<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---- ----
Commission file number 0-28622
INSIGHT HEALTH SERVICES CORP.
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(Exact name of registrant as specified in its charter)
Delaware 33-0702770
-------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4400 MaCarthur Blvd., Suite 800, Newport Beach, CA 92660
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 476-0733
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(Registrant's telephone number including area code)
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
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 2,714,725 shares of
Common Stock as of May 12, 1997.
The number of pages in this Form 10-Q is 18.
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
----------------------------------------------
INDEX
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PAGE NUMBER
------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
Condensed Consolidated Balance Sheets as of March 31, 1997
(unaudited) and June 30, 1996 3
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Operations (unaudited)
for the nine months ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended March 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS 11-16
-----------------------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
--------------------------------
SIGNATURES 18
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,504 $ 6,864
Trade accounts receivable, net of allowances of $10,279
and $10,088, respectively 13,841 12,916
Other receivables, net 713 973
Other current assets 2,201 1,708
--------- ---------
Total current assets 23,259 22,461
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $17,537 and $11,958, respectively 30,309 29,852
INVESTMENTS IN PARTNERSHIPS 474 359
OTHER ASSETS 204 749
INTANGIBLE ASSETS, net 18,297 16,965
--------- ---------
$ 72,543 $ 70,386
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 13,154 $ 13,352
Current portion of equipment and other notes 11,716 9,223
Current portion of deferred gain on debt restructure 821 1,053
--------- ---------
Total current liabilities 25,691 23,628
--------- ---------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 37,103 35,641
Deferred gain on debt restructure, less current portion 902 1,467
Other long-term liabilities 766 2,731
--------- ---------
Total long-term liabilities 38,771 39,839
--------- ---------
MINORITY INTEREST 1,929 1,515
STOCKHOLDERS' EQUITY: --------- ---------
Convertible Series A preferred stock,
$.001 par value, 3,500,000 shares authorized;
2,501,760 outstanding at March 31, 1997 and
June 30, 1996, respectively, stated at 6,750 6,750
Common stock, $.001 par value, 25,000,000
shares authorized; 2,714,725 and 2,710,240 shares outstanding
at March 31, 1997 and June 30, 1996, respectively 3 3
Additional paid-in capital 23,100 23,100
Accumulated deficit (23,701) (24,449)
--------- ---------
Total stockholders' equity 6,152 5,404
--------- ---------
$ 72,543 $ 70,386
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
3
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
REVENUES:
Contract services $ 11,596 $ 9,816
Patient services 10,695 2,252
Other 742 283
---------- ----------
Total revenues 23,033 12,351
COSTS OF OPERATIONS:
Cost of services 12,647 6,750
Provision for doubtful accounts 258 211
Equipment leases 4,732 3,515
Depreciation and amortization 2,471 1,053
---------- ----------
Total costs of operations 20,108 11,529
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GROSS PROFIT 2,925 822
CORPORATE OPERATING EXPENSES 1,688 1,042
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INCOME (LOSS) FROM COMPANY OPERATIONS 1,237 (220)
EQUITY IN EARNINGS OF UNCONSOLIDATED
PARTNERSHIPS 120 80
---------- ----------
OPERATING INCOME (LOSS) 1,357 (140)
INTEREST EXPENSE, net (947) (568)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 410 (708)
INCOME TAX EXPENSE 30 -
---------- ----------
NET INCOME (LOSS) $ 380 $ (708)
---------- ----------
---------- ----------
INCOME (LOSS) PER COMMON SHARE:
Net income (loss) $ 0.07 $ (0.52)
---------- ----------
---------- ----------
Weighted average number of common shares outstanding 5,438,545 1,359,586
---------- ----------
---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES:
Contract services $ 35,186 $ 29,787
Patient services 31,153 6,740
Other 1,790 729
--------- ---------
Total revenues 68,129 37,256
COSTS OF OPERATIONS:
Cost of services 37,386 20,688
Provision for doubtful accounts 1,116 836
Equipment leases 13,822 10,986
Depreciation and amortization 7,203 2,747
--------- ---------
Total costs of operations 59,527 35,257
--------- ---------
GROSS PROFIT 8,602 1,999
CORPORATE OPERATING EXPENSES 5,343 3,293
--------- ---------
INCOME (LOSS) FROM COMPANY OPERATIONS 3,259 (1,294)
EQUITY IN EARNINGS OF UNCONSOLIDATED
PARTNERSHIPS 364 292
--------- ---------
OPERATING INCOME (LOSS) 3,623 (1,002)
--------- ---------
OTHER EXPENSES:
Interest expense, net (2,741) (1,546)
Provision for securities litigation settlement - (1,500)
--------- ---------
Total other expenses (2,741) (3,046)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 882 (4,048)
INCOME TAX EXPENSE 134 -
--------- ---------
NET INCOME (LOSS) $ 748 $ (4,048)
--------- ---------
--------- ---------
INCOME (LOSS) PER COMMON SHARE $ 0.14 $ (2.98)
--------- ---------
--------- ---------
Net income (loss)
Weighted average number of common shares outstanding 5,444,308 1,357,510
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated financil statements.
</TABLE>
5
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
1997 1996
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 748 $ (4,048)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,360 3,760
Amortization of deferred gain on debt restructure (797) -
Provision for securites litigation settlement - 1,500
Operating expenses financed by issuance of long-term debt - 2,227
Gain on disposal of assets - (103)
Cash provided by (used in) changes in operating working capital:
Receivables, net (466) (500)
Other current assets (490) (850)
Accounts payable and other current liabilities 281 281
-------- --------
Net cash provided by operating activities 6,636 2,267
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (2,407) (840)
Proceeds from disposal of assets - 429
Acquisition of customer contracts and intangibles - (10)
Acquisition of imaging center (2,766) (1,668)
Other 351 221
-------- --------
Net cash used in investing activities (4,822) (1,868)
-------- --------
FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (7,727) (3,770)
Proceeds from issuance of debt 5,139 2,924
Other 414 14
-------- --------
Net cash used in financing activities (2,174) (832)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (360) (433)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,864 2,186
-------- --------
End of period $ 6,504 $ 1,753
-------- --------
-------- --------
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,969 $ 1,117
Securities litigation settlement paid with long-term debt 1,900 -
Equipment purchased with long-term debt 4,071 4,090
Property taxes paid with long-term debt 572 -
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
6
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. MERGER
InSight Health Services Corp. ("InSight" or the "Company") is a Delaware
corporation formed on February 23, 1996 in connection with the Agreement and
Plan of Merger, dated as of February 26, 1996 (the "Merger Agreement"), among
American Health Services Corp., a Delaware corporation ("AHS"), Maxum Health
Corp., a Delaware corporation ("MHC" or "Maxum"), InSight and two wholly owned
subsidiaries of InSight, AHSC Acquisition Company, a Delaware corporation ("AHSC
Acquisition"), and MXHC Acquisition Company, a Delaware corporation ("MXHC
Acquisition"). Pursuant to the terms of the Merger Agreement, (i) AHSC
Acquisition merged with and into AHS and MXHC Acquisition merged with and into
Maxum (collectively, the "Merger"), (ii) each outstanding share of common stock,
par value $.03 per share, of AHS ("AHS Common Stock") was converted into the
right to receive one-tenth of a share of common stock, par value $ .001 per
share, of InSight ("InSight Common Stock"), (iii) each outstanding share of
Series B Senior Convertible Preferred Stock, par value $ .03 per share, of AHS
("AHS Series B Preferred Stock") which was convertible into 100 shares of AHS
Common Stock was converted into the right to receive ten (10) shares of InSight
Common Stock, (iv) each outstanding share of Series C Preferred Stock, par value
$ .03 per share, of AHS (the "AHS Series C Preferred Stock"), which was issued
immediately prior to the consummation of the Merger, was converted into the
right to receive 1.25088 shares of Series A Preferred Stock, par value $ .001
per share, of InSight (the "InSight Series A Preferred Stock"), (v) each
outstanding share of common stock, par value $ .01 per share, of Maxum ("Maxum
Common Stock") was converted into the right to receive .598 of a share of
InSight Common Stock, (vi) each outstanding share of Series B Preferred Stock,
par value $.01 per share, of Maxum (the "Maxum Series B Preferred Stock"), which
was issued immediately prior to the consummation of the Merger, was converted
into the right to receive 83.392 shares of InSight Series A Preferred Stock, and
(vii) each outstanding option, warrant or other right to purchase AHS Common
Stock and Maxum Common Stock was converted into the right to acquire, on the
same terms and conditions, shares of InSight Common Stock, with the number of
shares and exercise price applicable to such option, warrant or other right
adjusted based on the applicable exchange ratio for the underlying AHS Common
Stock or Maxum Common Stock.
Concurrent with the consummation of the Merger, AHS and MHC completed a debt
restructuring with General Electric Company ("GE Medical"), the primary creditor
of MHC and AHS, and General Electric Capital Corporation. This restructuring
resulted in the reduction of certain debt and operating lease obligations and
cancellation of certain stock warrants of MHC and AHS 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 AHS Series C Preferred
Stock. In connection with this restructuring, MHC recorded the extinguishment
of $9.0 million of long-term debt obligations and an extraordinary gain
representing 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. 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, was deferred and will be reduced by future interest
payments over the terms of the respective debt instruments.
7
<PAGE>
At the effective time of the Merger, Maxum Series B Preferred Stock and AHS
Series C 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 such number of shares of 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 for ten years an annual supplemental service fee equal to
14% of the Company's pretax income, subject to certain adjustments. InSight may
terminate the supplemental service fee at any time during such ten-year period
by making a payment to GE Medical equal to $8.0 million less the discounted
value of the aggregate amount of the supplemental service fee (calculated at a
discount rate of 15% per annum) paid through the date of such termination
payment.
The Merger was accounted for using the purchase method of accounting in
accordance with generally accepted accounting principles. MHC is treated as the
acquiror for accounting purposes. The condensed consolidated financial
statements presented herein for the three and nine months ended March 31, 1996,
respectively, represent the operating results of MHC only.
The results of operations of AHS have been included in the consolidated
financial statements since the acquisition date. The pro forma effects of the
Merger, as if it had occurred as of July 1, 1995, are summarized as follows
(amounts in thousands):
Three Months Ended Nine Months Ended
March 31, 1996 March 31, 1996
------------------ -----------------
(unaudited) (unaudited)
Revenues $ 21,028 $ 63,866
Expenses 22,269 69,555
--------- ---------
Net loss $ (1,241) $ (5,689)
--------- ---------
--------- ---------
Loss per share $ (0.46) $ (2.10)
--------- ---------
--------- ---------
The pro forma results of operations for the nine and three months ended March
31, 1996 include $0.5 million and $0.2 million, respectively, of amortization of
intangibles related to the Merger. The pro forma results do not include the
interest and lease savings resulting from the Merger.
On September 13, 1996, AHS changed its name to InSight Health Corp. ("IHC").
8
<PAGE>
2. INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Company
included herein 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 by generally accepted accounting
principles for annual financial statements. These financial statements should
be read in conjunction with the consolidated financial statements and related
footnotes included as part of the Company's Annual Report on Form 10-K for the
period ended June 30, 1996 filed with the Securities and Exchange Commission on
October 15, 1996. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for fair presentation of results for the
period have been included. The results of operations for the nine months ended
March 31, 1997, are not necessarily indicative of the results to be achieved for
the full fiscal year.
Certain reclassifications have been made to conform prior year amounts to the
current year presentation.
3. INVESTMENTS IN PARTNERSHIPS
Set forth below is the summarized income statement data of the Company's
unconsolidated partnerships (amounts in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Net revenues $1,059 $1,212 $3,211 $3,490
Expenses 784 1,012 2,376 2,790
------ ------ ------ ------
Net income $ 275 $ 200 $ 835 $ 700
------ ------ ------ ------
------ ------ ------ ------
Equity in earnings
of partnerships $ 120 $ 80 $ 364 $ 292
------ ------ ------ ------
------ ------ ------ ------
9
<PAGE>
Set forth below is the summarized combined financial data of the Company's three
50% or less owned and controlled entities which are consolidated (amounts in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Condensed Combined Statement
of Operations Data:
Net revenues $1,823 $ - $5,310 $ -
Expenses 1,269 - 3,825 -
Provision for center profit distribution 290 - 771 -
------- ------- ------ -------
Net income $ 264 $ - $ 714 $ -
------- ------- ------ -------
------- ------- ------ -------
March 31, June 30,
1997 1996
----------- --------
(unaudited)
Condensed Combined
Balance Sheet Data:
Current assets $2,802 $2,523
Total assets 4,264 4,029
Current liabilities 793 895
Long-term debt 314 349
Minority interest equity 1,644 1,522
The provision for center profit distribution shown above represents the minority interest in the income of
these combined entities.
</TABLE>
4. INCOME (LOSS) PER COMMON SHARE
The number of shares used in computing income (loss) per common share is equal
to the weighted average number of common and common equivalent shares
outstanding during the respective periods, adjusted retroactively for the
conversion of Maxum Common Stock into InSight Common Stock as a result of the
Merger. Common stock equivalents relating to options, warrants and convertible
preferred stock are not included in 1996 due to their antidilutive effect.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ACQUISITIONS
InSight believes a consolidation in the diagnostic imaging industry is occurring
and is necessary in order to provide surviving companies the opportunity to
achieve operating and administrative efficiencies through the consolidation of
duplicative infrastructures. Subject to its ability to obtain financing on
terms reasonably acceptable to the Company, the strategy of InSight will be
focused on four interrelated initiatives: (i) consolidation of the highly
fragmented diagnostic imaging industry through acquisition of organizations
which either strategically fit into its regional networking strategy or provide
significant cost savings; (ii) development of a radiology co-source product
where InSight will provide management services for radiology departments within
hospitals; (iii) development of regional networks of radiology providers and
physicians designed to provide the highest quality and most cost-effective unit
of diagnostic information to the broadest population in a given market; and (iv)
new business initiatives focused on broadening its range of services to managed
care organizations, hospitals and physician management companies to include
radiology management services; information management services; unbundling of
current core services such as billing and collections, technician training and
staffing, and asset management; and continued evaluation of opportunities with
emerging technologies. InSight believes that long-term viability is contingent
upon its ability to successfully participate in this industry consolidation.
InSight views the Merger of MHC and IHC as reflective of this consolidation and
continues to consider and pursue consolidation opportunities. In September
1996, InSight completed the acquisition of an open magnetic resonance imaging
("MRI") center in Hayward, California. In January 1997, InSight also entered
into a definitive agreement to acquire three diagnostic imaging networks in the
Northeast United States, subject to satisfaction of certain conditions. It is
anticipated that this transaction will close during the fourth quarter of fiscal
1997.
RESULTS OF OPERATIONS
BECAUSE THE MERGER WAS ACCOUNTED FOR USING THE PURCHASE METHOD OF ACCOUNTING AND
MHC WAS TREATED AS THE ACQUIROR, THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS
THE HISTORICAL FINANCIAL DATA OF THE COMPANY (REFLECTING THE COMBINED OPERATIONS
OF IHC AND MHC) FOR THE NINE AND THREE MONTHS ENDED MARCH 31, 1997 AND THE
HISTORICAL FINANCIAL DATA OF MHC ONLY FOR THE NINE AND THREE MONTHS ENDED MARCH
31, 1996.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
REVENUES: Revenues increased approximately $30.9 million for the nine months
ended March 31, 1997, compared with the same period in 1996. The increase in
revenues was due primarily to additional IHC revenues as a result of the Merger
(approximately $27.4 million), increases in contract services, patient services
and other revenues (approximately $2.6 million), and an increase in patient
services revenues due to the acquisition of the open MRI center discussed above
in September 1996 (approximately $0.9 million).
Contract services revenues increased approximately $5.4 million for the nine
months ended March 31, 1997, compared with the same period in 1996. This
increase was due primarily to additional IHC
11
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revenues as a result of the Merger (approximately $4.7 million) and an increase
in existing contract services revenues due to increased numbers of procedures
(approximately $0.7 million)
Patient services revenues increased approximately $24.4 million for the nine
months ended March 31, 1997, compared with the same period in 1996. The
increase was due primarily to (i) additional IHC revenues as a result of the
Merger (approximately $22.5 million), (ii) an increase in revenues at the
Company's fixed site diagnostic imaging centers as a result of the acquisition
of two diagnostic imaging centers in October 1995, and higher volumes at
existing diagnostic imaging centers (approximately $1.0 million), and (iii) an
increase due to the acquisition of the open MRI center (approximately $0.9
million).
InSight's contract services revenues, primarily earned by its mobile facilities,
represent approximately 52% of total revenues. Each year approximately
one-quarter to one-third of the contract services agreements are subject to
renewal. It is expected that some high volume customer accounts will elect not
to renew their agreements and instead will purchase or lease their own
diagnostic imaging equipment and some customers may choose an alternative
services provider. In the past where agreements have not been renewed, the
Company has been able to obtain replacement customer accounts; however, it is
not always possible to obtain replacement accounts and some replacement accounts
have been smaller than the lost account. The non-renewal of a single customer
agreement would not have a material impact on InSight's contract services
revenues; however, non-renewal of several agreements could have a material
impact on contract services revenues.
In addition, the Company's contract services revenues with regard to its mobile
facilities in certain markets depend in part on some customer accounts with high
volume. If the future reimbursement levels of such customers were to decline or
cease or if such customers were to become financially insolvent and if such
agreements were not replaced with new accounts or with the expansion of services
on existing accounts, InSight's contract services revenues would be adversely
affected.
No single source accounts for more than 10% of InSight's revenues. The Company,
through IHC, has six individual contracts with the county of Los Angeles
("County") covering six separate sites. In the aggregate, these sites earn
revenues which represent approximately 10% of InSight's annual revenues. From
time to time, the County has experienced financial difficulties. If such
difficulties caused the County to curtail or terminate InSight's services, the
Company's business would be adversely affected.
Management believes that any future increases in revenues 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 the
Company 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 the radiology co-source
product.
COSTS OF OPERATIONS: Costs of operations increased approximately $24.2 million
for the nine months ended March 31, 1997, compared to the same period in 1996.
The increase was due primarily to (i) additional IHC costs as a result of the
Merger (approximately $21.1 million), (ii) increased amortization from the
acquisition of IHC (approximately $0.5 million), (iii) an increase of
approximately $0.7 million related to the acquisition of the open MRI center in
September 1996, and (iv) an increase at existing diagnostic imaging centers
(approximately $1.9 million), which was the result of the acquisition of the
12
<PAGE>
diagnostic imaging centers in October 1995 discussed above and a sales tax
refund (approximately $0.4 million) received during the nine months ended March
31, 1996.
To the extent that the Company has pretax income for the fiscal year ended June
30, 1997, under the terms of the amended equipment maintenance service agreement
with GE Medical described above, GE Medical will be entitled to receive a
payment equal to 14% of such pretax income, subject to certain adjustments.
During the nine months ended March 31, 1997, the Company recorded a provision of
approximately $0.2 million in connection with this agreement.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately $2.0 million for the nine months ended March 31, 1997, compared to
the same period in 1996. The increase was partially related to maintaining
duplicate staffing during the transition phase of the Merger. The Company has
achieved annualized cost savings compared to the historical combined costs of
MHC and IHC, primarily as a result of elimination of duplicate facilities
including corporate headquarters, and synergies in staff and functional areas.
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS: Equity in earnings of
unconsolidated partnerships increased approximately $0.1 million for the nine
months ended March 31, 1997, compared with the same period in 1996, due to
increased income at one of the Company's unconsolidated partnerships.
INTEREST EXPENSE: Interest expense increased approximately $1.2 million for the
nine months ended March 31, 1997, compared to the same period in 1996. The
increase was due primarily to (i) additional debt assumed as a result of the
Merger (approximately $2.2 million) and (ii) interest on additional debt related
to asset purchases and the acquisition of the open MRI center (approximately
$0.4 million), offset by reduced interest as a result of (i) amortization of the
deferred gain on the debt restructure with GE Medical (approximately $0.8
million) and (ii) amortization of long-term debt.
PROVISION FOR SECURITIES LITIGATION SETTLEMENT: During the nine months ended
March 31, 1996, MHC recorded a provision of approximately $1.5 million for
anticipated settlement costs related to certain securities litigation. There
were no similar charges in 1997.
INCOME (LOSS) PER COMMON SHARE: Net income per common share was $0.14 for the
nine months ended March 31, 1997, compared to a net loss per common share of
$(2.98) for the nine months ended March 31, 1996. The improvement in income per
common share is the result of (i) increased gross profit due to the addition of
IHC as a result of the Merger, and (ii) an increase in earnings from
unconsolidated partnerships, offset by (i) increased corporate operating
expenses, (ii) the provision for securities litigation settlement, and (iii)
increased interest expense.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
REVENUES: Revenues increased approximately $10.7 million for the three months
ended March 31, 1997, compared with the same period in 1996. The increase in
revenues was due primarily to additional IHC revenues as a result of the Merger
(approximately $9.3 million), increases in contract services, patient services
and other revenues (approximately $1.0 million) and an increase in patient
services revenues due to the acquisition of the open MRI center in September
1996 (approximately $0.4 million).
13
<PAGE>
Contract services revenues increased approximately $1.8 million for the three
months ended March 31, 1997, compared with the same period in 1996. This
increase was due primarily to additional IHC revenues as a result of the Merger
(approximately $1.5 million) and an increase in existing contract services
revenues.
Patient services revenues increased approximately $8.4 million for the three
months ended March 31, 1997, compared with the same period in 1996. The
increase was due primarily to (i) additional IHC revenues as a result of the
Merger (approximately $7.7 million), (ii) an increase in patient services
revenues due to the acquisition of the open MRI center in September 1996
(approximately $0.4 million), and (iii) a slight increase at the Company's fixed
site diagnostic imaging centers.
COSTS OF OPERATIONS: Costs of operations increased approximately $8.6 million
for the three months ended March 31, 1997, compared to the same period in 1996.
The increase was due primarily to (i) additional IHC costs as a result of the
Merger (approximately $7.1 million), (ii) increased amortization from the
acquisition of IHC (approximately $0.2 million), (iii) an increase of
approximately $0.3 million from the acquisition of the open MRI center in
September 1996 , and (iv) an increase from existing diagnostic imaging centers.
To the extent that the Company has pretax income for the fiscal year ended June
30, 1997, under the terms of the amended equipment maintenance service agreement
with GE Medical described above, GE Medical will be entitled to receive a
payment equal to 14% of such pretax income, subject to certain adjustments.
During the three months ended March 31, 1997, the Company recorded a provision
of approximately $0.1 million in connection with this agreement.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately $0.6 million for the three months ended March 31, 1997, compared
to the same period in 1996. The increase was partially related to increased
payroll costs and increased costs due to the Company's acquisition activities.
The Company has achieved annualized cost savings compared to the historical
combined costs of MHC and IHC, primarily as a result of elimination of duplicate
facilities including corporate headquarters, and synergies in staff and
functional areas.
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS: Equity in earnings of
unconsolidated partnerships increased approximately $0.04 million for the three
months ended March 31, 1997, compared with the same period in 1996, due to
increased income at one of the Company's unconsolidated partnerships.
INTEREST EXPENSE: Interest expense increased approximately $0.4 million for the
three months ended March 31, 1997, compared to the same period in 1996. The
increase was due primarily to (i) additional debt assumed as a result of the
Merger (approximately $0.7 million) and (ii) additional debt incurred primarily
related to acquisition and asset purchases (approximately $0.2 million); offset
by reduced interest as a result of (i) amortization of the deferred gain on the
debt restructure with GE Medical (approximately $0.2 million) and (ii)
amortization of long-term debt.
INCOME (LOSS) PER COMMON SHARE: Net income per common share was $0.07 for the
three months ended March 31, 1997, compared to a net loss per common share of
$(0.52) for the three months ended March 31, 1996. The improvement in income
per common share is the result of increased gross profit due to the addition of
IHC as a result of the Merger, and an increase in earnings from unconsolidated
partnerships, offset by (i) increased corporate operating expenses, and (ii)
increased interest expense.
14
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
InSight operates in a capital intensive, high fixed cost industry that requires
significant amounts of working capital to fund operations, particularly the
initial start-up and development expenses of new operations and yet is
constantly under external pressure to contain costs and reduce prices. Revenues
and cash flows have been adversely affected by an increased collection cycle,
increased competitive pressures and major restructurings within the healthcare
industry. This adverse effect on revenues and cash flow is expected to
continue, especially in the mobile diagnostic imaging business. Management
believes that InSight's long-term viability and success is contingent upon its
ability (through MHC and IHC, its principal operating subsidiaries) to
successfully participate in the ongoing industry consolidation, the continuing
expansion of managed care imaging networks and the development of the radiology
co-source product.
InSight continues to pursue acquisition opportunities. InSight believes that
the expansion of its business through acquisitions is a key factor in achieving
profitability. Generally, acquisition opportunities are aimed at increasing
revenues and profits, and maximizing utilization of existing capacity.
Incremental operating profit resulting from future acquisitions will vary
depending on geographic location, whether facilities are mobile versus fixed,
range of services provided and the Company's ability to integrate the acquired
businesses into its existing infrastructure. The ability of the Company to
capitalize on identified acquisition opportunities is dependent upon the
availability of financing on terms reasonably acceptable to the Company.
InSight completed the acquisition of the open MRI center in September 1996 and
has entered into a definitive agreement to acquire three diagnostic imaging
networks in the Northeast United States discussed above.
InSight's operations are principally dependent on its ability (either directly
or indirectly through its hospital customers) to attract referrals from
physicians and other healthcare providers representing a variety of specialties
The Company's eligibility to provide service in response to a referral is often
dependent on the existence of a contractual arrangement with the referred
patient's insurance carrier (primarily if the insurance is provided by a managed
care organization). Managed care contracting has become very competitive and
reimbursement schedules are nearing Medicare reimbursement levels. A decline in
referrals and/or reimbursement rates would adversely affect InSight's revenues
and profits.
In connection with the Merger, certain financial accommodations with MHC's and
IHC's primary creditor, GE Medical, became effective in June 1996. The
financial accommodations with GE Medical restrict InSight's ability to raise
capital, incur additional debt, enter into additional leases for equipment,
complete acquisitions, or enter into other corporate transactions without first
obtaining a waiver or consent from GE Medical.
Working capital decreased to a deficit of approximately $2.4 million at March
31, 1997 from a deficit of approximately $1.2 million at June 30, 1996. This
increase in deficit of approximately $1.2 million is primarily due to principal
payments on long-term debt, offset by net income before depreciation and
amortization. The Company has no lines of credit available to borrow against
for working capital purposes. Notwithstanding the above, the Company believes
that its current cash balances and cash flows from operations, absent further
declines in referrals, reimbursement and/or cancellation of contract services
agreements, will be sufficient to finance its current operations; however,
GE Medical loaned the Company approximately $2.7 million to purchase
15
<PAGE>
the open MRI center in September 1996 and has agreed to loan the Company
approximately $7.0 million to complete the acquisition in the Northeast United
States discussed above.
Cash and cash equivalents decreased to approximately $6.5 million at March 31,
1997 from approximately $6.8 million at June 30, 1996. This decrease of
approximately $0.3 million resulted from (i) purchases of property and
equipment (approximately $2.4 million), (ii) payments on debt and capital lease
obligations (approximately $7.7 million), and (iii) payments of Merger
transaction costs, including investment banking fees, legal fees, document
printing, mailing and filing fees and severance costs of terminated employees
(approximately $0.8 million), offset by (i) net income before depreciation and
amortization (approximately $8.1 million) and (ii) long-term borrowings
(approximately $5.1 million).
The Company has committed to purchase, at an aggregate cost of approximately
$4.0 million, three MRI systems and one CT system for delivery and installation
at four sites during the quarter ending June 30, 1997. The Company has obtained
commitments to finance the purchase or lease of such equipment. In addition,
the Company may purchase, lease or upgrade other MRI systems in the last quarter
of fiscal 1997, as opportunities arise to place new equipment into service when
new contract services agreements are signed, existing agreements are renewed,
acquisitions are completed, or new imaging centers are developed in accordance
with the Company's development strategy.
In February 1996, MHC and the other parties in a class action securities lawsuit
reached a settlement. On July 29, 1996, following final court approval, MHC and
the other parties collectively paid to the plaintiffs in the class action the
balance of the agreed upon settlement amount. In anticipation of this
settlement, MHC recorded a charge of $1.5 million in 1995 and as part of the
Merger borrowed approximately $1.9 million from GE Medical to finance the
settlement, which is payable over a five-year period beginning September 1,
1996.
This Management's Discussion and Analysis contains forward-looking statements
concerning the expected synergies from the Merger and the Company's ability to
finance its current and future operations and acquisitions. These
forward-looking statements involve a number of risks and uncertainties. In
addition to the above-mentioned factors, among other factors that could cause
actual results to differ materially are the following: availability of
financing; limitations and delays in reimbursement by third-party payors;
contract services renewals and financial stability of customers; technology
changes; governmental regulation; conditions within the healthcare environment;
adverse utilization trends for certain diagnostic imaging procedures; aggressive
competition; general economic factors; InSight's inability to carry out its
business strategy due to rising purchase prices of imaging centers and
companies; and the risk factors listed from time to time in InSight's filings
with the Securities and Exchange Commission ("SEC").
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS.
---------
There are none.
(b) REPORTS ON FORM 8-K.
--------------------
No current reports on Form 8-K were filed by the Company for
the quarter ended March 31, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSIGHT HEALTH SERVICES CORP.
/s/ E. Larry Atkins
----------------------
E. Larry Atkins
President and Chief Executive Officer
/s/ Thomas V. Croal
----------------------
Thomas V. Croal
Executive Vice President,
Chief Financial Officer and Secretary
May 13, 1997
18
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