<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, 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 September 30, 1999, there were 11,716,395 issued and 11,483,136 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>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 2-3
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations
Nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Operations
Three months ended September 30, 1999 and 1998 5
Consolidated Statement of Stockholders' Equity
September 30, 1999 6
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 7
Consolidated Statements of Cash Flows
Three months ended September 30, 1999 and 1998 8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis or
Plan of Operation 16-21
Part II. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit 11.1 - Statement re: computation of per share earnings 24-25
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
------
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, 1999 December 31, 1998
------------------- ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 619,206 $ 1,087,349
Accounts receivable: Trade, net of
allowance for doubtful accounts 11,262,178 10,088,540
Accrued interest and other -- 34,240
Stockholder receivables 51,321 51,321
Employee receivables 20,236 10,615
Income tax refund receivable -- 973,492
Deferred federal income taxes 1,115,200 1,115,200
Prepaid expenses and other 339,152 352,917
----------- -----------
Total Current Assets 13,407,293 13,713,674
----------- -----------
PROPERTY & EQUIPMENT:
Office furniture & equipment 2,396,691 2,381,019
Machinery & service equipment 34,147,920 31,888,460
Leasehold improvements 2,082,745 2,071,914
Less: Accumulated depreciation and amortization (15,724,789) (12,131,560)
----------- -----------
Total Property & Equipment 22,902,567 24,209,833
----------- -----------
OTHER ASSETS:
Deposits and other assets 975,014 1,010,753
Equity in unconsolidated partnership 1,820,043 1,933,477
Goodwill 19,043,582 19,043,582
Noncompete agreements 2,698,533 2,698,533
Deferred federal income taxes 8,570,155 8,352,567
Less: Accumulated amortization (4,161,188) (3,095,764)
----------- -----------
Total Other Assets 28,946,139 29,943,148
----------- -----------
TOTAL ASSETS $65,255,999 $67,866,655
=========== ===========
</TABLE>
2
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, 1999 December 31, 1998
------------------- ------------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 4,528,000 $ 3,503,268
Accrued liabilities 2,941,150 2,221,795
Current lease obligations 2,718,864 2,585,334
Long-term debt 7,589,915 814,106
Senior subordinated debt 20,000,000 --
Advance contract proceeds 1,955,000 1,955,000
Notes payable 553,288 --
------------ ------------
Total Current Liabilities 40,286,217 11,079,503
Long-term lease obligations 10,966,701 10,652,605
Long-term debt -- 7,190,030
Senior subordinated debt -- 20,000,000
Other liabilities 2,012,636 3,863,244
------------ ------------
Total Liabilities 53,265,554 52,785,382
------------ ------------
Mandatorily Redeemable Preferred stock,
$.001 par value; authorized 3,000,000 shares;
issued and outstanding 787,090 and 746,500 shares
at September 30, 1999 and December 31, 1998,
respectively 5,509,636 5,225,500
Stockholders' Equity:
Common stock, $.001 par value, authorized
15,000,000 shares; issued 11,716,395 and
11,713,895 shares and outstanding 11,483,136
and 11,480,636 shares at September 30, 1999
and December 31, 1998, respectively 11,716 11,714
Additional paid-in capital 48,573,971 48,571,630
Retained earnings (41,893,727) (38,516,420)
Stockholder receivable (103,500) (103,500)
Treasury stock (at cost) (107,651) (107,651)
------------ ------------
Total Stockholders' Equity 6,480,809 9,855,773
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 65,255,999 $ 67,866,655
============ ============
</TABLE>
3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Revenues:
Gross revenues $ 32,426,834 $ 43,861,302
--------------- --------------
Expenses:
General & administrative 1,676,900 2,581,337
Salaries & employee benefits 17,952,603 19,416,449
Legal & professional 472,950 320,911
Rent & utilities 1,157,071 1,168,095
Taxes & insurance 818,145 919,085
Technical operating expenses 4,958,606 4,465,178
Provision for doubtful accounts 155,344 295,296
Depreciation and amortization 4,887,241 5,259,873
Restructuring and impairment expense -- 5,518,489
Merger expense 717,861 --
--------------- --------------
Total operating expenses 32,796,721 39,944,713
--------------- --------------
Equity in earnings of
unconsolidated partnership 291,242 225,728
--------------- --------------
Income from operations (78,645) 4,142,317
Other income (expense):
Other income 35,166 104,635
Interest expense (3,140,521) (3,342,463)
--------------- --------------
Total other income (expense) (3,105,355) (3,237,828)
--------------- --------------
INCOME BEFORE INCOME TAXES (3,184,000) 904.489
Federal Income Taxes (Benefit) Provision (90,829) 327,175
--------------- --------------
NET LOSS $ (3,093,171) $ 577,314
Preferred Dividends 284,136 264,930
--------------- --------------
Net Loss available to commons stockholders $ (3,377,307) $ 312,384
=============== ==============
Loss per share :
Basic $ (0.29) $ 0.03
=============== ==============
Diluted $ (0.24) $ 0.05
=============== ==============
Weighted average common shares outstanding:
Basic 11,482,410 11,174,841
=============== ==============
Diluted 12,640,119 12,590,496
=============== ==============
</TABLE>
4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Gross revenues $ 10,382,582 $ 14,292,919
------------- ------------
Expenses:
General & administrative 527,170 900,945
Salaries & employee benefits 5,940,272 6,391,880
Legal & professional 150,586 127,096
Rent & utilities 372,845 412,799
Taxes & insurance 341,427 325,610
Technical operating expenses 1,662,402 1,335,902
Provision for doubtful accounts 52,778 37,521
Depreciation and amortization 1,637,121 1,765,430
-------------- -------------
Total operating expenses 10,684,601 11,297,183
-------------- --------------
Equity in earnings of
unconsolidated partnership 141,242 45,885
-------------- --------------
Income from operations (160,777) 3,041,621
Other income (expense):
Other income 53,379 12,343
Interest expense (1,080,568) (1,167,257)
-------------- --------------
Total other income (expense) (1,027,189) (1,154,914)
-------------- --------------
LOSS BEFORE INCOME TAXES (1,187,966) 1,886,707
Provision for Federal Income Taxes 253 641,567
-------------- --------------
NET LOSS $ (1,188,219) $ 1,245,140
Preferred Dividends 94,712 88,310
-------------- --------------
Net Loss available to commons stockholders $ (1,282,931) $ 1,156,830
============== ==============
Loss per share :
Basic $ (0.11) $ 0.10
============== ==============
Diluted $ (0.09) $ 0.10
============== ==============
Weighted average common shares outstanding:
Basic 11,482,410 11,407,466
============== ==============
Diluted 12,619,240 12,641,469
============== ==============
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Retained
Additional Earnings
Common Paid-In (Accumulated Stockholder Treasury
Stock Capital Deficit) Receivable Stock Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998, $11,714 $48,571,630 $(33,291,667) $(103,500) $(107,651) $15,080,526
as previously reported
Prior period adjustments ** (5,224,753) (5,224,753)
---------------------------------------------------------------------------------------------
Balance, December 31, 1998, $11,714 $48,571,630 $(38,516,420) $(103,500) $(107,651) $ 9,855,773
Adjusted
Net Loss (3,377,307) (3,377,307)
Stock options exercised 2 2,341 2,343
----------------------------------------------------------------------------------------------
Balance, September 30, 1999 $11,716 $48,573,971 $(41,893,727) $(103,500) $(107,651) $ 6,480,809
================================================================================================================================
</TABLE>
**NOTE: To adjust the mandatorily redeemable preferred stock to its liquidation
preference of $7.00 per share.
6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Cash Flows from Operations:
Net income (loss) $ (3,093,171) $ 577,314
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 4,887,241 5,259,873
Deferred federal income taxes (217,588) (50,716)
Decrease in deferred rent expense -- (3,373)
Loss on disposal of assets 28,284 --
Restructuring and impairment expense -- 4,593,808
(Increase) decrease in other receivable 198,755 (13,437,197)
(Increase) decrease in trade receivable (1,328,983) 667,738
Provision for bad debt 155,344 295,296
(Increase) decrease in prepaid expenses 13,765 (225,914)
Increase in equity in unconsolidated partnership 113,434 190,764
Increase (decrease) in accounts payable 1,024,732 370,406
Increase (decrease) in accrued liabilities 554,841 (306,867)
Increase (decrease) in income taxes payable 973,492 (623,677)
-------------- -------------
Net Cash Provided by Operations 3,310,146 (2,692,545)
-------------- -------------
Cash Flows Used in Investing Activities:
Proceeds from sale of assets 22,074 --
(Increase) decrease in other assets (63,113) (93,567)
Cash payments for the purchase of property (261,176) (1,352,418)
Acquisition of businesses net of cash acquired -- (11,352)
(Increase) decrease in subsidiary acquisition costs 98,852 (176,160)
(Increase) decrease in other receivables -- (360,100)
(Increase) decrease in employee receivables (9,621) 71,621
Increase in stockholder receivable -- (4,118)
-------------- --------------
Net Cash (Used IN) Provided By Investing
Activities (212,984) (1,926,094)
-------------- --------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 2,343 2,539,544
Net borrowings on line of credit 553,288 137,446
Increase in other liabilities (1,850,608) 3,085,139
Principal payments on long-term debt (414,221) (1,149,860)
Principal payments on capital lease obligations (1,856,107) (3,088,699)
----------- ------------
Net Cash (Used IN) Provided by Financing
Activities (3,565,305) 1,523,570
----------- ------------
NET INCREASE (DECREASE) IN CASH (468,143) (3,095,069)
CASH AND CASH EQUIVALENTS BALANCE,
BEGINNING OF PERIOD 1,087,349 5,126,114
----------- ------------
CASH AND CASH EQUIVALENTS BALANCE,
END OF PERIOD $ 619,206 $ 2,031,045
=========== ============
</TABLE>
7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operations:
Net loss $ (1,188,219) $ 1,245,140
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Depreciation and amortization 1,637,121 1,765,430
Gain on disposal of assets 926 --
(Increase) decrease in other receivable 102,186 (8,265,042)
(Increase) decrease in trade receivable (381,811) (676,287)
Provision for bad debt 52,778 37,521
(Increase) decrease in prepaid expenses 23,865 11,196
Increase in equity in unconsolidated partnership 98,919 246,257
Increase (decrease) in accounts payable 890,614 1,199,446
Increase (decrease) in accrued liabilities 9,899 121,126
Increase in income taxes payable 846,712 1,041,022
------------ ------------
Net Cash Provided by Operations 2,092,990 (3,274,191)
------------ ------------
Cash Flows Used in Investing Activities:
Proceeds from sale of assets 22,074 --
(Increase) decrease in other assets (3,000) 34,769
Cash payments for the purchase of property -- (362,164)
(Increase) decrease in subsidiary acquisition costs -- (994)
(Increase) decrease in other receivables -- (329,199)
(Increase) decrease in employee receivables (6,027) 13,139
Increase in stockholder receivable -- (1,553)
------------ ------------
Net Cash (Used IN) provided by Investing
Activities 13,047 (646,002)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock -- 11,812
Net borrowings on line of credit (446,712) --
Increase in other liabilities (740,410) 1,363,015
Principal payments on long-term debt (404,826) (102,348)
Principal payments on capital lease obligations (732,173) (1,053,213)
------------- ------------
Net Cash (Used IN) provided by Financing
Activities (2,324,121) 219,266
------------- ------------
NET INCREASE (DECREASE) IN CASH (218,084) (3,700,927)
CASH AND CASH EQUIVALENTS BALANCE,
BEGINNING OF PERIOD 837,290 5,731,972
------------- ------------
CASH AND CASH EQUIVALENTS BALANCE,
END OF PERIOD $ 619,206 $ 2,031,045
============= ============
</TABLE>
8
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC & SUBSIDIARIES
NOTE 1. GENERAL
The unaudited consolidated financial statements included herein for Diagnostic
Health Services, Inc. and subsidiaries ("DHS" or the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and include all adjustments which are, in the opinion of management,
necessary for a fair presentation. Certain information and footnote disclosures
required by generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Certain 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.
[ORGANIZATIONAL CHART APPEARS HERE]
In addition, DHS and DHSMS have three inactive wholly owned subsidiaries, MAI
Acquisition Corp., 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.
9
<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
The Prudential Insurance Company of America ("Prudential") in connection with
the sale of $20,000,000 in principal amount of senior subordinated promissory
notes. As of September 30, 1999, none of such warrants had been exercised.
At September 30, 1999, stock warrants outstanding amounted to 70,000 at exercise
prices ranging from $6.25 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 was 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.
10
<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 Prudential of $20,000,000 in principal amount of senior subordinated
promissory notes of the Company (the "Subordinated Notes"). The Subordinated
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 Subordinated 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 Subordinated Notes), and the Company may be
required (at the Noteholders' option) to purchase the Subordinated 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 Subordinated 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 Subordinated 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 stockholder
of MDII.
Effective as of December 9, 1997, SoCal acquired Mobil Diagnostics, Inc.
("Mobil"), a southern California-based provider of mobile non-invasive
diagnostic 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.
11
<PAGE>
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 operation 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 related 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 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 stockholders of Sonomed.
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.
On May 11, 1998, the Company's Heart Institute of Tulsa, Inc. subsidiary ("HIT")
acquired Diagnostic Radiology Mobile Ultrasound, Inc. ("DRMU"), an 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.
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.
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the nine months ended September 30, 1999 and 1998 for interest was
approximately $2,079,000 and $3,163,000, respectively.
No cash payments for income taxes were made for the nine months ended September
30, 1999, while the Company paid approximately $1,007,977 in cash for the nine
months ended September 30, 1998.
The Company also recognized assets and obligations under noncompete agreements
of approximately $22,000 for the nine months ended September 30, 1998.
The Company acquired property and equipment under capital leases, excluding
leases in connection with business acquisitions, of approximately $2,304,000 and
$212,000 for the nine months ended September 30, 1999 and 1998, respectively.
No adjustments were made to goodwill during the nine months ended September 30,
1999. 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 conversion of liabilities to DHS common shares occurred during the nine
months ended September 30, 1999. 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 shares.
12
<PAGE>
Dividends paid in kind on the Company's mandatorily redeemable preferred stock
were $284,136 and $264,930 for the nine months ended September 30, 1999 and 1998
respectively.
NOTE 5. MANDATORILY REDEEMABLE PREFERRED STOCK
The mandatorily redeemable preferred stockholders are entitled to receive
preferential and cumulative annual preferred stock dividends, payable in kind in
additional preferred shares, at a rate of 7.25% of the liquidation preference of
$7.00 per share and are entitled to a preference, in liquidation, in the amount
of $7.00 per share plus accrued and unpaid dividends. As of September 30, 1999,
there were no cumulative preferred stock dividends in arrears. Preferred shares
are not entitled to vote except in certain circumstances. The holders of
outstanding preferred shares may convert such shares at the rate of one share
for each share of common stock. Additionally, in any fiscal quarter in which the
mean average daily last reported sale price of the common stock is less than
$7.00 per share, then, at any time during the next succeeding fiscal quarter of
the Company, the holders of the preferred stock shall have the right to convert
any or all of their shares into common stock, with each outstanding share being
convertible into a number of shares of common stock equal to the liquidation
value divided by the average closing price during the preceding fiscal quarter.
Each conversion has a limitation whereby the conversion shares held by the
subject holder cannot exceed 9.9% of the outstanding common shares outstanding
prior to conversion.
The holders of the preferred stock may require the Company to redeem any or all
of the outstanding preferred stock at a price of $7.00 per share at any time and
from time to time on or after November 13, 2001, subject to certain limitations
under the Company's loan agreements. Additionally, the Company may at its sole
discretion redeem all or any portion of the preferred stock then outstanding. On
any such redemption, the Company will pay a price per share on a progressive
scale specifically designated by the certificate of stock designation agreement.
At September 30, 1999, the Company would pay a price of no less than $8.10 per
preferred share for any such redemption.
The liquidation preference amounts and shares outstanding, including all
dividends, are as follows:
<TABLE>
<CAPTION>
Liquidation Preference
----------------------
As of December 31, No. of Shares Amount
- ------------------ ------------- ------
<S> <C> <C>
1998 746,500 $5,225,500
1997 695,593 4,872,263
1996 648,986 4,542,903
</TABLE>
NOTE 6. CHANGE IN ACCOUNTING METHOD
In December 1998, the Company elected to change its method for accounting for
future payments relating to contract receivables due on long-term equipment and
service agreements. Under the previous method, expected profits or losses on
contracts were based on the Company's estimates of guaranteed minimum contract
values and related 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 are made. Losses on contracts were recorded in full as they were
identified.
Under the new method, contract revenues are recognized ratably on a monthly
basis as billed to customers, and all costs are treated as period costs. The
Company believes that the new method is preferable because results of operations
will more closely approximate actual cash flows.
13
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
NOTE 7. EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Nine Months Ended 9/30/99
-----------------------------------------------------------------------------
Income Shares Per - Share
(Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $(3,093,171)
Less: Preferred stock dividend (284,136)
-------------------
Basic EPS
Income available to
Common shareholders (3,377,307) 11,482,410 $ (0.29)
=================
Effects of Dilutive Securities
Stock options - plan year 1992 20,879
Convertible preferred stock 284,136 1,136,830
------------------- ------------------
Diluted EPS $(3,093,171) 12,640,119 $ (0.24)
=================== ================== =================
</TABLE>
NOTE 8. GOING CONCERN
The Company's current cash flows are not sufficient to fund its operations and
meet its current debt service requirements. The Company is attempting to
refinance its senior debt with a new lender under terms that would better enable
the Company to meet its refinanced debt service obligations. The Company also
expects that a restructuring of its subordinated debt will be required, as well
as raising additional equity. If these efforts fail, the Company would most
likely be forced to attempt to reorganize its affairs through a bankruptcy.
The Company is in default in payment of two quarterly principal payments (each
in the amount of $400,000) that was due Chase Bank of Texas, N.A. ("Chase") on
July 17 and October 17, 1999. Additionally, the Company's $1 million revolving
credit facility with Chase matured on September 30, 1999, and has not been
repaid or renewed by Chase. The Company has received a notice of event of
default from Chase; accordingly, all of the Chase debt has been reclassified to
current liabilities.
14
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
The Company is in default in payment of three quarterly interest payments (each
in the amount of $525,000) that were due under the Subordinated Notes on April
17, July 17, and October 17, 1999, respectively. The Company is also in default
with respect to financial covenants of its subordinated note agreement with
Prudential. Such defaults to Prudential also constitute events of default under
the Company's loan agreement with Chase. Accordingly, the entire Prudential
debt has been reclassified to current liabilities. The following table sets
forth the liabilities section of the balance sheet as if the Chase and
Prudential debt had not been reclassified to current liabilities:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 4,528,000 $ 3,503,268
Accrued liabilities 2,941,150 2,221,795
Current lease obligations 2,718,864 2,585,334
Current portion of long-term debt 1,615,172 814,106
Advance contract proceeds 1,955,000 1,955,000
Notes payable 553,288 --
----------- -----------
Total Current Liabilities 14,311,474 11,079,503
Long-term lease obligations 10,966,701 10,652,605
Long-term debt 5,974,743 7,190,030
Senior subordinated debt 20,000,000 20,000,000
Other liabilities 2,012,636 3,863,244
----------- -----------
Total Liabilities 53,265,554 52,785,382
----------- -----------
</TABLE>
The Company is not in compliance with most of the financial covenants in the
Chase and Prudential loan agreements.
Except for reclassification of the entire Chase and Prudential debt as current,
these financial statements do not contain any adjustments that might be
necessary should the Company be unable to continue as a going concern. Should
the Company be unable to continue as a going concern, additional adjustments
will be required, including charging off remaining intangibles (which are
realized through continuing operations of acquired businesses) and deferred tax
assets (which are realized through future taxable income).
15
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
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,
re-pricing 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.
Due to the continued lack of resources, the Company has been unable to pursue
significant new business opportunities. As a result, the Company has been at a
competitive disadvantage, and revenues have declined. The Company has a high
fixed-cost structure, and as revenues from the acquired businesses declined,
operating margins also declined. Many of the Company's restructuring efforts
during 1999 and 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 continues to seek opportunities to reduce costs and improve
cash flows.
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.
16
<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 throughout the
year 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>
Third Quarter Third Quarter Variance
-----------------------------------------------------------------------------
1999 1998 3Q 99 vs 3Q 98
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues $10,382,582 100.00% $11,696,551 100.00% $(1,313,969) $ -11.23%
--------------------- --------------------- ------------------------
Expenses:
General & administrative 527,170 5.08% 901,825 7.71% (374,655) -41.54%
Salaries & employee benefits 5,940,272 57.21% 6,391,981 54.65% (451,709) -7.07%
Legal & professional 150,586 1.45% 127,097 1.09% 23,489 18.48%
Rent & utilities 372,845 3.59% 412,799 3.53% (39,954) -9.68%
Taxes & insurance 341,427 3.29% 325,610 2.78% 15,817 4.86%
Technical operating expenses 1,662,402 16.01% 1,336,615 11.43% 325,787 24.37%
Provision (credit) for doubtful accounts 52,778 0.51% 37,521 0.32% 15,257 40.66%
Depreciation and amortization 1,637,121 15.77% 1,765,430 15.09% (128,309) -7.27%
--------------------- --------------------- ------------------------
Total operating expenses 10,684,601 102.91% 11,298,878 96.60% (614,277) -5.44%
--------------------- --------------------- ------------------------
Equity in earnings of unconsolidated
partnership 141,242 1.36% 45,885 0.39% 95,357 207.82%
--------------------- --------------------- ------------------------
Income (loss) from continuing operations
before income taxes $ (160,777) -1.55% $ 443,558 3.79% $ (604,335) 136.25%
===================== ===================== ========================
Earnings before Interest, Taxes,
Depreciation and Amortization (EBITDA) $ 1,476,344 14.22% $ 2,208,988 18.89% $ (732,644) -33.17%
===================== ===================== ========================
Income (loss) from continuing operations
before incomes taxes per share:
Basic $ (0.01) $ 0.04
============ ===========
Diluted $ (0.01) $ 0.04
============ ===========
Weighted average common shares outstanding:
Basic 11,482,410 11,407,466
Diluted 12,619,240 12,641,469
</TABLE>
NOTE: Numbers may not add due to rounding.
17
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Three Months Ended September 30, 1999 Compared with Three Months Ended September
30, 1998
During the three months ended September 30, 1999, gross revenues declined $1.3
million, or approximately 11% compared to the same period a year ago. Operating
expenses decreased by approximately 5.4% from $11,299,000 to $10,684,000. The
principal areas that decreased in 1999 were general and administrative expense
(down 42%), salaries and employee benefits (down 7%), and depreciation and
amortization (down 7%). Salaries and benefits, and general and administrative
expenses decreased as a result of cost-cutting and restructuring efforts.
Technical operating expenses increased by $326,000 (up 24%), primarily due to
increased repair and maintenance expenses. Operating income decreased $604,000
to a loss of $161,000 in the third quarter of 1999 compared to income from
operations of $444,000 in the third quarter of 1998.
Nine Months Ended September 30, 1999 Compared with Nine Months Ended September
30, 1998
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 30 June 30 Variance
1999 1998 3Q 99 vs 3Q 98
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues $32,426,834 100.00% $33,832,252 100.00% $(1,405,418) -4.15%
Expenses:
General & administrative 1,676,900 5.17% 2,582,217 7.63% (905,317) -35.06%
Salaries & employee benefits 17,952,603 55.36% 19,416,550 57.39% (1,463,947) -7.54%
Legal & professional 472,950 1.46% 320,912 0.95% 152,038 47.38%
Rent & utilities 1,157,071 3.57% 1,168,095 3.45% (11,024) -0.94%
Taxes & insurance 818,145 2.52% 919,085 2.72% (100,940) -10.98%
Technical operating expenses 4,958,606 15.29% 4,465,891 13.20% 492,715 11.03%
Provision (credit) for doubtful
accounts 155,344 0.48% 295,296 0.87% (139,952) -47.39%
Depreciation and amortization 4,887,241 15.07% 5,259,873 15.55% (372,632) -7.08%
--------------------- --------------------- ---------------------
Total operating expenses 32,078,860 98.93% 34,427,919 101.76% (2,349,059) -6.82%
--------------------- --------------------- ----------------------
Equity in earnings of unconsolidated
partnership 291,242 0.90% 225,728 0.67% 65,514 29.02%
--------------------- --------------------- ----------------------
Income (loss) from continuing operations
before income taxes $ 639,216 1.97% $ (369,939) -1.09% $ 1,009,155 272.79%
===================== ====================== ======================
Earnings before Interest, Taxes,
Depreciation and Amortization (EBITDA) $ 5,526,457 17.04% $ 4,889,934 14.45% $ 636,523 13.02%
===================== ====================== ======================
Income (loss) from continuing operations
before incomes taxes per share:
Basic $ 0.06 $ (0.03)
=========== ============
Diluted $ 0.05 $ (0.03)
=========== ============
Weighted average common shares outstanding:
Basic 11,482,410 11,407,466
Diluted 12,640,119 12,641,469
</TABLE>
NOTE: Numbers may not add due to rounding.
18
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Nine Months Ended September 30, 1999 Compared with Nine Months Ended September
30, 1998
During the nine months ended September 30, 1999, gross revenues declined $1.4
million (4%). Operating expenses decreased by 2,349,000 to $21,394,000. The
principal areas that decreased in 1999 were general and administrative expense
(down 35%), salaries and employee benefits (down 8%), depreciation and
amortization (down 7%). Salaries and benefits, and general and administrative
expenses decreased as a result of cost-cutting and restructuring efforts.
Technical operating expenses increased $492,000 compared to last year, an 11%
increase. The increase was primarily due to increased repair and maintenance
expenses. Depreciation and amortization decreased by $373,000 as a result of
goodwill written off during 1998. Operating income increased $1,010,000 to
$639,000 in 1999 compared to a net loss from operations of $370,000 in 1998. The
improvement was due primarily to the expense reductions described above.
For the nine months ended September 30, 1999, EBITDA was $5.5 million,
representing a $637,000 improvement from the same period a year ago. During
1999, the Company has reduced total debt by $1.7 million to $45.8 million, or
approximately 6.2 times annualized EBITDA. The Company's scheduled principal and
interest obligations for the next 12 months are approximately $9.7 million, and
thus the Company must refinance or retire debt through proceeds of an equity
infusion in order to meet its obligations.
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 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,
with less emphasis on 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 identified one potential
refinancing source, the Company is uncertain as to whether or when it will be
able to complete such financing. Completion of such financing will also require
an amendment and restructuring of the Company's outstanding subordinated debt.
In May 1998, the Company and its subsidiaries entered into 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. Simultaneously, the Company also entered into 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 September 30, 1999, the
Company was not in compliance with the
19
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
required minimum EBITDA level, and had failed to make scheduled principal and
interest payments under the loan.
Also under the December 31, 1998 Chase amendment, the outstanding $7,952,930
principal balance of the Company's term loan was to begin a five-year
amortization program commencing 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 September 30, 1999), and on September 30, 1999, the outstanding
principal balance of the revolving credit loans was $553,288. All of the Chase
loans bear interest at varying rates, depending on the Company's leverage from
time to time. The revolving facility matured September 30, 1999 and has not been
repaid or renewed. The Company was also unable to make the required $400,000
principal payment due under its term facility on July 15, 1999. On July 8, 1999,
the Company received from Chase a notice of event of default.
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 three quarterly interest payments (each
in the amount of $525,000) that were due under the Subordinated Notes on April
17, July 17, and October 17, 1999, respectively. The Company is also in default
as of September 30, 1999 with respect to financial covenants of its subordinated
note agreement with Prudential. The defaults to Prudential also constitute
events of default under the Company's loan agreement with 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.
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, Nasdaq notified the Company 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 from Nasdaq that the Company's common stock would be promptly delisted
from the Nasdaq National Market (the "NNM") absent a further showing of a plan
of compliance. The Company appealed the proposed delisting, and an oral hearing
was held before Nasdaq on May 20, 1999, at which time the Company provided
details regarding a proposed merger with Medical Alliance, Inc. ("MAII"), which
would have had the effect of restoring compliance with the tangible net worth
requirement. Thereafter, the Company's common stock ceased to meet the minimum
bid price required for continued listing. On August 10, 1999, the Company and
MAII announced that they were unable to consummate the proposed merger, and on
August 11, 1999, the Company's stock was delisted from the NNM and now trades on
the OTC Bulletin Board. The termination of the proposed merger with MAII, and
the delisting of the Company's common stock, have had and can be expected to
continue to have a material adverse effect on the Company's ability to refinance
its indebtedness and/or raise additional equity capital.
20
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
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, raise additional equity capital, and continue to increase cash flow
from operations. The Company's financial statements classify all of its senior
and subordinated debt as current liabilities, but do not include any other
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.
Management believes that completion of the proposed refinancing of its senior
debt facility, restructuring and modification of its subordinated debt, and
possibly additional equity capital will be required in order for the Company to
continue in its current form. In the event that the Company is unable to
consummate these proposed transactions, management believes that the Company
will be required to obtain other sources of financing or reorganize its affairs
through a bankruptcy.
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.
21
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Part II
OTHER INFORMATION
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits to this report:
Exhibit 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 September 30, 1999.
22
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAGNOSTIC HEALTH SERVICES, INC.
/S/ MAX W. BATZER
- ---------------------------------------------------------------------
Max W. Batzer
Chairman and Director
/S/ CHRISTOPHER L. TURNER
- ---------------------------------------------------------------------
Christopher L. Turner
Chief Executive Officer, President, Director, Chief Financial Officer
and Principal Accounting Officer
/S/ JAMES R. ANGELICA
- ---------------------------------------------------------------------
James R. Angelica
Chief Operating Officer
Date: November 14, 1999
23
<PAGE>
Exhibit 11.1
------------
Statement Re: Computation of Per Share Earnings
<PAGE>
Exhibit 11
- ----------
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
For the Nine Months Ended September 30, 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 - 9/30/99 Various 2,500 1,774
- ----------------------------------------------------------------------------------------------------------
Basic weighted average shares 9/30/99 11,483,136 11,482,410 11,482,410
=============================
Diluted:
- --------
Common stock equivalents (scheduled below) 20,879
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
Convertible Preferred - 3/31/99 dividend 13,530
Convertible Preferred - 6/30/99 dividend 13,530
Convertible Preferred - 9/30/99 dividend 13,530
----------
Calculation #1 - Actual shares issued 787,090
----------
Calculation #2 - 9.9% limitation or liquidation value 1,136,830 1,136,830
---------- ----------
Diluted weighted average shares 12,640,119
Net Income (Loss) for the Nine Months Ended September 30, 1999 $(3,377,307) $(3,093,171)
==============================
Earnings Per Share $(0.29) $(0.24)
==============================
</TABLE>
<TABLE>
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Diluted
Average share price during period $1.2772 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 57,621 20,879
1992 176,800 1.6875 0 0 0
1992 7,300 1.9375 0 0 0
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 0 0 0
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 20,879
==========================================================================================================
</TABLE>
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
For the Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
Total Issued Basic Diluted
Date # Shares Wtd. Avg. Wtd. Avg.
-------------------------------------------------------------------
<S> <C> <C> <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 - 9/30/99 Various 2,500 1,774
- ---------------------------------------------------------------------------------------------------------------
Basic weighted average shares 9/30/99 11,483,136 11,482,410 11,482,410
================================
Diluted:
- --------
Common stock equivalents (scheduled below) 0
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
Convertible Preferred - 3/31/99 dividend 13,530
Convertible Preferred - 6/30/99 dividend 13,530
Convertible Preferred - 9/30/99 dividend 13,530
------------
Calculation #1 - Actual shares issued 787,090
------------
Calculation #2 - 9.9% limitation or liquidation value 1,136,830 1,136,830
------------ -----------
Diluted weighted average shares 12,619,240
===========
Net Income (Loss) for the Three Months Ended September 30, 1999 $(1,282,931) $(1,188,219)
===============================
Earnings Per Share $(0.11) $(0.09)
===============================
</TABLE>
<TABLE>
<CAPTION>
Schedule of Common Stock Equivalents
------------------------------------
Diluted
Average share price during period $0.5100 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 0 0 0
1992 176,800 1.6875 0 0 0
1992 7,300 1.9375 0 0 0
1992 2,500 7.5000 0 0 0
1992 1,500 8.6250 0 0 0
1992 565,601 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 237,589 109,200 8.6250 0 0 0
1995 85,000 1.9375 0 0 0
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 253,000 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 763,861 140,200 8.6250 0 0 0
- --------------------------------------------------------------------------------------------------------------
Total Common Stock Equivalents 1,890,051 0
==============================================================================================================
1,820,051 1,820,051
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 619,206
<SECURITIES> 0
<RECEIVABLES> 12,606,624
<ALLOWANCES> (1,272,889)
<INVENTORY> 0
<CURRENT-ASSETS> 13,407,293
<PP&E> 38,627,356
<DEPRECIATION> (15,724,789)
<TOTAL-ASSETS> 65,255,999
<CURRENT-LIABILITIES> 53,265,554
<BONDS> 10,966,701
5,509,636
0
<COMMON> 11,716
<OTHER-SE> 6,469,093
<TOTAL-LIABILITY-AND-EQUITY> 65,255,999
<SALES> 32,426,834
<TOTAL-REVENUES> 32,426,834
<CGS> 0
<TOTAL-COSTS> 32,350,135
<OTHER-EXPENSES> 35,166
<LOSS-PROVISION> 155,344
<INTEREST-EXPENSE> (3,140,521)
<INCOME-PRETAX> (3,184,000)
<INCOME-TAX> (90,829)
<INCOME-CONTINUING> (3,093,171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,093,171)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.24)
</TABLE>
