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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4400 MacArthur Blvd., Suite 800, Newport Beach, CA 92660
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(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
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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 November 10, 1997.
The number of pages in this Form 10-Q is 18.
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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Condensed Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and June 30, 1997 3-4
Condensed Consolidated Statements of Income
(unaudited) for the three months ended
September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended
September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATION 12-16
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
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SIGNATURES 18
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
SEPTEMBER 30, JUNE 30,
1997 1997
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 8,604 $ 7,135
Trade accounts receivable, net 18,136 15,645
Other receivables, net 556 358
Other current assets 2,729 1,554
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Total current assets 30,025 24,692
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $17,062 and
$16,203, respectively 39,198 34,488
INVESTMENT IN PARTNERSHIPS 425 402
OTHER ASSETS 96 5,468
INTANGIBLE ASSETS, net 38,199 33,272
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$107,943 $ 98,322
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The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
SEPTEMBER 30, JUNE 30,
1997 1997
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(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 4,826 $ 15,462
Accounts payable and other accrued expenses 17,148 14,225
Current portion of deferred gain on debt
restructure 674 745
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Total current liabilities 22,648 30,432
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LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 74,080 57,733
Deferred gain on debt restructure, less current
portion 586 728
Other long-term liabilities 723 744
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Total long-term liabilities 75,389 59,205
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MINORITY INTEREST 2,117 2,000
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STOCKHOLDERS' EQUITY:
Convertible Series A preferred stock, $.001
par value, 3,500,000 shares authorized;
2,501,760 outstanding at September 30, 1997
and June 30, 1997, respectively, stated at 6,750 6,750
Common stock, $.001 par value, 25,000,000
shares authorized, 2,714,725 shares
outstanding at September 30, 1997 and
June 30, 1997, respectively 3 3
Additional paid-in capital 23,100 23,100
Accumulated deficit (22,064) (23,168)
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Total stockholders' equity 7,789 6,685
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$107,943 $ 98,322
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The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts in thousands, except share and per share data)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
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REVENUES:
Contract services $ 13,412 $ 11,723
Patient services 13,812 9,993
Other 612 400
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Total revenues 27,836 22,116
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COSTS OF OPERATIONS:
Costs of services 14,191 12,183
Provision for doubtful accounts 502 442
Equipment leases 4,512 4,519
Depreciation and amortization 3,206 2,343
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Total costs of operations 22,411 19,487
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GROSS PROFIT 5,425 2,629
CORPORATE OPERATING EXPENSES 2,358 1,770
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INCOME FROM COMPANY OPERATIONS 3,067 859
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 154 107
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OPERATING INCOME 3,221 966
INTEREST EXPENSE, Net 1,686 860
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INCOME BEFORE INCOME TAXES 1,535 106
PROVISION FOR INCOME TAXES 431 -
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NET INCOME $ 1,104 $ 106
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INCOME PER COMMON SHARE $ 0.20 $ 0.02
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,448,736 5,432,545
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
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OPERATING ACTIVITIES:
Net income $ 1,104 $ 106
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,242 2,397
Amortization of deferred gain on debt restructure (213) (290)
Cash provided by (used in) changes in operating
working capital:
Receivables, net (2,689) 57
Other current assets (1,275) (851)
Accounts payable and other current liabilities 2,902 173
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Net cash provided by operating activities 3,071 1,592
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INVESTING ACTIVITIES:
Additions to property and equipment (7,339) (885)
Acquisition of imaging center - (2,766)
Other (91) 337
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Net cash used in investing activities (7,430) (3,314)
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FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (3,334) (2,542)
Proceeds from issuance of debt 9,045 3,340
Other 117 -
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Net cash provided by financing activities 5,828 798
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,469 (924)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,135 6,864
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End of period $ 8,604 $ 5,940
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SUPPLEMENTAL INFORMATION:
Interest paid $ 1,854 $ 1,173
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. MERGER
------
InSight Health Services Corp. (InSight or 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 (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, 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), the primary creditor of MHC
and AHS. 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, immediately
prior to the consummation of the Merger, of Maxum Series B Preferred Stock
and AHS Series C Preferred Stock.
At the effective time of the Merger, Maxum Series B Preferred Stock and AHS
Series C Preferred Stock issued to GE 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 was also
entitled to receive for ten years an annual supplemental service fee equal to
14% of the Company's pretax income, subject to certain adjustments. In
connection with the Company's recapitalization, GE surrendered its rights
under the amended equipment service agreement to receive the supplemental
service fee (see Note 5).
The Merger was accounted for using the purchase method of accounting in
accordance with generally accepted accounting principles. MHC was treated as
the acquiror for accounting purposes.
On September 13, 1996, AHS changed its name to InSight Health Corp. (IHC).
7
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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, 1997 filed with the Securities and
Exchange Commission on October 14, 1997. 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 three months ended September 30, 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
SEPTEMBER 30,
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1997 1996
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(unaudited)
Net revenues $ 1,292 $ 1,025
Expenses 895 780
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Net income $ 397 $ 245
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Equity in earnings
of partnerships $ 154 $ 107
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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):
SEPTEMBER 30, JUNE 30,
1997 1997
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(unaudited)
Condensed Combined
Balance Sheet Data:
Current assets $ 3,129 $ 2,596
Total assets 4,752 4,288
Current liabilities 1,041 727
Long-term debt 380 424
Minority interest equity 1,806 1,702
8
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THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
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(unaudited)
Condensed Combined Statement
of Operations Data:
Net revenues $ 1,828 $ 1,751
Expenses 1,234 1,261
Provision for center profit distribution 304 250
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Net income $ 290 $ 240
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The provision for center profit distribution shown above represents the
minority interest in the income of these combined entities.
4. INCOME PER COMMON SHARE
-----------------------
The number of shares used in computing income per common share is equal to
the weighted average number of common and common equivalent shares
outstanding during the respective period.
5. SUBSEQUENT EVENT
----------------
On October 14, 1997, InSight consummated a recapitalization
(Recapitalization) pursuant to which (a) certain investors affiliated with TC
Group, LLC and its affiliates (collectively, Carlyle), a private merchant
bank headquartered in Washington, D.C., made a cash investment of $25 million
in the Company and received therefor (i) 25,000 shares of newly issued
Convertible Preferred Stock, Series B of the Company, par value $0.001 per
share (Series B Preferred Stock), initially convertible, at the option of the
holders thereof, in the aggregate into 2,985,075 shares of Common Stock, and
(ii) warrants (Carlyle Warrants) to purchase up to 250,000 shares of Common
Stock at the current exercise price of $10.00 per share; (b) GE (i)
surrendered its rights under the amended equipment service agreement to
receive supplemental service fee payments equal to 14% of pretax income (see
Note 1, above) in exchange for (i) the issuance of 7,000 shares of newly
issued Convertible Preferred Stock, Series C of the Company, par value $0.001
per share (Series C Preferred Stock) initially convertible, at the option of
GE, in the aggregate into 835,821 shares of Common Stock, (ii) warrants (GE
Warrants) to purchase up to 250,000 shares of Common Stock at the current
exercise price of $10.00 per share, (for which the Company will record a
non-recurring expense of approximately $6.0 million in the second quarter of
fiscal 1998), and (iii) agreed to exchange all of its InSight Series A
Preferred Stock, on the business day (Second Closing) after all waiting
periods with respect to GE's filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, had expired or been terminated, for an
additional 20,953 shares of Series C Preferred Stock, initially convertible,
at the option of the holders thereof, in the aggregate into 2,501,760 shares
of Common Stock; and (c) the Company executed a Credit Agreement with
NationsBank, N.A. pursuant to which NationsBank, as agent and lender,
provided a total of $125 million in senior secured credit (Bank Financing),
including (i) a $50 million term loan facility consisting of a $20 million
tranche with increasing amortization over a five-year period and a $30
million tranche with increasing amortization over a seven-year period,
principally repayable in years 6 and 7, (ii) a $25 million revolving working
capital facility with a five-year maturity, and (iii) a $50 million
acquisition facility, which may be increased by up to an additional $25
million upon the satisfaction of certain conditions, including commitments
from participating lenders.
The terms of the Series B Preferred Stock and the Series C Preferred Stock
(collectively, Preferred Stock) are substantially the same. The Preferred
Stock has a liquidation preference of $1,000 per share. It will participate
in any dividends paid with respect to the Common Stock. There is no
mandatory or optional redemption provision for the Preferred Stock. The
Preferred Stock is convertible at an initial conversion price of $8.375 per
share.
9
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For so long as Carlyle and its affiliates own at least 33% of the Series B
Preferred Stock or GE and its affiliates own at least 33% of the Series C
Preferred Stock, respectively, the approval of at least 67% of the holders of
such series of Preferred Stock is required before the Company may take
certain actions including, but not limited to, amending its certificate of
incorporation or bylaws, changing the number of directors or the manner in
which directors are selected, incurring indebtedness in excess of $15 million
in any fiscal year, issuing certain equity securities below the then current
market price or the then applicable conversion price, acquiring equity
interests or assets of entities for consideration equal to or greater than
$15 million, and engaging in mergers for consideration equal to or greater
than $15 million. The Preferred Stock will vote with the common stock on an
as-if-converted basis on all matters except the election of directors,
subject to an aggregate maximum Preferred Stock percentage of 37% of all
votes entitled to be cast on such matters. Assuming the conversion of all of
the Series B Preferred Stock into common stock and the exercise of all of the
Carlyle Warrants, Carlyle would own approximately 31% of the common stock of
the Company, on a fully diluted basis. Assuming the conversion of all of the
Series C Preferred Stock after the Second Closing and the exercise of the GE
Warrants, GE would own approximately 34% of the common stock of the Company,
on a fully diluted basis.
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Company's Board of Directors (the Board) is currently fixed at
nine. Six directors (Common Stock Directors) are to be elected by the common
stockholders, one of whom (Joint Director) is to be proposed by Carlyle and
GE and approved by a majority of the Board in its sole discretion. Of the
three remaining directors (Preferred Stock Directors), two are to be elected
by the holders of the Series B Preferred Stock and one is to be elected by
the holders of the Series C Preferred Stock, in each case acting by written
consent and without a meeting of the common stockholders. As long as Carlyle
and certain affiliates thereof own an aggregate of at least 50% of the Series
B Preferred Stock, originally purchased thereby, the holders of the Series B
Preferred Stock will have the right to elect two Preferred Stock Directors
and as long as Carlyle and certain affiliates thereof own an aggregate of at
least 25% of such stock, such holders will have the right to elect one
Preferred Stock Director. As long as GE and its affiliates own an aggregate
of at least 25% of the Series C Preferred Stock, originally purchased
thereby, GE will have the right to elect one Preferred Stock Director. If
any such ownership percentage falls below the applicable threshold, the
Preferred Stock Director(s) formerly entitled to be elected by Carlyle or GE,
as the case may be, will initially be appointed by the Board, and will
thereafter be elected by the common stockholders.
At any time after October 22, 1998 all of the Series B Preferred Stock and
the Series C Preferred Stock may be converted into a newly created
Convertible Preferred Stock, Series D of the Company, par value $0.001 per
share (Series D Preferred Stock). The Series D Preferred Stock allows the
number of directors to be automatically increased to a number which would
permit each of Carlyle and GE, by filling the newly created vacancies, to
achieve representation on the Board proportionate to their respective common
stock ownership percentages on an as-if-converted basis but would limit such
representation to less than two thirds of the Board of Directors for a
certain period of time. The Series D Preferred Stock has a liquidation
preference of $0.001 per share but no mandatory or optional redemption
provision. It will participate in any dividends paid with respect to the
Common Stock and is convertible into 6,322,660 shares of Common Stock. The
Board will consist of eight directors, five of whom are Common Stock
Directors and three of whom are Preferred Stock Directors. The vacancy
created for the Joint Director has not yet been filled.
Holders of the Preferred Stock also have a right of first offer with respect
to future sales in certain transactions or proposed transactions not
involving a public offering by the Company of its Common Stock or securities
convertible into Common Stock. Holders of the Preferred Stock are also
entitled to certain demand and "piggyback" registration rights.
10
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Set forth below is an unaudited pro forma condensed consolidated balance
sheet as of September 30, 1997, as if the transaction described above had
occurred on September 30, 1997 (amounts in thousands):
PRO FORMA
----------------------------
AS REPORTED ADJUSTMENTS TOTAL
----------- -------------- ------------
(unaudited)
Current assets $ 30,025 $ - $ 30,025
Property and equipment, net 39,198 - 39,198
Investment in partnerships 425 - 425
Other assets 96 3,100 3,196
Intangible assets 38,199 - 38,199
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$ 107,943 $ 3,100 $ 111,043
----------- ------------- -------------
----------- ------------- -------------
Current liabilities $ 22,648 $ (1,230) $ 21,418
Long-term liabilities 75,389 (19,822) 55,567
Minority interest 2,117 - 2,117
Stockholders' equity 7,789 24,152 31,941
----------- ------------- -------------
$ 107,943 $ 3,100 $ 111,043
----------- ------------- -------------
----------- ------------- -------------
The unaudited pro forma condensed consolidated balance sheet as of September
30, 1997 gives effect to the issuance of $25 million of Series B Preferred
Stock, the draw down of the $50 million term loan and the draw down of
approximately $5 million under the working capital loan, which collectively
was used to repay approximately $75 million in outstanding notes payable and
to pay approximately $5 million in transaction costs related to the
Recapitilization and Bank Financing.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CENTERS IN OPERATION
InSight provides diagnostic imaging, treatment and related management
services in 26 states throughout the United States. InSight's services are
provided through a network of 35 mobile magnetic resonance imaging ("MRI")
facilities ("Mobile Facilities"), 28 fixed-site MRI facilities ("Fixed
Facilities"), ten multi-modality imaging centers ("Centers"), two Leksell
Stereotactic Gamma Unit treatment centers ("Gamma Knife"), and one radiation
oncology center. An additional radiation oncology center is operated by the
Company as part of one of its Centers. The Company's operations are located
throughout the United States, with a substantial presence in California,
primarily Los Angeles county, and northern Texas, primarily the Dallas-Ft.
Worth metroplex.
At its Centers, InSight offers other services in addition to MRI including
diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound,
nuclear medicine, nuclear cardiology, computed tomography ("CT") and
cardiovascular services. The Company offers additional services through a
variety of arrangements including equipment rental, technologist services and
training/applications, marketing, radiology management services, patient
scheduling, utilization review and billing and collection services.
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
consolidation. The strategy of InSight is focused on five 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; (iv)
development of a network of open MRI systems; and (v) 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. As part of its consolidation strategy, InSight completed
three acquisitions during fiscal 1997 and two during fiscal 1998 as follows:
In September 1996, InSight completed the acquisition of a Fixed Facility in
Hayward, California. The transaction included the purchase of certain
assets, primarily diagnostic equipment. The purchase price of approximately
$2.8 million was financed by GE.
In May 1997, InSight acquired certain assets, primarily Mobile Facilities, in
Maine and New Hampshire, and assumed certain equipment related liabilities.
The purchase price of approximately $6.8 million and an additional $0.4
million for working capital requirements were financed by GE.
In June 1997, InSight completed the acquisition of a Center in Chattanooga,
Tennessee. The transaction included the purchase of certain assets,
primarily diagnostic equipment, and the assumption of certain equipment
related liabilities. The purchase price of approximately $9.0 million was
financed by GE.
In July 1997, InSight completed the acquisition of a Center in Columbus,
Ohio. As part of this transaction, InSight also acquired a majority ownership
interest in the development of a new Center in Dublin, Ohio. The
transactions included the purchase of certain assets, primarily diagnostic
equipment, and the assumption of certain equipment
12
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related liabilities. The purchase price of approximately $5.5 million and
approximately $0.5 million for the Center under development were financed by
GE.
In November 1997, InSight completed the acquisition of a Center in
Murfreesboro, Tennessee. The Bank Financing discussed below was used to
finance the purchase price of approximately $2.7 million.
As discussed below, InSight has an acquisition facility in the amount of $50
million, which may be increased, under certain circumstances to $75 million.
InSight believes this facility will enhance its ability to participate in the
industry consolidation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
REVENUES: Revenues increased approximately $5.7 million, or approximately
25.9%, for the three months ended September 30, 1997, compared to the same
period in 1996. The increase in revenues was due primarily to the
acquisitions discussed above (approximately $3.5 million) and an increase in
contract services, patient services and other revenues at existing facilities
(approximately $2.2 million).
Contract services revenues increased approximately $1.7 million, or
approximately 14.4%, for the three months ended September 30, 1997, compared
to the same period in 1996. This increase was due primarily to an increase
in revenues due to the acquisitions discussed above (approximately $0.5
million) and an increase in revenues at existing facilities (approximately
$1.2 million). The increase at existing facilities was due to higher
utilization (approximately 32%) offset by reductions in reimbursement
(approximately 4%) from customers, primarily hospitals.
InSight's contract services revenues, primarily earned by its Mobile
Facilities, represent approximately 48% 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.
Patient services revenues increased approximately $3.8 million, or
approximately 38.2%, for the three months ended September 30, 1997, compared
to the same period in 1996. The increase in revenues was due primarily to
increased revenues due to the acquisitions discussed above (approximately
$3.0 million), and an increase in revenues at existing facilities
(approximately $0.8 million). The increase at existing facilities was due to
higher utilization (approximately 15%) partially offset by continued declines
in reimbursement from third party payors.
Management believes that any future increases in revenues at existing
facilities 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, 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 execution of provider
13
<PAGE>
agreements with managed care companies and other payors, and the execution of
the Company's strategic initiatives. No single source accounts for more than
10% of InSight's revenues.
COSTS OF OPERATIONS: Costs of operations increased approximately $2.9
million, or approximately 15%, for the three months ended September 30, 1997,
compared to the same period in 1996. This increase was due primarily to an
increase in costs due to the acquisitions discussed above (approximately $2.1
million), and an increase in costs at existing facilities (approximately $0.8
million). The increase at existing facilities was due primarily to increases
in costs of services and depreciation and amortization.
Costs of services, including the provision for doubtful accounts, increased
approximately $2.1 million, or approximately 16.4%, for the three months
ended September 30, 1997, compared to the same period in 1996. The increase
in costs was due primarily to an increase in costs due to the acquisitions
discussed above (approximately $1.5 million) and an increase in costs at
existing facilities (approximately $0.6 million). The increase in costs at
existing facilities was due primarily to (i) salary and benefits and (ii) an
increase in sales tax and property taxes, offset by reduced costs in service
supplies and equipment maintenance.
Equipment leases and depreciation and amortization increased approximately
$0.9 million, or approximately 12.5%, for the three months ended September
30, 1997, compared to the same period in 1996. The increase was due
primarily to the acquisitions discussed above (approximately $0.5 million)
and an increase in costs at existing facilities (approximately $0.4 million).
The increase at existing facilities was primarily due to the Company
upgrading its existing medical equipment.
Under the terms of the amended equipment maintenance service agreement with
GE, GE was entitled to receive a supplemental service fee equal to 14% of
pretax income, subject to certain adjustments. During the three months ended
September 30, 1997, the Company recorded a provision of approximately $0.4
million in connection with this agreement. The Company's future obligations
under this agreement were terminated as part of the Recapitalization. As
discussed below, the Company will record a non-recurring expense of
approximately $6.0 million in the second quarter of fiscal 1998 in connection
with the termination of this agreement.
GROSS PROFIT: Gross profit increased approximately $2.8 million during the
three months ended September 30, 1997, compared to the same period in 1996.
The increase was due to the acquisitions discussed above (approximately $1.4
million), and an increase at existing facilities (approximately $1.4 million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately $0.6 million for the three months ended September 30, 1997,
compared to the same period in 1996. The increase was primarily due to
additional consulting and legal costs associated with the Company's
acquisition activities.
INTEREST EXPENSE, NET: Interest expense, net increased approximately $0.8
million for the three months ended September 30, 1997, compared to the same
period in 1996. The increase was due primarily to additional debt related to
the acquisitions discussed above (approximately $0.4 million) and additional
debt related to the Company upgrading its existing medical equipment, offset
by reduced interest as a result of amortization of long-term debt. The
Company anticipates that interest expense, net will decrease in future
periods due to (i) the reduction in interest rate and (ii) the extinguishment
of approximately $23 million in long-term debt as a result of the
Recapitalization and Bank Financing discussed below, offset by additional
borrowings as a result of the Company's acquisition activities.
PROVISION FOR INCOME TAXES: During the three months ended September 30,
1997, the Company recorded a provision for income taxes of approximately
$431,000. The provision was due primarily as a result of increased income
from the Company's operations. The Company's effective tax rate at September
30, 1997 was approximately 28% due to the utilization of certain operating
loss carry forwards. The Company did not record a provision for income taxes
during the three months ended September 30, 1996.
INCOME PER COMMON SHARE: On a diluted basis, net income per common share was
$0.20 for the three months ended September 30, 1997, compared to net income
per common share of $0.02 for the three months ended
14
<PAGE>
September 30, 1996. The improvement in net income per common share is the
result of (i) increased gross profit, and (ii) an increase in earnings from
unconsolidated partnerships, offset by (i) increased corporate operating
expenses, (ii) increased interest expense, and (iii) the provision for income
taxes.
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, competitive pressures and major restructurings within the
health care 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 success is based upon its
ability to successfully execute its five interrelated strategic initiatives.
InSight continues to pursue acquisition opportunities. InSight believes that
the expansion of its business through acquisitions is a key factor in
achieving and maintaining 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 or Fixed, the range of services provided and the
Company's ability to integrate the acquired businesses into its existing
infrastructure. Since the Merger, InSight has completed five acquisitions,
as discussed above.
The Company consummated the Recapitalization on October 14, 1997 pursuant to
which (a) the Company issued to Carlyle 25,000 shares of Series B Preferred
Stock having a liquidation preference of $1,000 per share and warrants to
purchase 250,000 shares of InSight Common Stock at the current exercise price
of $10.00 per share, generating net proceeds to the Company (after related
transaction costs of approximately $2.0 million) of approximately $23.0
million; (b) the Company issued to GE 7,000 shares of Series C Preferred
Stock, with a liquidation preference of $1,000 per share, in consideration of
the termination of GE's right to receive supplemental service fee payments
equal to 14% of InSight's pre-tax income, (for which the Company will record
a non-recurring expense of approximately $6.0 million in the second quarter
of fiscal 1998), and agreed to issue to GE an additional 20,953 shares of
Series C Preferred Stock at the Second Closing in exchange for all of GE's
shares of Series A Preferred Stock; and (c) the Company executed a Credit
Agreement with NationsBank which, was consummated October 22, 1997 and
included, (i) a $50 million term loan facility consisting of a $20 million
tranche with increasing amortization over a five-year period and a $30
million tranche with increasing amortization over a seven-year period
principally repayable in years 6 and 7, (ii) a $25 million revolving working
capital facility with a five-year maturity, and (iii) a $50 million
acquisition facility, which may be increased by up to an additional $25
million upon the satisfaction of certain conditions, including commitments
from participating lenders. The net proceeds from the Carlyle investment
were used to refinance a portion of the outstanding GE indebtedness
(approximately $23 million). At the initial funding of the Bank Financing,
all of the term loan facility was drawn down to refinance all of the
remaining GE indebtedness (approximately $47 million) and approximately $10
million of the revolving facility was drawn down for working capital purposes
InSight's operations are principally dependent on its ability (either
directly or indirectly through its hospital customers) to attract referrals
from physicians and other health care 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.
In connection with the Merger, certain financial accommodations with GE
became effective in June 1996. The GE indebtedness was repaid in full from
the proceeds of the Carlyle investment and the Bank Financing. The terms of
the Series B Preferred Stock and the Series C Preferred Stock, as well as the
Bank Financing, contain certain restrictions on InSight's ability to act
without first obtaining a waiver or consent from Carlyle, GE and NationsBank.
15
<PAGE>
Working capital increased to approximately $7.4 million at September 30, 1997
from a deficit of approximately $5.7 million at June 30, 1997. This increase
in working capital of approximately $13.1 million is primarily due to net
income before depreciation and amortization and the reclassification of the
current portion of debt to long-term debt as a result of the Bank Financing,
offset by the current portion of additional debt incurred as a result of the
Company's acquisition strategy discussed above and principal payments on
long-term debt. As part of the Bank Financing, the Company has a $25 million
working capital facility.
Cash and cash equivalents increased to approximately $8.6 million at
September 30, 1997 from approximately $7.1 million at June 30, 1997. This
increase of approximately $1.5 million resulted primarily from (i) cash
provided by operating activities of (approximately $3.0 million) and (ii)
long-term borrowings of (approximately $9.0 million), offset by (i) purchases
of property and equipment (approximately $7.3 million), and (ii) payments on
debt and capital lease obligations (approximately $3.3 million).
The Company has committed to purchase, at an aggregate cost of approximately
$4.0 million, three MRI systems for delivery during the quarter ending
December 31, 1998. The Company has obtained commitments to finance the
purchase or lease of such equipment; however, the Bank Financing may be used
to finance the purchase of such equipment. In addition, the Company has
committed to purchase or lease from GE, at an aggregate cost of approximately
$20.0 million, including siting costs, 20 open MRI systems for delivery and
installation over the next two years. The Company may purchase, lease or
upgrade other MRI systems 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 strategic initiatives.
On November 3, 1997, the Company agreed to purchase certain assets, of a
multi-modality imaging center in Las Vegas, Nevada, from the trustee in
bankruptcy. The Company delivered an earnest money deposit of $700,000 to the
trustee, which will be forfeited if the Company fails to complete the
transaction by November 18, 1997. The Company expects to finance the
purchase price of approximately $11 million from the Bank Financing.
Certain statements contained in this report are forward-looking statements
that involve a number of risks and uncertainties. The factors that could
cause actual results to differ materially include the following: availability
of financing; limitations and delays in reimbursement by third-party payors;
contract renewals and financial stability of customers; technology changes;
governmental regulation; conditions within the health care 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.
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.
A current report on Form 8-K was filed with the Securities and
Exchange Commission by the Company on July 14, 1997, relating to
the acquisition of certain assets of Desmond L. Fischer, M.D.
(d/b/a/ Chattanooga Outpatient Center).
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
November 14, 1997
18
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