<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, 1999
[ ] 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, 1999, there were 11,714,895 issued and 11,481,636 shares
outstanding of Registrant's common stock, $.001 par value.
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 2-3
March 31, 1999 and December 31, 1998
Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity
March 31, 1999 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis or
Plan of Operation 11-15
PART II. Other Information 16
Signatures 17
Item 6. Exhibits and Reports on Form 8-K 18
Exhibit 11.1 - Statement re: computation of per share earnings 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
------
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, 1999 December 31, 1998
--------------- ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 918,928 $ 5,664,014
Accounts receivable: Trade, net of
allowance for doubtful accounts 10,356,652 16,207,993
Accrued interest and other 915,532 693,289
Contract receivables - current -- 2,230,576
Deferred federal income taxes 1,115,200 87,876
Prepaid expenses and other 419,375 1,440,721
------------ ------------
Total Current Assets 13,725,687 26,324,469
------------ ------------
PROPERTY & EQUIPMENT:
Office furniture & equipment 2,381,019 2,098,414
Machinery & service equipment 34,306,337 35,932,977
Leasehold improvements 2,077,189 289,299
Less: Accumulated depreciation and amortization (13,310,206) (10,200,442)
------------ ------------
Total Property & Equipment 25,454,339 28,120,248
------------ ------------
OTHER ASSETS:
Deposits and other assets 957,154 3,443,707
Deferred acquisition costs 250,732 140,582
Contract receivables - long-term -- 10,980,847
Equity in unconsolidated partnership 2,008,477 1,692,206
Goodwill 19,043,582 39,064,547
Noncompete agreements 2,698,533 3,450,270
Long Term Deferred Tax Asset 8,570,155 --
Less: Accumulated amortization (3,450,619) (3,802,757)
------------ ------------
Total Other Assets 30,078,014 54,969,402
------------ ------------
TOTAL ASSETS $ 69,258,040 $107,414,119
============ ============
</TABLE>
2
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, 1999 December 31, 1998
--------------- ------------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 3,544,209 $ 1,410,654
Accrued liabilities 2,115,889 1,951,141
Current lease obligations 2,747,158 4,568,536
Current portion of long-term debt 814,455 1,361,559
Deferred liability 1,955,000 1,500,000
Notes payable 1,000,000 2,500,000
Current income taxes -- 1,654,582
------------ ------------
Total Current Liabilities 12,176,711 14,946,472
Long-term lease obligations 12,151,757 9,241,631
Long-term debt 7,185,026 4,640,871
Senior subordinated debt 20,000,000 20,000,000
Deferred rent 147,567
Other liabilities 3,084,714 2,742,500
Deferred income taxes 2,018,480
------------ ------------
Total Liabilities 54,598,208 53,737,521
------------ ------------
Stockholders' Equity:
Common stock, $.001 par value, authorized
15,000,000 shares; issued 11,714,895 and
10,713,895 shares and outstanding 11,481,636
and 11,480,636 shares at March 31, 1999 and
December 31, 1998, respectively 11,715 11,248
Preferred stock, $.001 par value; authorized
3,000,000 shares; issued and outstanding
746,500 shares at March 31, 1999 and at
December 31, 1998; $4.5 million at $7.00 per
share, the preference = $5,225,500 for the
746,500 shares liquidation preference 747 696
Additional paid-in capital 48,572,566 46,406,603
Retained earnings (33,714,045) 9,469,202
Stockholder receivable (103,500) (103,500)
Treasury stock (at cost) (107,651) (107,651)
------------ ------------
Total Stockholders' Equity 14,659,832 55,676,598
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 69,258,040 $109,414,119
============ ============
</TABLE>
3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 1998
------------- -----------
<S> <C> <C>
Revenues:
Gross revenues $11,001,678 $14,414,390
----------- -----------
Expenses:
General & administrative 588,059 810,245
Salaries & employee benefits 6,090,383 6,490,857
Legal & professional 153,592 60,090
Rent & utilities 401,274 367,908
Taxes & insurance 252,533 271,072
Technical operating expenses 1,589,023 1,310,870
Provision for doubtful accounts 54,512 144,144
Depreciation and amortization 1,585,095 1,924,177
----------- -----------
Total operating expenses 10,714,471 11,379,363
----------- -----------
Equity in earnings of
unconsolidated partnership 75,000 85,675
----------- -----------
Income from operations 362,207 3,120,702
Other income (expense):
Other income 9,228 53,133
Interest expense (1,011,401) (1,014,338)
----------- -----------
Total other income (expense) (1,002,173) (961,205)
----------- -----------
INCOME BEFORE INCOME TAXES (639,966) 2,159,497
Provision for Federal Income Taxes (217,588) 691,038
----------- -----------
NET INCOME $ (422,378) $ 1,468,459
=========== ===========
Earnings (Loss) per share :
Basic $ (0.04) $ 0.14
=========== ===========
Diluted $ (0.04) $ 0.12
=========== ===========
Weighted average common shares outstanding:
Basic 11,481,636 10,761,768
=========== ===========
Diluted 11,481,636 12,366,956
=========== ===========
</TABLE>
4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 1999
<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 $11,714 $747 $48,571,630 ($33,291,667) ($103,500) ($107,651) $15,081,273
Net income (422,378) (422,378)
Stock options exercised 1 936 937
-------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $11,715 $747 $48,572,566 ($33,714,045) ($103,500) ($107,651) $14,659,832
=================================================================================================
</TABLE>
5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows from Operations:
Net income $ (422,378) $ 1,468,459
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 1,585,095 1,924,178
Decrease in deferred rent expense (1,686)
Deferred federal income taxes (217,588) --
Gain on disposal of assets (186)
(Increase) decrease in other receivable 155,853 --
(Increase) decrease in trade receivable (322,624) 1,254,878
Increase in contracts receivable -- (985,484)
Provision for bad debt 54,512 --
(Increase) decrease in prepaid expenses (66,458) 92,759
(Increase) decrease in other assets (74,426) (444,007)
Increase in equity in unconsolidated partnership (75,000) (85,675)
Increase (decrease) in accounts payable 40,941 (1,234,303)
Increase (decrease) in accrued liabilities (96,633) (1,825,596)
Increase in income taxes payable 291,039
Increase (decrease) in other liabilities (778,530) 95,223
--------- -----------
Net Cash Provided by Operations (217,236) 549,599
--------- -----------
Cash Flows Used In Investing Activities:
Decrease in cash investments -- --
Cash payments for the purchase of property (140,527) (516,908)
Acquisition of businesses net of cash acquired -- (4,472)
(Increase) decrease in subsidiary acquisition costs (151,880) (91,741)
Decrease in other receivables -- 37,215
(Increase) decrease in employee receivables (1,717) 64,958
Increase in stockholder receivable -- (2,093)
Net Cash (USED IN) PROVIDED BY Investing --------- -----------
Activities (294,124) (513,041)
--------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 937 2,189,731
Net borrowings on line of credit 1,000,000 137,446
Principal payments on long-term debt 37,446 (624,227)
Principal payments on capital lease obligations (653,343) (1,201,608)
--------- -----------
Net Cash (Used IN) provided by Financing Activities 342,938 501,342
--------- -----------
Net increase (decrease) in cash (168,421) 537,900
Cash and cash equivalents balance,
beginning of period 1,087,349 5,126,114
--------- -----------
Cash and cash equivalents balance,
end of period $ 918,928 $5,664,014
=========== ==========
</TABLE>
6
<PAGE>
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 1998 balances have been
reclassified to conform to the 1999 presentation. These financial statements
include the accounts of the Company and its subsidiaries, which are set forth in
the following table.
[FLOW 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>
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, 1999, stock warrants outstanding amounted to 70,000 at exercise
prices ranging from $6.25 to $12.25 per common share.
NOTE 3. ACQUISITIONS
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 from Diagnostic
Imaging Services, Inc., a Delaware corporation ("DIS-Delaware"), 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>
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.
In March 1998, DIS-Delaware agreed to convert into DHS common stock the
$1,500,000 of deferred purchase price payments described above and all rights to
receive DHS warrants as described above; as a result, $1,500,000 of deferred
liabilities were recorded by DHS as current liabilities at March 31, 1998. On
April 8, 1998, the deferred liabilities and warrant rights were converted into
200,000 DHS common shares, which were subsequently included in DHS' S-3
Registration Statement declared effective by the Securities and Exchange
Commission (the "SEC") on April 24, 1998.
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 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 were included in DHS' S-3 Registration
Statement declared effective by the SEC on April 24, 1998.
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.
On May 11, 1998, the Company's Heart Institute of Tulsa, Inc. subsidiary ("HIT)
acquired Diagnostic Radiology Mobile Ultrasound, Inc. ("DRMU"), and Edmond,
Oklahoma-based provider of non-invasive ultrasound testing services. The
consideration paid to the former owners of DRMU consisted of 13,484 shares of
DHS common stock.
9
<PAGE>
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the three months ended March 31, 1999 and 1998 for interest was
approximately $1,011,000 and $1,014,000, respectively.
No cash payments for income taxes were made for the three months ended March 31,
1999, while the Company paid approximately $400,000 in cash for the three months
ended March 31, 1998.
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 March 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Assets acquired $0 $688,935
Liabilities assumed (199,721)
Common stock issued (459,214)
--------- ---------
Total cash paid 0 30,000
Fees and expenses - -
Less cash acquired (25,528)
--------- ---------
Net cash paid $0 $ 4,472
========= =========
</TABLE>
NOTE 5. SUBSEQUENT EVENTS
On February 18, 1999, the Company entered into an agreement and Plan of Merger
with Medical Alliance, Inc. ("MAI"), a Nasdaq National Market company, pursuant
to which MAI is to merge with and into a wholly-owned subsidiary of DHS. The
Company is currently negotiating with MAI to restructure this proposed
transaction. However, the Company has not entered into any amendment of the
original agreement, and there can be no assurance as to whether or when a
transaction with MAI will be consummated.
10
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
RESULTS OF OPERATIONS
In 1998, the Company's performance declined due to deterioration in the
ultrasound business it acquired from Advanced Clinical Technology, Inc. and
Horizon/MDS Corporation (collectively, "ACT"), and to a lesser extent, the
mobile ultrasound business acquired from Diagnostic Imaging Services, Inc.
("DIS"). The Company spent most of 1998 restructuring the acquired businesses,
repricing or resigning from unprofitable accounts, and adjusting its cost
structure to service the remaining business. As a result of the deterioration
in the ACT and DIS ultrasound businesses, the Company went through a period in
which liquid resources were depleted and the Company's balance sheet became
increasingly leveraged. During 1998, the Company wrote off $18.2 million in
goodwill, $1.9 million in fixed assets, and $2.4 million of acquired accounts
receivable primarily related to these acquisitions, as well as smaller
additional write-offs related to other acquisitions as described below.
The Company has a high fixed-cost structure, and as revenues from the acquired
businesses declined, operating margins also declined. Additionally, the margins
related to portions of the replacement revenues related to the business were too
low. Many of the Company's restructuring efforts during 1998 were directed
towards reducing fixed costs, eliminating marginal and unprofitable accounts,
and establishing and improving returns on new and existing business. Management
began this process during the second quarter of 1998 and substantially completed
its restructuring efforts during the fourth quarter. Although the net effect of
these events in 1998 was increased expenses on essentially flat revenues,
management believes that its efforts to restructure the business can result in a
more stable and enduring revenue stream with improved margins for 1999 and
beyond.
In December 1998, the Company elected to change its method for accounting for
future payments relating to contract receivables due from long-term equipment
and service agreements. Under the previous method, expected profits or losses
on contracts were based on the contracts' guaranteed minimum values and total
estimated related contract costs upon installation. These estimates were
reviewed and revised periodically throughout the lives of the contracts, and
adjustments resulting from such revisions were recorded in the periods in which
the revisions were made. Losses on contracts were recorded in full as they were
identified. Accordingly, the Company's ability to accurately predict its
earnings was based in part on the timing, size, and estimated costs to be
incurred on new long-term contracts in any given period. As the Company's long-
term contracts increased in recent periods, both in length and dollar amount,
the impact of long-term contract revenue recognition became greater. Also,
because of uncertainties inherent in the estimation process as it relates to
long-term contracts, it was reasonably possible that actual earnings would
differ from the estimates. The Company changed its accounting method effective
October 1, 1998, in order to recognize revenue and expense on long-term
contracts ratably over the lives of the contracts. 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.
11
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
The following table sets forth pro forma operating results of the Company,
presented as if the change in accounting method had been in place for the years
ended 1998 and to exclude nonrecurring charges. The discussion that follows is
based on a comparison of 1999 results of operations as compared to pro forma
presentation of the operating results for 1998.
<TABLE>
<CAPTION>
First Quarter First Quarter Variance
------------------------------------------------------------------------------------------
1999 1998 1Q 99 vs 1 Q 98
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues 11,001,678 100.00% 10,977,952 100.00% 23,726 0.22%
-------------------------- -------------------------- --------------------------
Expenses:
General & administrative 588,059 5.35% 810,245 7.38% (222,186) -27.42%
Salaries & employee benefits 6,090,383 55.36% 6,490,857 59.13% (400,474) -6.17%
Legal & professional 153,592 1.40% 60,090 0.55% 93,502 155.60%
Rent & utilities 401,274 3.65% 367,908 3.35% 33,366 9.07%
Taxes & insurance 252,533 2.30% 271,072 2.47% (18,539) -6.84%
Technical operating expenses 1,589,023 14.44% 1,310,870 11.94% 278,153 21.22%
Provision (credit) for 54,512 0.50% 144,144 1.31% (89,632) -62.18%
doubtful accounts
Depreciation and amortization 1,585,095 14.41% 1,924,177 17.53% (339,082) -17.62%
-------------------------- -------------------------- --------------------------
Total operating expenses 10,714,471 97.39% 11,379,363 103.66% (664,892) -5.84%
-------------------------- -------------------------- --------------------------
Equity in earnings of
unconsolidated partnership 75,000 0.68% 85,675 0.78% (10,675) -12.46%
-------------------------- -------------------------- --------------------------
Income from operations 362,207 3.29% (315,736) -2.88% 677,943 214.72%
-------------------------- -------------------------- --------------------------
Other income (expense):
Other income 9,228 0.08% 53,133 0.48% (43,905) -82.63%
Interest expense (1,011,401) -9.19% (1,014,338) -9.24% 2,938 -0.29%
-------------------------- -------------------------- --------------------------
Total other income (expense) (1,002,173) -9.11% (961,205) -8.76% (40,967) 4.26%
-------------------------- -------------------------- --------------------------
Income Before Income Taxes (639,966) -5.82% (1,276,941) -11.63% 636,976 49.88%
Income tax expense (benefit) at 34% (217,588) -1.98% (434,160) -3.95% 216,572 49.88%
-------------------------- -------------------------- --------------------------
Net income (422,378) -3.84% (842,781) -7.68% 420,404 49.88%
========================== ========================== ==========================
Earnings before Interest, Taxes,
Depreciation, and Amortiaztions 1,947,302 17.70% 1,608,441 14.65% 338,861 21.07%
========================== ========================== ==========================
Earnings Per Share:
Basic -0.04 -0.08
============ ============
Diluted -0.04 -0.08
============ ============
Weighted average common shares
oustanding:
Basic 11,481,636 10,761,768
============
Diluted 11,481,636 10,761,768
============ ============
</TABLE>
NOTE: Numbers may not add due to rounding.
12
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
During the three months ended March 31, 1999, gross revenues remained
essentially unchanged from the comparable prior year period. Operating expenses
decreased by approximately 5.8% from $11,379,000 to $10,714,000, due to the
Company's 1998 restructuring efforts and decreased amortization expense as a
result of goodwill charged off in 1998. The principal areas that decreased in
1999 were personnel expenses, which decreased by approximately 6.2% from
$6,491,000 to $6,090,000, and general and administrative expenses, which
decreased by approximately 27.4% from $810,000 to $588,000. Most of the
personnel expense reductions were related to overhead and sales salaries, and to
a lesser extent a reduction in technical salaries. Technical salaries were
reduced as a result of elimination of unprofitable and marginally profitable
accounts, and more efficient utilization of remaining staff. In all, the
Company eliminated or converted to part-time approximately 65 full-time
positions, representing slightly less than 15% of its workforce. General and
administrative expenses declined due to reduced staffing levels, marketing
initiatives, travel expenses, and other savings realized from the Company's
restructuring plans. Technical operating expenses increased by 21.2% from
$1,311,000 to $1,589,000, primarily due to increased repair and maintenance
expenses the Company incurred under its partially self-insured maintenance
programs. During 1998, the Company met its stop loss limits under this program
during the fourth quarter.
Operating income increased $677,000 to $362,000 in 1999 compared to a net loss
from operations of $316,000 in 1998. The improvement was due primarily to the
expense reductions described above.
Revenues were flat due to the account culling that the Company undertook in 1998
described above, and lack of resources to start new projects. The Company's
current pipeline of projects includes nine projects that were implemented during
the first quarter of 1999 with expected annual revenue of approximately
$1,869,000, and four projects with expected annual revenue of approximately
$1,389,000. Annual earnings before interest, depreciation and taxes on these
projects is expected to be approximately $1.3 million. The Company's plans for
financing these projects and other growth are discussed below.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources are strained. As a result of
declines in the performance of debt-financed acquisitions, the Company's cash
flow is not adequate to fund debt service and future growth, and may not be
adequate to fund continuing operations. The Company refinanced its capital
lease debt in late 1998 and early 1999, and is attempting to replace its senior
lender with an asset-based lender whose principal covenants will be based on the
collateral value underlying its loan, rather than ratios of cash flows to funded
debt and fixed charges. Management believes that an asset-based facility is
appropriate to its circumstances, and will provide additional capacity to fund
new projects and provide working capital. Although the Company has received
proposal letters from one potential refinancing source, the Company has not
received any binding commitments with respect to any refinancing.
On February 18, 1999, the Company entered into an agreement and Plan of Merger
with Medical Alliance, Inc. ("MAI"), a Nasdaq National Market company, pursuant
to which MAI is to merge with and into a wholly-owned subsidiary of DHS. The
Company is currently negotiating with MAI to restructure this proposed
transaction. However, the Company has not entered into any amendment of the
original agreement, and there can be no assurance as to whether or when a
transaction with MAI will be consummated.
At December 31, 1998, the Company was not in compliance with the tangible net
worth requirement for continued listing on the Nasdaq National Market. In
February 1999, the Company was notified by Nasdaq that the Company would be
required to demonstrate, to Nasdaq's satisfaction, that the Company would be
able to promptly cure this deficiency. In March 1999, the Company received
further notice form Nasdaq that the Company's common stock
13
<PAGE>
would be promptly delisted from the Nasdaq National Market (the "NNM") absent a
further showing of a plan of compliance. The Company has appealed the proposed
delisting, and an oral hearing is scheduled before Nasdaq on May 20, 1999, at
which time the Company intends to provide more concrete details regarding the
proposed merger with MAI, as well as certain other (albeit less probable)
transactions under consideration, which would also have the effect of restoring
compliance with the tangible net worth requirement. Among other things, the
Company intends to demonstrate that the combined tangible net worth of MAI and
DHS will be substantially in excess of the Nasdaq requirement, that there is a
reasonable likelihood that the MAI merger will be consummated within a
reasonable time, and that there is no compelling reason to delist the Company's
common stock prior to completion of the merger process. However, because the
merger with MAI will not be completed prior to the hearing date, and because
Nasdaq has the discretion to determine that the prospects of the merger with MAI
are not sufficiently certain or will require too long to complete, there is the
possibility that the Company's common stock will be delisted from the NNM
immediately after the May 20, 1999 hearing. In this event, the Company has
requested immediate listing on the Nasdaq SmallCap Market based on the Company's
compliance with all criteria required for listing thereon. However, Nasdaq is
not obligated to grant such listing on the Nasdaq SmallCap Market, and in this
event, the Company's common stock would therupon be traded over the counter as a
"bulletin board" stock, which would result in stockholders having substantially
less ability to sell their shares.
The Company's continuation as a going concern is dependent on its ability to
refinance its senior debt, to obtain additional financing or refinancing as may
be required, and continue to increase cash flow from operations, or complete its
proposed merger with MAI. The Company's 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.
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.
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.
Effective as of December 31, 1998, the Company and its subsidiaries entered into
a further amendment of the revolving credit and term loan facility with Chase.
This amendment provides for the implementation of a new financial covenant
structure. The Company has also entered in to an amendment of its subordinated
note agreement with Prudential, containing amendments consistent with the Chase
amendment.
The new financial covenant structure temporarily suspends the Fixed Charge
Coverage Ratio, Funded Debt to EBITDA Ratio, and Senior Debt to EBITDA Ratio,
and requires the Company to maintain minimum EBITDA levels. In addition, the
new structure limits unleveraged capital expenditures, and prohibits the Company
from incurring additional debt or selling assets. At March 31, 1999, the
company was not in compliance with the required minimum EBITDA level.
Also under the new amendment, the outstanding $7,952,930 principal balance of
the Company's term loan begins a five-year amortization program to commence July
15, 1999, and the remaining availability under that facility is cancelled. The
revolving facility was reduced to $1 million with a shortened maturity of
January 31, 1999 (which was thereafter extended to June 30, 1999), and on March
31, 1999, the outstanding principal balance of the revolving credit loans was
$1,000,000. All of the Chase loans bear interest at varying rates, depending on
the Company's leverage from time to time.
14
<PAGE>
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 is in default in payment of the $525,000 interest payment that was
due on the Subordinated Notes on April 17, 1999, and is also in default as of
March 31, 1999 with respect to certain financial covenants of its subordinated
note agreement with Prudential. Prudential has agreed to defer until July 1,
1999 (or such earlier date as the MAI merger is completed or the Company
otherwise obtains $1,000,000 or more of new equity proceeds) the required
payment of the interest arrearage, and to forbear from exercising any of its
rights and remedies in respect of the interest payment default during such
extended payment period. Prudential's waiver does not extend to any other
defaults, including but not limited to any financial covenant defaults
subsequent to December 31, 1998. The interest payment default to Prudential also
constitutes an event of default under the Company's loan agreement with Chase,
although the Company has not received notice of such event of default from
Chase.
The Company and its subsidiaries have also entered into various financing
arrangements with commercial leasing companies and equipment suppliers, bearing
interest ranging from 7.7% to 12.1% per annum.
In 1998, the Company received net proceeds of approximately, $1,801,858 from the
exercise of warrants, and $811,136 from the exercise of options under the
Company's various stock option plans.
Based on the Company's operating plan, management believes that completion of
the proposed refinancing of its senior debt facility or completion of its
proposed merger with MAI will be sufficient to meet the Company's operating
requirements through the close of the Company's fiscal year ending December 31,
1999. In the event that the Company is unable to consummate either of these
proposed transactions, management believes that the Company will be required to
obtain other sources of financing to meet its obligations and sustain its
operations beyond July 1, 1999.
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.
15
<PAGE>
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 report on Form 8-K during the quarterly period
ended March 31, 1999.
<PAGE>
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 and Director
/S/ BRAD A. HUMMEL
- --------------------------------------------
Brad A. Hummel
Chief Executive Officer, President, Chief Operating Officer
and Director
/S/ CHRISTOPHER L. TURNER
- --------------------------------------------
Christopher L. Turner
Chief Financial Officer
and Principal Accounting Officer
/S/ JAMES R. ANGELICA
- --------------------------------------------
James R. Angelica
Director
Date: May 14, 1999
17
<PAGE>
EXHIBIT 11.1
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Total Issued Basic Diluted
Date # Shares Wtd. Avg. Wtd. Avg
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued January 1, 1999 1/1/99 11,713,895 11,713,895
Treasury Shares 1/1/99 (233,259) (233,259)
Shares issued 1/1/99 - 3/31/99 Various 1,000 622
-------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares 3/31/99 11,481,636 11,481,258 11,481,258
============================
Diluted:
-------
Common stock equivalents (scheduled below) 96,376
Convertible Preferred - original issuance 642,857
Convertible Preferred - 12/31/96 dividend 6,129
Convertible Preferred - 12/31/97 dividend 47,052
Convertible Preferred - 12/31/98 dividend 50,462
-------------
842,876
-------------
Diluted weighted average shares 12,324
=============
Net Income (Loss) for the Three Months Ended March 31, 1999 ($422,378) ($422,378)
===========================
Earnings Per Share $ (0.04) $ (0.03)
===========================
</TABLE>
<TABLE>
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Diluted
Average share price during period $2.1924 Diluted Net
Exercise Assumed Treas. Shs. Add'l
Stock options & warrants: Number Price Proceeds Acquired Shares
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bridge Warrants 10,000 6.2500 0 0 0
Prudential Warrants 60,000 12.2500 0 0 0
Stock options - Plan Year
1992 290,001 2.2100 0 0 0
1992 0 2.6250 0 0 0
1992 78,500 0.9375 73,594 33,568 44,932
1992 176,800 1.6875 298,350 136,086 40,714
1992 7,300 1.9375 14,144 6,451 849
1992 2,500 7.5000 0 0 0
1992 1,500 8.6250 0 0 0
1992 9,000 8.1250 0 0 0
1995 19,750 6.2500 0 0 0
1995 48,700 8.0000 0 0 0
1995 59,939 10.6875 0 0 0
1995 109,200 8.6250 0 0 0
1995 85,000 1.9375 164,688 75,119 9,881
1995 115,000 4.2500 0 0 0
1995 6,000 5.3750 0 0 0
1995 30,500 6.2500 0 0 0
1995 14,000 8.0000 0 0 0
1995 2,500 10.2500 0 0 0
1997 253,600 7.4375 0 0 0
1997 150,000 8.1875 0 0 0
1997 220,061 10.6875 0 0 0
1997 140,200 8.6250 0 0 0
-------------------------------------------------------------------------------------------------------------------------
Total Common Stock Equivalents 1,890,051 96,376
=========================================================================================================================
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 918,928
<SECURITIES> 0
<RECEIVABLES> 12,605,207
<ALLOWANCES> (1,333,023)
<INVENTORY> 0
<CURRENT-ASSETS> 13,725,687
<PP&E> 38,764,545
<DEPRECIATION> (13,310,206)
<TOTAL-ASSETS> 69,258,040
<CURRENT-LIABILITIES> 12,176,711
<BONDS> 39,336,783
747
0
<COMMON> 11,715
<OTHER-SE> 14,647,370
<TOTAL-LIABILITY-AND-EQUITY> 69,258,040
<SALES> 11,001,678
<TOTAL-REVENUES> 11,001,678
<CGS> 0
<TOTAL-COSTS> 10,584,959
<OTHER-EXPENSES> (9,228)
<LOSS-PROVISION> 54,512
<INTEREST-EXPENSE> 1,011,401
<INCOME-PRETAX> (639,966)
<INCOME-TAX> (217,588)
<INCOME-CONTINUING> (422,378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (422,378)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
