103,500) ($107,651) $55,676,598
==========================================================================================
</TABLE>
5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 1,468,459 $ 1,020,632
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 1,924,178 1,162,132
Decrease in deferred rent expense (1,686) (1,112)
Gain on disposal of assets (186) --
Foreign currency translation adjustments -- 2,350
(Increase) decrease in trade receivable 1,254,878 (265,944)
Increase in contracts receivable (985,484) (411,433)
(Increase) decrease in prepaid expenses 92,759 (681,413)
Increase in other assets (444,007) (1,106,052)
Increase in equity in unconsolidated partnership (85,675) --
Increase (decrease) in accounts payable (1,234,303) 164,840
Increase (decrease) in accrued liabilities (1,825,596) 5,088,338
Increase in income taxes payable 291,039 525,780
Increase in other liabilities 95,223 614,770
------------ ------------
NET CASH PROVIDED BY OPERATIONS 549,599 6,112,888
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Decrease in cash investments -- 5,000,000
Cash payments for the purchase of property (516,908) (349,786)
Acquisition of businesses net of cash acquired (4,472) (14,357,147)
Additional subsidiary acquisition costs (91,741) (148,952)
Decrease in other receivables 37,215 137,856
(Increase) decrease in employee receivables 64,958 (39,117)
Increase in stockholder receivable (2,093) (1,552)
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (513,041) (9,758,698)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,189,731 8,662,569
Net borrowings on line of credit 137,446 715,000
Proceeds from bank loans -- 5,980,000
Principal payments on long-term debt (624,227) (2,582,160)
Principal payments on capital lease obligations (1,201,608) (491,155)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES 501,342 12,284,254
------------ ------------
NET INCREASE IN CASH 537,900 8,638,444
CASH AND CASH EQUIVALENTS BALANCE,
BEGINNING OF PERIOD 5,126,114 229,547
------------ ------------
CASH AND CASH EQUIVALENTS BALANCE,
END OF PERIOD $ 5,664,014 $ 8,867,991
============ ============
</TABLE>
6
<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.
[ORGANIZATION CHART APPEARS HERE]
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.
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.
7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND 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
March 31, 1998, no warrants under this agreement had been exercised. At March
31, 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.
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.
8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTE 3 - 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.
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.
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.
9
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTE 3 - ACQUISITIONS (Continued)
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 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).
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.
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the three months ended March 31, 1998 and 1997 for interest was
approximately $1,014,000 and $391,000, respectively.
The Company paid $400,000 in cash for income tax payments for the three months
ended March 31, 1998. No cash payments for income taxes were made for the three
months ended March 31, 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
for the three months ended March 31, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Assets acquired $ 688,935 $ 24,536,692
Liabilities assumed (199,721) (9,343,352)
Common stock issued (459,214) (690,000)
------------ ------------
Total cash paid 30,000 14,503,340
Fees and expenses - -
Less cash acquired (25,528) (146,193)
------------ ------------
Net cash paid $ 4,472 $14,357,147
============ ============
</TABLE>
10
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
The Company also recognized assets and obligations under noncompete agreements
of approximately $22,000 and approximately $2,160,000 for the three months ended
March 31, 1998 and 1997, respectively.
For the three months ended March 31, 1998 and 1997, except in connection with
the UDS and DIS acquisitions, no property and equipment was acquired under
capital leases.
NOTE 5. SUBSEQUENT EVENTS
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.
The Company has concluded the negotiation of an amended credit facility with
Chase Bank of Texas, N.A. ("Chase"). Under the revised agreement, the
availability of new borrowings under the Company's term loan facility has been
extended to December 31, 1998 (subject to Chase's discretion in making
advances), and the outstanding borrowings of $2,500,000 under the Company's
$2,500,000 revolving credit facility have been added to the $5,815,039
outstanding under the term loan facility. Additionally, certain debt ratio and
fixed charge coverage ratio covenants have been adjusted and modified so that
the Company can more readily meet current and future financial covenants.
Also subsequent to the first quarter close, the Company announced the execution
of a letter of intent to acquire the southwestern operations of WorldCare
Imaging, Inc. ("WCI"), for which closing is subject to the completion of the
Company's due diligence review and definitive documents.
On April 17, 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 described in the first paragraph of this Note 5. 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 pending the completion of
the WCI transaction. All shares in the registration statement are subject to
substantial restrictions as detailed in the plan of distribution described in
the registration statement.
On May 11, 1998, the Company 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.
11
<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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Gross revenues 100.0% 100.0%
Operating expenses 78.9% 82.3%
Equity in earnings of unconsolidated partnership 0.6% --
------- -------
Income from operations 21.7 17.7
Interest expense 7.0 3.7
Other expense (income) (0.3) (0.7)
------- -------
Income before provision for income taxes 15.0 14.7
Income tax expense 4.8 5.0
------- -------
Net income 10.2 % 9.7 %
======= =======
</TABLE>
Note: Numbers may not add due to rounding.
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997
Gross revenues increased by 37.1% to approximately $14,414,000 for the three
months ended March 31, 1998 from approximately $10,510,000 for the three months
ended March 31, 1997. Excluding revenues attributable to acquired businesses,
gross revenues increased by 12.0% to approximately $11,771,000 for the three
months ended March 31, 1998 from approximately $10,510,000 for the three months
ended March 31, 1997.
Operating expenses increased by 31.6% to approximately $11,379,000 for the three
months ended March 31, 1998 from approximately $8,646,000 for the three months
ended March 31, 1997, due to the Company's expanded operations through its
acquisitions. As a percentage of gross revenues, total operating expenses
decreased to 78.9% for the three months ended March 31, 1998 from 82.3% for the
three months ended March 31, 1997. This reduction is attributable primarily to
efficient utilization of personnel and resources, and absorption of fixed costs
over a broader revenue base, resulting from the Company's integration of
acquired businesses. The Company has also experienced an increase in the number
of in-house contracts for the provision of radiology and cardiology services.
These contracts typically generate higher profit margins than the other services
provided by the Company.
Income from operations increased by 67.4% to approximately $3,121,000 for the
three months ended March 31, 1998 from approximately $1,864,000 for the three
months ended March 31, 1997. As a percentage of gross revenues, income from
operations increased to 21.7% for the three months ended March 31, 1998 from
17.7% in the comparable prior year period.
Interest expense increased by 159.1% to approximately $1,014,000 for the three
months ended March 31, 1998 from approximately $391,000 for the three months
ended March 31, 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 7.0% for the three months ended March
31, 1998 from 3.7% for the three months ended March 31, 1997.
12
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Other income is primarily gain realized upon disposition of equipment at the end
of its lease term, and interest earned on liquid investments.
Net income increased by 43.9% to approximately $1,468,000 for the three months
ended March 31, 1998 from approximately $1,021,000 for the comparable prior year
period. This increase is due primarily to increased revenues and continued
consolidation resulting in efficient utilization of personnel and equipment.
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 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 March 31, 1998, the Company's outstanding borrowings under the loan agreement
were $2,500,000 under the revolving credit facility (which borrowings have since
been rolled over into the term loan facility), and $5,815,039 under the term
loan facility. These loans bear interest at varying rates, depending on the
Company's relative leverage from time to time. The Company'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, 1998. At March 31, 1998, the Company had approximately $5,664,000 in
cash and cash equivalents. In connection with the amendment, Chase waived
certain prior financial covenant defaults.
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 three
months ended March 31, 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 three months ended March 31,
1998 and $1,492,801 in fiscal year 1997 from the exercise of options under the
Company's various stock option plans.
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.
13
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
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.
14
<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 11.1: Computation re: Computation of Earnings Per Share
(b) The Company did not file any reports on Form 8-K during the quarterly period
ended March 31, 1998.
15
<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: May 15, 1998
16
<PAGE>
EXHIBIT 11.1
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
For the Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Total Issued Basic Diluted
Date # Shares Wtd. Avg. Wtd. Avg.
-----------------------------------------------------------------
<S> <C> <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 - 3/31/98 Various 580,932 276,160
- ---------------------------------------------------------------------------------------------------------------------
Basic weighted average shares 3/31/98 11,066,540 10,761,768 10,761,768
Diluted:
- --------
Common stock equivalents 909,595
Convertible Preferred - original issuance 642,857
Convertible Preferred - 12/31/96 dividend 6,129
Convertible Preferred - 12/31/97 dividend 46,607
-----------
1,605,188 1,605,188
----------- -----------
Diluted weighted average shares 12,366,956
===========
Quarter ended March 31, 1998 Net Income $ 1,468,459 $ 1,468,459
=========== ===========
Earnings Per Share 0.14 0.12
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Diluted
Average share price during period 11.5307 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 5,420 4,580
Stock options & warrants - Plan Year
1995 111,000 1.9375 215,063 18,651 92,349
1995 121,000 4.2500 514,250 44,598 76,402
1995 6,000 5.3750 32,250 2,797 3,203
1995 41,750 6.2500 260,938 22,630 19,120
1995 21,700 8.0000 173,600 15,055 6,645
1995 2,500 10.2500 25,625 2,222 278
1995 33,250 6.2500 207,813 18,022 15,228
1995 56,550 8.0000 452,400 39,234 17,316
1995 31,075 10.6875 332,114 28,802 2,273
1992 290,001 2.2100 640,902 55,582 234,419
1992 2,000 2.6250 5,250 455 1,545
1992 8,000 1.8400 14,720 1,277 6,723
1992 104,109 0.9375 97,602 8,465 95,644
1992 181,800 1.6875 306,788 26,606 155,194
1992 19,800 1.9375 38,363 3,327 16,473
1992 2,500 7.5000 18,750 1,626 874
1992 1,500 8.6250 12,938 1,122 378
1992 9,000 8.1250 73,125 6,342 2,658
1997 272,100 7.4375 2,023,744 175,509 96,591
1997 150,000 8.1875 1,228,125 106,509 43,491
1997 248,925 10.6875 2,660,386 230,721 18,204
Prudential Warrants 60,000 12.2500 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
Total Common Stock Equivalents 1,784,560 909,595
=======================================================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
PERIOD ENDING 3/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895659
<NAME> DIAGNOSTIC HEALTH SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,664,014
<SECURITIES> 0
<RECEIVABLES> 17,366,868
<ALLOWANCES> (465,586)
<INVENTORY> 0
<CURRENT-ASSETS> 26,324,469
<PP&E> 38,320,690
<DEPRECIATION> (10,200,442)
<TOTAL-ASSETS> 109,414,119
<CURRENT-LIABILITIES> 14,946,472
<BONDS> 33,882,502
696
0
<COMMON> 11,248
<OTHER-SE> 55,664,654
<TOTAL-LIABILITY-AND-EQUITY> 109,414,119
<SALES> 14,414,390
<TOTAL-REVENUES> 14,414,390
<CGS> 0
<TOTAL-COSTS> 11,149,544
<OTHER-EXPENSES> (53,133)
<LOSS-PROVISION> 144,144
<INTEREST-EXPENSE> 1,014,338
<INCOME-PRETAX> 2,159,497
<INCOME-TAX> 691,038
<INCOME-CONTINUING> 1,468,459
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468,459
<EPS-PRIMARY> .14
<EPS-DILUTED> .12
</TABLE>
