<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1996 to June 26, 1996
--------------- -------------
Commission File Number 3-02935
------------------------------
InSight Health Services Corp.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 33-0702770
- ------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
4400 MacArthur Boulevard, Suite 800, Newport Beach, CA 92660
- --------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code 714/476-0733
--------------
N/A
- --------------------------------------------------------------------------------
(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
--- ---
The number of shares of the Registrant's common stock outstanding as of
August 9, 1996 was 2,710,240.
The number of pages in this Form 10-Q is 30.
<PAGE>
INTRODUCTION
On June 26, 1996, pursuant to an Agreement and Plan of Merger dated
February 26, 1996 (the "Merger Agreement") among the Registrant, InSight Health
Services Corp. ("InSight"), American Health Services Corp. ("AHSC"), Maxum
Health Corp. ("Maxum") and two wholly owned subsidiaries of InSight, each of
AHSC and Maxum became a wholly owned subsidiary of InSight (the "Merger") and
terminated its status as a reporting company under Sections 13 and 15 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
This Transition Report on Form 10-Q is filed by InSight, as successor,
pursuant to the requirements of Rule 13a-10(f) under the Exchange Act, because
the fiscal year of InSight, which ends on June 30, is different from the fiscal
years of its predecessors, AHSC and Maxum, which end on December 31. The
Transition Report consists of separate reports with respect to each of AHSC and
Maxum and covers the transition period from January 1, 1996, to immediately
prior to the effective time of the Merger on June 26, 1996 which is the period
between the close of the fiscal year covered by the last annual report of each
of the predecessors and the date of succession.
2
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
PAGE
INTRODUCTION 2
A. AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, June 26,
1996, and December 31, 1995 5-6
Consolidated Statements of Operations,
for the period from January 1, 1996 to
June 26, 1996 and for the six months ended
June 30,1995 7
Consolidated Statements of Cash Flows,
for the period from January 1, 1996 to
June 26, 1996 and for the six months ended
June 30, 1995 8
Notes to Consolidated Financial Statements 9-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 13-18
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
3
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B. MAXUM HEALTH CORP. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
June 26, 1996 and December 31, 1995 20
Condensed Consolidated Statements of Operations,
for the period from January 1, 1996 to
June 26, 1996 and for the six months ended
June 30, 1995 21
Condensed Consolidated Statements of Cash Flows,
for the period from January 1, 1996 to
June 26, 1996 and for the six months ended
June 30, 1995 22
Notes to Condensed Consolidated
Financial Statements 23-25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 25-27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28-29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
4
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A. AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 26, 1996 AND DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
June 26, December 31,
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 5,489,329 $ 6,175,842
Accounts receivable, net of an allowance for doubtful
accounts and contractual discounts of $3,759,074
and $3,793,780 at June 26, 1996 and December 31, 1995,
respectively, and an allowance for professional fees
of $1,645,736 and $1,567,308 at June 26, 1996
and December 31, 1995, respectively 6,923,806 6,892,436
Prepaid expenses and other 413,058 447,726
----------- -----------
Total current assets 12,826,193 13,516,004
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation and amortization of $15,053,961 and
$13,513,147 at June 26, 1996 and December 31, 1995,
respectively 18,723,232 20,169,446
OTHER ASSETS 3,314,511 2,754,904
----------- -----------
$34,863,936 $36,440,354
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
5
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AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 26, 1996 AND DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
June 26, December 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,901,326 $ 2,917,800
Accrued payroll and related costs 887,750 924,986
Professional fees payable 431,307 544,705
Current portion of deferred rent expense 424,929 485,740
Current portion of reserve for center terminations 369,659 630,000
Current portion of long-term debt 4,550,070 19,207,076
Current portion of deferred gain on debt restructuring 1,232,821 -
------------ ------------
Total current liabilities 11,797,862 24,710,307
------------ ------------
DEFERRED RENT EXPENSE 243,906 286,928
------------ ------------
RESERVE FOR CENTER TERMINATIONS 586,739 635,078
------------ ------------
LONG-TERM DEBT 24,701,801 21,307,834
------------ ------------
DEFERRED GAIN ON DEBT RESTRUCTURING 6,609,945 -
------------ ------------
CONTINGENCIES AND COMMITMENTS
MINORITY INTEREST 1,515,312 1,602,240
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
10 percent convertible Series B preferred stock with a liquidation
preference of $185 per share plus declared and unpaid dividends
Authorized--5,000,000 shares
Outstanding--37,837.83 at June 26, 1996 and
December 31, 1995 stated at 6,075,107 6,075,107
Convertible Series C preferred stock stated at 3,375,000 -
Common stock, $.03 par value
Authorized--26,000,000 shares
Outstanding--9,713,647 and 9,683,647 at June 26, 1996 and
December 31, 1995, respectively 291,409 290,509
Common stock warrants - 1,115,569
Additional paid-in capital 9,350,265 9,343,665
Accumulated deficit (29,683,410) (28,926,883)
------------ ------------
(10,591,629) (12,102,033)
------------ ------------
$34,863,936 $36,440,354
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
6
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AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period from
January 1, 1996 to Six Months Ended
June 26, 1996 June 30, 1995
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
REVENUES:
Center revenues $17,789,289 $19,066,015
EXPENSES:
Center expenses 13,351,549 15,000,932
Provision for doubtful accounts 450,985 371,792
Provision for center profit
distributions 456,603 375,744
---------- -----------
Income from center operations 3,530,152 3,317,547
CORPORATE OPERATING EXPENSES 2,293,098 1,849,187
---------- -----------
Income from operations
before interest 1,237,054 1,468,360
INTEREST INCOME AND OTHER 82,660 77,410
INTEREST EXPENSE (2,076,241) (1,920,150)
---------- -----------
Net loss $ (756,527) $ (374,380)
----------- ------------
----------- ------------
LOSS PER COMMON SHARE
Loss per common share $ (0.08) $ (0.04)
----------- ------------
----------- ------------
Weighted average number of common
shares outstanding 9,711,010 9,683,647
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
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AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period from
January 1, 1996 to Six Months Ended
June 26, 1996 June 30, 1995
---------------- ----------------
(unaudited) (unaudited )
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (756,527) $ (374,380)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,249,655 2,617,406
Deferred rent expense (103,833) (218,989)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (31,370) (93,733)
(Increase)decrease in prepaid expenses and other 34,668 (160,300)
Increase in other assets (500,821) (426,350)
Increase in accounts payable and accrued expenses 219,101 510,129
Increase (decrease) in professional fees payable (113,398) 11,725
Decrease in reserve for center terminations (308,680) (101,495)
---------- ---------
Net cash provided by operating activities 688,795 1,764,013
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (557,708) (79,259)
Investment in radiation oncology center - (408,221)
---------- ---------
Net cash used in investing activities (557,708) (487,480)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (1,218,595) (2,283,448)
Increase in principal under long-term obligations 480,423 1,151,331
Proceeds from issuance of common stock 7,500 -
Decrease in minority interest (86,928) (41,149)
---------- ----------
Net cash used in financing activities (817,600) (1,173,266)
---------- ----------
NET INCREASE (DECREASE) IN CASH (686,513) 103,267
CASH, beginning of period 6,175,842 3,663,795
---------- ----------
CASH, end of period $5,489,329 $3,767,062
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
8
<PAGE>
AMERICAN HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1996
1. BASIS OF PREPARATION
American Health Services Corp. ("AHSC") provides diagnostic imaging and
treatment services including MRI, gamma knife technology and other
diagnostic equipment to hospitals, physicians and managed care
organizations, through the management and operation of hospital-based
centers.
On February 26, 1996, AHSC announced that its Board of Directors agreed
to merge ("Merger") with Maxum Health Corp. ("Maxum") to form a new
medical imaging management company called InSight Health Services Corp.
("InSight"). Maxum is a provider of diagnostic imaging and related
management services through its imaging network in the Central and
Eastern United States. Maxum delivers its services through a network
of mobile MRI facilities, fixed MRI facilities and imaging centers.
On June 25, 1996, the Merger was approved by the stockholders of AHSC
and Maxum.
A prerequisite to the consummation of the Merger was a restructuring with
General Electric Company, acting through GE Medical Systems ("GE Medical"),
the primary creditor of each of AHSC and Maxum, and its affiliate General
Electric Capital Corporation, which resulted in the reduction of certain
debt and operating lease obligations and cancellation of certain stock
warrants of AHSC and Maxum in exchange for, among other things, the
issuance to GE Medical, immediately prior to the consummation of the
Merger, of AHSC Series C Preferred Stock and Maxum Series B Preferred
Stock.
At the effective time of the Merger, the preferred stock issued to GE
Medical was converted into the right to receive such number of shares of
InSight Series A Preferred Stock that is convertible into InSight common
stock representing approximately 48% of InSight common stock outstanding at
the effective time of the Merger (after giving effect to such conversion).
Under an amended equipment maintenance service agreement, GE Medical will
also be entitled to receive certain supplemental service fee payments based
on future income of InSight.
The consolidated unaudited financial statements presented herein represent
the final operating results of AHSC for the transition period from January
1, 1996 to June 26, 1996 (the "Transition Period")
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and include the effects of the long-term debt restructuring. The
consolidated statements of operations and cash flows actually reflect the
results for the six months ended June 30, 1996. Management believes that
the results for the period of June 27, 1996 to June 30, 1996 are immaterial
to the financial statements taken as a whole.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and do not include all of the information and
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes for the year ended December 31, 1995
included as part of AHSC's Annual Report on Form 10-K (File No. 0-14380)
filed with the Securities and Exchange Commission on March 27, 1996.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary to present fairly AHSC's financial position
at June 26, 1996, the results of operations and changes in cash flows for
the Transition Period have been included.
The results of operations of the Transition Period are not necessarily
indicative of the results to be expected for the full fiscal year.
2. CANADIAN ACCOUNTING PRINCIPLES
AHSC's common stock was listed with the Ontario Securities Commission (OSC)
and AHSC was required to file its financial statements with OSC. Although
the accompanying financial statements and notes thereto have been prepared
in accordance with generally accepted accounting principles applicable in
the United States, the primary difference between these accounting
principles and those applicable in Canada is as follows:
CURRENCY TRANSLATION
The accompanying financial statements are stated in United States
dollars. Translation of the financial statements into Canadian
dollars would be performed using the historical rate in effect on the
dates transactions occurred. No translation gains or losses would
result from the translation. The rates of exchange in effect at the
end of each of the reporting periods and the average exchange rate for
those periods are as follows:
10
<PAGE>
EXCHANGE RATES
--------------
(Canadian Dollars per U.S. Dollar)
Average for
Six
Months Ended
Year June 30 June 30
---- ------- -------------
1994 1.340 1.356
1995 1.399 1.404
1996 1.366 1.367
3. LONG-TERM DEBT
On June 26, 1996, AHSC entered into a Preferred Stock Acquisition
Agreement with its primary lender, GE Medical. In exchange for a
comprehensive debt and lease restructuring of the existing obligations
of AHSC, GE Medical received non-voting Series C preferred stock of
AHSC, convertible into approximately forty-eight percent (48%) of the
common stock of AHSC on a fully-diluted basis. The terms and conditions
of the debt and lease restructure included, among other things, (i) an
extension of AHSC's balloon payments totaling approximately $11,686,000
in 1996, until June 2003; (ii) a reduction of AHSC's long-term debt;
(iii) restructure of certain operating lease arrangements; and (iv) the
surrender by GE Medical of warrants to purchase 1,589,072 shares of
AHSC's common stock at $0.10 per share. As a result of the transaction,
AHSC recorded a gain of approximately $7,843,000, which, under the
provisions of troubled debt accounting, was deferred and will be
amortized over the life of the restructured long-term debt.
At June 26, 1996, a summary of the debt restructuring is as follows:
Long-term debt forgiven $10,524,867
Common stock warrants canceled 1,115,569
Deferred finance costs written off (422,670)
-----------
11,217,766
Series C preferred stock issued (3,375,000)
-----------
Deferred gain on debt restructuring $ 7,842,766
-----------
-----------
11
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4. LOSS PER COMMON SHARE
The number of shares used in computing loss per common share is equal to
the totals of the weighted average number of common and common equivalent
shares outstanding during the period. Common stock equivalents relating to
options, warrants and convertible preferred stock have not been included in
the computation of loss per share in 1996 and 1995 due to their
antidilutive effect. Preferred stock dividends have not been considered in
the calculation of loss per common share since the shares are non-
cumulative and no dividends have been declared.
5. INCOME TAXES
AHSC accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standard No. 109, Accounting for
Income Taxes ("FAS No. 109") pursuant to which AHSC recorded the benefit of
its net operating loss carryforwards and also recorded a valuation reserve
for the entire amount.
6. SUMMARIZED CONDENSED COMBINED FINANCIAL DATA OF CONTROLLED ENTITIES
The summarized condensed combined financial data of AHSC's three 50
percent or less owned and controlled entities for the Transition Period
and for the six months ended June 30, 1995 are as follows:
1996 1995
----------- -----------
(Unaudited) (Unaudited)
Condensed Combined Statement
of Operations Data:
Center revenues $3,350,834 $3,294,536
Center expenses 2,530,618 2,516,297
Provision for doubtful
accounts 70,520 70,859
Provision for center
profit distributions 375,989 344,515
---------- ----------
Income from center
operations $ 373,707 $ 362,865
---------- ----------
---------- ----------
12
<PAGE>
June 26, December 31,
1996 1995
----------- ------------
(Unaudited)
Condensed Combined
Balance Sheet Data:
Current assets $2,327,382 $1,944,849
Total assets 3,955,042 3,701,452
Current liabilities 1,019,355 683,383
Long-term debt 416,004 480,016
Minority interest equity 1,390,706 1,432,721
The provision for center profit distribution shown above represents the
minority interest in the income of these combined entities.
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121) in March
1995. AHSC adopted SFAS No. 121 in 1996, which did not have a material
effect on AHSC's financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123) in October 1995. AHSC adopted the provisions of SFAS No. 123
during 1996.
8. RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated financial
statements to make them conform with the current year presentations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO JUNE 26, 1996, COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1995
AHSC reported revenues from the operation of its centers for the Transition
Period of approximately $17,789,000, compared to approximately $19,066,000 for
the six months ended June 30, 1995, representing a decrease of approximately 7%.
The decrease in reported revenues of approximately
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$1,277,000 is due to the sale or closure of three centers and the expiration of
operating agreements relating to three centers subsequent to December 31, 1994
(approximately $2,082,000), offset by increased revenues generated by a majority
of the centers which existed as of June 30, 1995 (approximately $805,000).
Management believes that any future increases in revenues from existing centers
can only be achieved by higher utilization and not by increases in procedure
prices since reimbursement is declining; however, excess capacity of diagnostic
imaging equipment, increased competition, anticipated healthcare reform and the
expansion of managed care may impact utilization and make it difficult for AHSC
to achieve revenue increases in the future, absent the negotiation of provider
agreements with managed care companies and other payors, acquisition of
profitable diagnostic imaging centers and development of management services
which are not capital intensive.
Center expenses, including the provision for doubtful accounts, for the
Transition Period aggregated approximately $13,803,000, compared to
approximately $15,373,000 for the six months ended June 30, 1995. This decrease
of approximately $1,570,000, or 10%, is due primarily to the elimination of
expenses at the six terminated centers discussed above (approximately
$1,989,000), offset by (i) increased expenses related to the development of an
outside billing service (approximately $127,000) and (ii) an increase in costs
at the majority of AHSC's remaining centers (approximately $292,000) primarily
from increases in equipment costs related to upgrades and maintenance.
AHSC has agreements with its partners at certain co-venture centers which
provide for contingent payments based on annual pre-tax profits, as defined, of
the individual center. The contingent payments, which are charged to operations
as they become accruable, are included in the provision for center profit
distributions. Provision for center profit distributions was approximately
$457,000 for the Transition Period compared to approximately $376,000 for the
six months ended June 30, 1995. This represents an increase of approximately
$81,000, or 22%. This increase is due primarily to the elimination of an
operating loss at one of the terminated centers discussed above.
AHSC reported income from center operations of approximately $3,530,000 for
the Transition Period, compared to approximately $3,318,000 for the six months
ended June 30, 1995, representing an increase of approximately $212,000, or 6%.
This increase in income from center operations is due primarily to increased
income at AHSC's centers which existed at June 30, 1995 (approximately
$386,000), offset by the loss of
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income from center operations in 1996 at the six terminated centers discussed
above (approximately $93,000) and the increase in provision for center profit
distributions.
AHSC recorded corporate operating expenses during the Transition Period of
approximately $2,293,000, compared to corporate operating expenses of
approximately $1,849,000 for the six month period ended June 30, 1995, an
increase of approximately 24%. This increase of approximately $444,000 is due
primarily to increases in legal, consulting, personnel and travel costs related
to the merger and debt restructuring negotiations discussed below and business
development.
Interest expense was approximately $2,076,000 during the Transition Period,
compared to approximately $1,920,000 for the six months ended June 30, 1995, an
increase of approximately $156,000, or 8%. This increase was primarily due to
increased interest as a result of the April 12, 1994 restructuring agreement
discussed below, offset by reduced interest related to amortization of long-term
obligations.
AHSC reported a net loss of approximately $757,000 for the Transition
Period compared to a net loss of approximately $374,000 for the six months ended
June 30, 1995. This increase in net loss of approximately $383,000 is the
result of an increase in net interest expense and an increase in corporate
operating expenses, offset by increased income from center operations.
Net loss per share for the Transition Period was ($0.08), compared to a
net loss per share of ($0.04) for the six months ended June 30, 1995. As
discussed below under "Liquidity and Capital Resources," dividends on the Series
B Preferred stock are non-cumulative. Since the Board of Directors did not
declare a dividend in 1996 or 1995, respectively, no dividend has been
subtracted from net loss to determine loss per share in 1996 or 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to approximately $1,028,000 at June 26, 1996 from
a deficit of approximately $11,194,000 at December 31, 1995. This increase of
approximately $12,222,000 is primarily due to the restructuring of AHSC's long-
term debt discussed below and to net income before depreciation and
amortization, offset by principal payments on long-term obligations. During the
past three years, AHSC has financed its operations primarily through internally
generated funds and the credit arrangements discussed below.
15
<PAGE>
Cash decreased to approximately $5,489,000 at June 26, 1996 from
approximately $6,176,000 at December 31, 1995, a decrease of approximately
$687,000, or 11%. This decrease resulted from (i) an increase in other assets
(approximately $501,000), (ii) principal payments on long-term debt obligations
(approximately $1,219,000), (iii) the decrease in reserve for center
terminations (approximately $309,000), and (iv) payments made to minority
interest partners (approximately $87,000). The decrease was offset by net income
before depreciation and amortization and deferred rent expense (approximately
$1,389,000). AHSC currently has no lines of credit available to borrow against
for working capital purposes.
On June 26, 1996, AHSC completed a merger with Maxum and formed InSight,
a new medical imaging company, of which AHSC and Maxum became wholly owned
subsidiaries (see an expanded discussion in the preceding Note 1).
Immediately prior to the consummation of the Merger, AHSC issued to GE
Medical Series C Preferred Stock convertible into approximately 48% of AHSC's
common stock on a fully diluted basis in exchange for a comprehensive debt
and lease restructuring of the existing obligations of AHSC. The terms and
conditions of the debt and lease restructuring include, among other things,
(i) an extension of AHSC's balloon payments totaling approximately
$11,686,000 in 1996 until June 2003, (ii) a reduction of AHSC's long-term
debt, (iii) a restructure of certain operating lease arrangements, and (iv)
the surrender by GE Medical of warrants to purchase 1,589,072 shares of
AHSC's common stock at $0.10 per share. A similar restructuring was
consummated by Maxum and GE Medical.
In addition, as a result of the restructure of AHSC's and Maxum's master
equipment service contracts, GE Medical will be entitled to receive an amount
equal to approximately 14 percent of income before provision for taxes, as
defined in the agreement, from the consolidated income statement of AHSC,
Maxum and InSight.
Pursuant to the terms of an April 12, 1994 agreement between AHSC and GE
Medical, the maturity of a balloon principal payment of approximately
$9,600,000 which was due in May 1994, was extended until January 1, 1996 and
the principal payment was reduced from $9,600,000 to $8,000,000. In
addition, the interest rate on the note related thereto was reduced from
12.75% per annum to 9.25% per annum. As a result, AHSC was required to make
certain balloon principal payments pursuant to its loan agreements with its
primary lender as follows: $10,500,000 in June 1996 and $1,500,000 in August
1996. GE Medical also agreed to restructure the monthly payments under a
$15,200,000 equipment loan which resulted in monthly cash savings of $75,000
in 1995. Finally, GE Medical agreed to provide three deferred payments to be
used in 1995, under certain circumstances. During 1995, AHSC utilized all of
its deferrals which totaled approximately $2,133,000. As a result of the debt
16
<PAGE>
restructuring and merger agreements discussed above, AHSC's balloon payments
were extended until June 2003.
The healthcare industry is highly regulated and changes in laws and
regulations can be significant. Management believes that the expanding managed
care environment accompanied by cost containment pressures may have a materially
adverse impact on AHSC's business, since they may directly affect the
utilization of AHSC's centers and reimbursement for those procedures performed
at AHSC's centers; however, management believes that as long as AHSC is able to
negotiate provider agreements with the managed care companies and other payors
to provide productive and cost efficient services with measurable outcomes,
AHSC's business should not be negatively impacted.
In addition to the restructuring and merger arrangements discussed above,
AHSC is also taking certain other actions to achieve profitability. First, if
utilization at certain underperforming centers continues to deteriorate, those
centers will be considered for closure and/or disposition. During 1995 AHSC
sold or closed several underperforming centers. Second, AHSC has sold or
negotiated the termination of leases of all its idle diagnostic imaging
equipment and has renegotiated its equipment maintenance contracts and contracts
with vendors of medical supplies and film. Third, AHSC is continuing to develop
a long-term plan which includes (i) changes in AHSC's debt and capital
structure, and (ii) raising additional working capital. In this regard, AHSC
has engaged outside professional assistance and continues to explore raising new
capital for future operations.
While management believes the financial accommodations and other benefits
resulting from the restructuring and the Merger are significant and will
favorably impact InSight's ability to continue as a going concern in the near
term, management believes InSight's long-term viability is contingent upon its
ability (through AHSC and Maxum, its principal operating subsidiaries) to
consider, pursue and to successfully participate in the ongoing industry
consolidation.
Effective March 1, 1996, Radiosurgery Centers, Inc., AHSC's wholly owned
subsidiary, refinanced a Gamma Knife equipment loan (approximately $2,075,000)
with GE Medical on terms substantially equivalent to the original equipment
loan. This loan is secured by all of the assets of the Gamma Knife center, as
well as by a letter of credit of $400,000 which is guaranteed by the estate of
Cal Kovens.
In connection with AHSC's expansion plans, AHSC has reviewed several
diagnostic imaging centers as acquisition candidates. In 1995, AHSC purchased
an interest in a radiation oncology treatment facility in
17
<PAGE>
Valparaiso, Indiana. The cash needed to purchase this center was made
available from long-term notes with GE Medical. AHSC continues to review
diagnostic imaging centers as acquisition candidates but has not entered into
any letters of intent or definitive agreements. Approval of AHSC's primary
lender is required for any equipment purchase financing in connection with
any acquisitions by AHSC.
Subject to the limitations described above, AHSC expects to finance the
development and other start-up costs and the costs of equipment and site
improvements at any new centers through (i) financing arrangements with the
manufacturers of the equipment utilized at such centers, and (ii) other
financing sources utilized by AHSC. The ability of AHSC to establish such
centers and to expand operations is dependent upon the availability of financing
on terms reasonably acceptable to AHSC.
Dividends on the Series B Preferred Stock are non-cumulative so long as the
Series B Preferred Stockholders control a majority of the Board of Directors of
AHSC. In addition, any dividends declared on the Series B Preferred Stock may
be paid in cash or shares of common stock at the discretion of the Board of
Directors. No dividend was declared by the Board of Directors in 1996.
AHSC accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standard No. 109, Accounting for Income
Taxes ("SFAS No. 109"), pursuant to which AHSC recorded the benefit of its net
operating loss carryforwards and also recorded a valuation reserve for the
entire amount.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of ("SFAS No. 121") in March 1995. AHSC
adopted SFAS No. 121 in 1996, which did not have a material effect on AHSC
financial statements.
Inflation has not had a significant impact on AHSC's operations and, in
management's opinion, based upon current trends will not have an adverse impact
on operations in the near future.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) AHSC held a special meeting of its stockholders on June 25, 1996
to seek stockholder approval of (i) the Merger Agreement and the
transactions contemplated thereby (the "Merger Proposal"), (ii) the
InSight 1996 Employee Stock Option Plan and the InSight 1996 Directors'
Stock Option Plan (the "InSight Option Plans Proposal") and (iii)
certain amendments to the existing AHSC stock option and incentive plans
(the "AHSC Plan Amendment Proposal"). Each of the proposals was approved.
(b) Inapplicable.
(c) (1) With respect to the Merger Proposal, 5,301,351 votes were
cast for, 128,343 votes were cast against and 24,352 votes
abstained.
(2) With respect to the InSight Option Plans Proposal, 5,344,000
votes were cast for, 261,538 votes were cast against and 38,592 votes
abstained.
(3) With respect to the AHSC Plan Amendment Proposal, 5,393,325
votes were cast for, 205,513 votes were cast against and 45,292
votes abstained.
(4) One hundred percent of AHSC's Series B preferred stock
voted in favor all three proposals.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the Transition Period, AHSC did not file any current report on
Form 8-K with the Securities and Exchange Commission.
19
<PAGE>
B. MAXUM HEALTH CORP. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXUM HEALTH CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
June 26, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,375 $ 1,870
Trade accounts receivable, less allowances
of $4,049 and $3,283, respectively 6,626 6,916
Lease and other receivables 973 490
Other current assets 2,763 1,704
--------- ---------
Total current assets 11,737 10,980
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $12,225 and $10,278,
respectively 11,129 12,386
INVESTMENTS IN PARTNERSHIPS 359 442
OTHER ASSETS 749 1,071
INTANGIBLE ASSETS 3,893 4,047
--------- ---------
TOTAL $ 27,867 $ 28,926
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 7,744 $ 5,519
Current portion of long-term liabilities 4,673 6,143
Accrued equipment related costs 2,127 1,546
Deferred gain on debt restructure 1,053 --
--------- ---------
Total current liabilities 15,597 13,208
LONG-TERM LIABILITIES 12,407 19,723
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock: 10,000,000 shares of $.01 par
value authorized; 3,005,055 shares issued 30 30
Common stock warrant for 700,000 shares -- 7
Convertible Series B preferred stock stated at 3,375 --
Additional paid-in capital 19,693 19,693
Accumulated deficit (22,970) (23,470)
Treasury stock at cost, 731,500 shares (265) (265)
--------- ---------
Total stockholders' equity (deficiency) (137) (4,005)
--------- ---------
TOTAL $ 27,867 $ 28,926
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
20
<PAGE>
MAXUM HEALTH CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Amounts in thousands, except shares and per share data)
- --------------------------------------------------------------------------------
For the Period from
January 1, 1996 to Six Months Ended
June 26, 1996 June 30, 1995
------------- -------------
REVENUES:
Contract services $ 20,035 $ 19,005
Patient services 5,853 4,847
Other 558 582
--------- ---------
Total revenues 26,446 24,434
COSTS OF OPERATIONS:
Cost of services 15,895 13,565
Provision for bad debts 617 1,044
Equipment leases 6,947 6,993
Depreciation 2,091 1,384
--------- ---------
Total costs of operations 25,550 22,986
--------- ---------
GROSS PROFIT 896 1,448
CORPORATE OVERHEAD 2,569 1,915
--------- ---------
LOSS FROM COMPANY OPERATIONS (1,673) (467)
EQUITY IN EARNINGS OF UNCONSOLIDATED
PARTNERSHIPS 138 136
--------- ---------
OPERATING LOSS (1,535) (331)
INTEREST EXPENSE, Net 1,144 648
--------- ---------
LOSS BEFORE EXTRAORDINARY GAIN (2,679) (979)
EXTRAORDINARY GAIN ON DEBT
EXTINGUISHMENT 3,179 -
--------- ---------
NET INCOME (LOSS) $ 500 $ (979)
--------- ---------
--------- ---------
LOSS PER COMMON SHARE
BEFORE EXTRAORDINARY GAIN $ (1.18) $ (0.44)
--------- ---------
--------- ---------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,273,555 2,229,380
--------- ---------
--------- ---------
NET INCOME (LOSS) PER COMMON SHARE:
Primary earnings per share $ 0.17 $ (0.44)
--------- ---------
--------- ---------
Fully diluted earnings per share $ 0.16 $ (0.44)
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
21
<PAGE>
MAXUM HEALTH CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From the Period from Six Months
January 1, 1996 to Ended
June 26, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 500 $ (979)
Noncash items in net income (loss):
Total depreciation and amortization 2,543 1,579
Loss (gain) on sale of assets (133) 38
Operating expenses financed by issuance of debt 1,015 1,118
Extraordinary gain (3,179) --
Cash provided (used) by changes in operating
working capital:
Receivables (174) 184
Other current assets (851) 117
Accounts payable and other accrued expenses 975 (1,610)
--------- ---------
Net cash provided by operating activities 696 447
INVESTING ACTIVITIES:
Additions to property and equipment (960) (174)
Proceeds from the sale of assets 369 515
Acquisition of customer contracts and intangibles -- (2,098)
Acquisition of imaging centers -- (187)
Other 195 33
--------- ---------
Net cash used by investing activities (396) (1,911)
FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (2,302) (3,300)
Proceeds from issuance of debt 1,507 -
--------- ---------
Net cash used by financing activities (795) (3,300)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (495) (4,764)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,870 6,950
--------- ---------
End of period $ 1,375 $ 2,186
--------- ---------
--------- ---------
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 1,011 $ 294
Additions to property and equipment
under capital leases $ 264 $ 6,160
Insurance premiums financed $ 208 $ 246
</TABLE>
See notes to condensed consolidated financial statements.
22
<PAGE>
MAXUM HEALTH CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
1. Merger
Maxum Health Corp. (Maxum) is a provider of diagnostic imaging and related
management services through its imaging network in the Central and Eastern
United Sates. Maxum delivers its services through a network of Mobile MRI
Facilities, Fixed MRI Facilities and Imaging Centers.
On February 26, 1996, Maxum announced that its Board of Directors agreed
to merge (the Merger) with American Health Services Corp. (AHSC) to form
a new medical imaging management company called InSight Health Services
Corp. (InSight). AHSC provides diagnostic imaging and treatment
services including MRI, gamma knife technology and other diagnostic
equipment to hospitals, physicians and managed care organizations,
through the management and operation of hospital-based centers. On June
25, 1996, the Merger was approved by the stockholders of Maxum and AHSC.
A prerequisite to the consummation of the Merger was a restructuring with
General Electric Company, acting through GE Medical Systems (GE Medical),
the primary creditor of each of Maxum and AHSC, and its affiliate General
Electric Capital Corporation, which resulted in the reduction of certain
debt and operating lease obligations and cancellation of certain stock
warrants of Maxum and AHSC in exchange for, among other things, the
issuance to GE Medical, immediately prior to the consummation of the
Merger, of Maxum Series B Preferred Stock and AHSC Series C Preferred
Stock. In connection with this restructuring, Maxum recorded the
extinguishment of $9.0 million of long-term debt obligations. The
extraordinary gain represents the difference in the carrying value ($9.0
million) of the debt obligations settled over the fair value ($3.4 million)
of the Maxum Series B Preferred Stock issued to GE Medical. (The 15,000
shares of Maxum Series B Preferred Stock are convertible into 2,098,666
shares of Maxum common stock). In accordance with the provisions of
troubled debt accounting, a portion of the extraordinary gain equal to the
sum of the current and long-term portions of future interest payable on all
remaining GE Medical debt and capital lease obligations of $1.0 million and
$1.5 million, respectively, is being deferred and will be reduced by future
interest payments over the terms of the respective debt instruments.
At the effective time of the Merger, the preferred stock issued to GE
Medical was converted into the right to receive such number of shares of
InSight Series A Preferred Stock that is convertible into InSight common
stock representing approximately 48% of InSight common stock outstanding
at the effective time of the Merger (after giving effect to such
conversion). Under an amended equipment maintenance service agreement,
GE Medical will also be entitled to receive certain supplemental service
fee payments based on future income of InSight.
2. Interim Financial Statements
As discussed above, on June 26, 1996, Maxum entered into an agreement to
substantially restructure all of its long-term debt which was followed
by an agreement to merge with AHSC to form InSight. The consolidated
financial statements presented herein represent the final operating
results of Maxum for the transition period from January 1, 1996 to June
26, 1996 (Transition
23
<PAGE>
Period), and include the effects of the long-term debt restructuring.
Management believes that the results for the period of June 27, 1996 to
June 30, 1996 are immaterial to the financial statements taken as a whole.
The condensed consolidated financial statements of Maxum included herein
have been prepared in accordance with generally accepted accounting
principles for interim financial statements and Rule 10-01 of Regulation S-
X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the statements for the unaudited
interim periods include all adjustments necessary for fair presentation of
results for the period and all such adjustments are of a normal recurring
nature. The results of operations for the Transition Period are not
necessarily indicative of the results to be achieved for the full year.
These financial statements should be read in conjunction with the audited
annual financial statements and the notes thereto included in Maxum's Form
10-K for the year ended December 31, 1995.
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
3. Maxum's Unconsolidated Partnerships
Following is summarized unaudited income statement data pertaining to
Maxum's unconsolidated partnerships (amounts in thousands):
1996 1995
---- ----
Revenues $ 2,346 $ 2,177
Expenses 2,002 1,858
------- -------
Net Income $ 344 $ 319
------- -------
------- -------
4. Per Share Data
The loss per common share before extraordinary item is computed by
dividing the loss before extraordinary item by the weighted average
number of common shares outstanding during the respective period.
Common shares issuable upon exercise of common stock options and
warrants are not included as common stock equivalents for the
Transition Period and the six months ended June 30, 1995, since they are
antidilutive (decrease the loss before extraordinary item per share).
The net income (loss) per common share is computed by dividing the net
income (loss) by the weighted average number of common shares
outstanding during the respective period. Common shares issuable upon
exercise of common stock options and warrants are not included as common
stock equivalents for the six months ended June 30, 1995 since they are
antidilutive (decrease the net loss per share). Common shares issuable
upon the exercise of common stock options and warrants of 735,177 are
included as common stock equivalents for purposes of calculating primary
earnings per share for the Transition Period. Common shares issuable
upon the exercise of common stock options, warrants and the conversion
of convertible
24
<PAGE>
preferred stock of 917,516 are included as common stock equivalents for
purposes of calculating fully diluted earnings per share for the
Transition Period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In 1994, Maxum completed a restructure of its operations and financial
obligations, which was primarily focused on lowering equipment financing and
other overhead costs, and identifying opportunities for achieving operational
efficiencies (Maxum Prior Restructure). The favorable results of the Maxum
Prior Restructure have been diminished by continued deterioration in the
industry.
In June 1996 Maxum completed a merger with AHSC and formed InSight, a
new medical imaging management company (see an expanded discussion in the
preceding Note 1. MERGER). In connection with the Merger, certain financial
accommodations with Maxum's primary creditor became effective on June 26,
1996. While these transactions were significant and will favorably impact
InSight's ability to continue as a going concern in the near-term, management
believes that InSight's long-term viability is contingent upon its ability
(through Maxum and AHSC, its principal operating subsidiaries) to consider,
pursue and to successfully participate in the ongoing industry consolidation.
Financial Condition, Liquidity and Capital Resources
Prior to the Merger, Maxum continued to operate while experiencing negative
cash flow by completing transactions involving the financing for certain
operating expenses by GE Medical, its primary creditor, and the disposal of
certain assets and partnership interests. During the Transition Period, Maxum
obtained financing of $1.0 million for certain operating expenses, and $1.2
million for transaction costs related to the Merger. At June 26, 1996 other
current assets includes $1.3 million of transaction costs related to the Merger,
$0.8 million of which were incurred in 1996. Maxum had a working capital deficit
of $3.9 million and $2.2 million, at June 26, 1996 and December 31, 1995,
respectively. The net increase in the working capital deficit of $1.7 million
is primarily due to the reclassification of the accrued securities litigation
settlement into current liabilities and the increase in accrued expenses due to
one-time charges (see discussion that follows under "Results of Operations -
Costs of Operations and Corporate Overhead"), offset by the favorable impact of
the aforementioned financial accommodations.
Maxum's cash and cash equivalents decreased $0.5 million during the
Transition Period. Net cash provided by operating activities for the
Transition Period was $0.7 million, compared with $0.4 million for the six
months ended June 30, 1995. This increase is primarily attributable to an
increase in accounts payable and other accrued expenses during the 1996
period. Net cash used by investing activities for the Transition Period was
$0.4 million, compared with $1.9 million for the six months ended June 30,
1995. This decrease is primarily attributable to the absence of acquisitions
in the 1996 period, as compared to the prior year. Net cash used by
financing activities during the Transition Period was $0.8 million, compared
with $3.3 million for the six months ended June 30, 1995. This decrease is
primarily attributable to a $1.3 million balloon payment in the prior year
and the aforementioned proceeds of $1.2 million in 1996 for the financing of
transaction costs related to the Merger.
25
<PAGE>
In the quarterly filing for the period ended March 31, 1996, Maxum
indicated that its ability to operate as a going concern beyond June 30,
1996, was dependent upon the closing of the financial accommodations with GE
and the consummation of the Merger. While these events have occurred, Maxum,
as a principal operating subsidiary of InSight, continues to be dependent on
the financing of certain operating expenses until such time that the impact
of the aforementioned financial accommodations and the consummation of future
acquisitions offset the adverse market effects of competitive pressures and
decreasing reimbursement rates.
RESULTS OF OPERATIONS
The following table sets forth selected financial data as a percentage of
total revenues for the Transition Period and for the six months ended June 30,
1995 (amounts in whole percentages):
1996 1995
---- ----
Revenues 100 100
Gross profit 3 6
Loss from Company Operations (6) (2)
Net income (loss) 2 (4)
REVENUES: Revenues increased $2.0 million during the Transition Period,
compared with the six months ended June 30, 1995. Generally, the increase in
revenues was due to the acquisition of certain customer contracts in April
1995, the acquisition of certain Imaging Centers in October 1995 and
increases in volumes on certain contracts serviced by Mobile and Fixed MRI
Facilities. These increases were offset by continued decreases in
reimbursement rates from third party payors.
COSTS OF OPERATIONS: Costs of operations increased $2.6 million (or 3
percentage points of revenues) during the Transition Period, compared with
the six months ended June 30, 1995. The following table sets forth the
components of costs of operations as a percentage of total revenues for the
Transition Period and the six months ended June 30, 1995 (amounts in whole
percentages):
1996 1995
---- ----
Cost of services:
One-time charges 2 0
Sales tax refunds (1) (2)
Other, net 59 58
---- ----
Total 60 56
Provision for bad debts 3 3
Equipment leases 26 29
Depreciation 8 6
---- ----
Total costs of operations 97 94
---- ----
---- ----
Cost of services increased $2.3 million (or 4 percentage points of
revenues) during the Transition Period, compared with the six months ended
June 30, 1995. Generally, the increase is due to: (i) certain one-time
charges of approximately $0.7 million relating to operating strategies
associated with the Merger which
26
<PAGE>
include provisions for the closure of two small centers, the write-down of a
certain Mobile MRI Facility and the estimated costs and termination fees for the
early return of certain Mobile MRI Facilities; (ii) a $0.1 million difference
in sales tax refunds recorded in 1996 as compared to 1995; and (iii) higher
costs associated with the increase in patient services revenues which include
personnel costs, facility costs, service supplies and professional fees.
The provision for bad debts decreased $0.4 million during the Transition
Period, compared with the six months ended June 30, 1995. This decrease is
primarily attributable to a $0.3 million charge recorded in June 1995. A
similar charge was not recorded in 1996.
Depreciation increased $0.7 million during the Transition Period,
compared with the six months ended June 30, 1995. This increase is due
primarily to capital leases entered into, an acquisition completed, and
leasehold improvements incurred at several of Maxum's Fixed MRI Facilities
during the latter part of 1995.
GROSS PROFIT: Gross profit decreased 3 percentage points, as a
percentage of total revenues, during the Transition Period, compared with the
six months ended June 30, 1995. This decrease is primarily attributable to
the increase in cost of services discussed above.
CORPORATE OVERHEAD: Corporate overhead increased $0.7 million during
the Transition Period, compared with the six months ended June 30, 1995.
This increase is due primarily to (i) a provision in June 1996 of $0.6
million for termination benefits and facility costs for the reduction in the
administrative infrastructure due to the Merger, and (ii) an increase in the
amortization of intangibles related to the acquisitions completed during
1995. These increases were offset by a decrease in legal and consulting fees.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT: In connection with the Merger
(see an expanded discussion in the preceding Note 1. Merger) Maxum recorded an
extinguishment of $9.0 million of long-term obligations owed its primary
creditor. The extraordinary gain represents the excess of the carrying value of
the debt obligations settled over the sum of the fair value of the preferred
stock issued in exchange for such debt extinguishment and the sum of future
interest payable on all remaining obligations owed the primary creditor.
INTEREST EXPENSE, NET: Interest expense, net increased $0.5 million
during the Transition Period, compared with the six months ended June 30,
1995. This increase is due primarily to debt financed by Maxum's primary
creditor in 1995 in connection with acquisitions and the financing of certain
operating expenses.
27
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May and June 1993, Maxum was named a defendant in two lawsuits filed on
behalf of a purported class of present and former stockholders in the U.S.
District Court for the Southern District of New York (the Court). Also named as
defendants were the underwriting firms that led Maxum's initial public offering
in September, 1991, a former stockholder and senior creditor of Maxum, and
certain or former members of Maxum's Board of Directors and/or executives.
These two actions have been consolidated into one action.
On February 22, 1994, the plaintiffs filed a second consolidated amended
complaint, which superseded the previously filed complaints. The plaintiffs,
who seek to represent a purported class of plaintiffs which acquired Maxum's
common stock, have alleged that misstatements and omissions were made by Maxum
and the other defendants in connection with Maxum's initial public offering and
in subsequent public disclosures from September 19, 1991 until March 1, 1993
when Maxum announced that it would write down assets and establish reserves
related to the restructuring of its mobile MRI business. The plaintiff's seek
monetary damages under various provisions of the federal securities laws and
state law in an unspecified amount, as well as other relief.
In March 1994, Maxum and all other defendants moved to dismiss the second
amended complaint for, among other things, failure to state a claim. On
November 18, 1994, the Court granted the motions to dismiss and gave plaintiffs
permission to file a third amended complaint.
On January 6, 1995, the plaintiffs served their third consolidated amended
complaint. At approximately the same time, plaintiffs agreed to dismiss without
prejudice their claims against the two underwriter defendants. On June 2, 1995,
Maxum and the other defendants moved to dismiss the third amended complaint for
failure to state a claim and failure to plead fraud with particularity. At the
conclusion of a hearing on October 20, 1995, the Court reserved decision on the
motions to dismiss the complaint. Although the parties have substantially
completed their production of documents as a part of pretrial discovery in the
action, no depositions have been taken.
On February 23, 1996, while the motions to dismiss were still under
consideration by the Court, the defendants, plaintiffs and other interested
parties (acting through their respective counsel) entered into a Stipulation of
Settlement pursuant to which, subject to certain conditions, the foregoing
action will be settled and all claims dismissed on the merits. In anticipation
of this settlement, Maxum recorded a charge of $1.5 million in the fourth
quarter of 1995. As a part of the pending Merger discussed in Note 2, Maxum has
arranged to borrow approximately $1.9 million to finance the litigation
settlement. This borrowing will be payable over a five year period beginning in
late 1996.
On April 8, 1996, the Court entered an order that, among other things,
approved the proposed settlement on a preliminary basis, set May 27, 1996 as the
deadline for interested persons to object to the settlement and to opt-out of
the settlement, and scheduled a hearing on June 21, 1996 to determine, among
other things, whether to grant final approval to the settlement.
28
<PAGE>
At a hearing on June 21, 1996, the Court, among other things, granted final
approval to the settlement. On June 25, 1996, the Court entered a Final
Judgment of Dismissal that, among other things, dismissed the complaint and
other settled class claims against Maxum and the other defendants with prejudice
and on the merits, and permanently barred and enjoined all class members from
asserting any settled class claims against Maxum and the other released parties.
The Final Judgment of Dismissal became final on July 26, 1996. Pursuant to
the parties' Stipulation of Settlement, and as a result of all conditions to
effectiveness having been met, including Maxum's having financing available to
it for its contribution, the Settlement became effective of July 27, 1996. On
July 29, 1996, Maxum and other parties collectively paid to the plaintiffs in
the class action the balance of the agreed upon Settlement amount, including
accrued interest, thereby completing the remaining obligations of Maxum and the
other parties in connection with the Settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) Maxum held a special meeting of its stockholders on June 25, 1996
to seek stockholder approval of (i) the Merger Agreement and the
transactions contemplated thereby (the "Merger Proposal"), (ii) the
InSight 1996 Employee Stock Option Plan and the InSight 1996 Directors'
Stock Option Plan (the "InSight Option Plans Proposal") and (iii)
the grant of certain stock options to purchase Maxum common stock
previously authorized by the Maxum Board of Directors to each of the
directors of Maxum (the "Maxum Option Ratification Proposal"). Each of
the proposals was approved.
(b) Inapplicable.
(c) (1) With respect to the Merger Proposal, 1,302,816 votes were
cast for, 4,600 votes were cast against and 1,800 votes abstained.
(2) With respect to the InSight Option Plans Proposal, 1,281,196
votes were cast for, 20,020 votes were cast against and 8,000 votes
abstained.
(3) With respect to the Maxum Option Ratification Proposal,
1,268,011 votes were cast for, 23,705 votes were cast against and
17,500 votes abstained.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the Transition Period, Maxum did not file any current
report on Form 8-K with the Securites and Exchange Commission.
29
<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 thereto duly authorized.
InSight Health Services Corp.
- -----------------------------
(Registrant)
/s/THOMAS V. CROAL
- -----------------------------
Thomas V. Croal,
Executive Vice President
Chief Financial Officer
/s/E. LARRY ATKINS
- -----------------------------
E. Larry Atkins,
President
Chief Executive Officer
Date: August 12, 1996
30
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001012697
<NAME> INSIGHT HEALTH SERVICES CORP
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-26-1996
<CASH> 5,489,329
<SECURITIES> 0
<RECEIVABLES> 10,682,880
<ALLOWANCES> 4,183,717
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