<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) July 21, 1998
------------------------------
InSight Health Services Corp.
- ------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 0-28622 33-0702770
- ------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
4400 MacArthur Boulevard, Suite 800, Newport Beach, CA 92660
--------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 476-0733
--------------------------------------------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
N/A
--------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) Financial statements of businesses acquired.
The financial statements of Signal Medical Services, Inc.
("Signal") required by this item are attached as Exhibit 99.1 (a).
(b) Pro forma financial information (unaudited).
The unaudited pro forma combined condensed financial statements
are presented which reflect the acquisition by merger of Signal by
InSight Health Services Corp. ("Registrant") through its wholly owned
subsidiary, SMSI Acquisition Company. The unaudited pro forma
combined condensed financial statements are provided for informational
purposes only and are not necessarily indicative of the results that
actually would have occurred had the acquisition been in effect for
the period presented.
The unaudited pro forma combined condensed balance sheet is based
on the historical balance sheet as of March 31, 1998 and is presented
as if the acquisition had been consummated at that date. The
unaudited proforma combined condensed consolidated statements of
operations are based on the historical statements of operations of
each of Registrant and Signal for the nine months ended March 31,
1998, and reflect certain adjustments to give effect to the
acquisition as if it had occurred on July 1, 1997, and for the year
ended June 30, 1997, and reflect certain adjustments to give effect to
the acquisition as if it had occurred on July 1, 1996.
Pro forma adjustments are based on the purchase method of
accounting and a preliminary allocation of the purchase price.
However, changes to the adjustments included in the unaudited pro
forma combined condensed financial statements are expected as
evaluations of assets and liabilities are completed and additional
information becomes available. Accordingly, the final allocated
values will differ from the amounts used to calculate the adjustment
in the unaudited pro forma combined condensed consolidated statements
of operations.
(c) Exhibits.
23 Consent of Independent Public Accountant (filed herewith).
99.1 (a) Financial Statements of Signal Medical Services, Inc. (filed
herewith).
99.1 (b) Unaudited Pro Forma Combined Condensed Financial Statements
of InSight Health Services Corp (filed herewith).
2
<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.
Date: July 21, 1998
INSIGHT HEALTH SERVICES CORP.
/s/ E. Larry Atkins
-------------------------------
E. Larry Atkins
President and Chief Executive Officer
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DOCUMENT DESCRIPTION NUMBERED PAGE
- ----------- -------------------- -------------
<C> <C> <C>
23 Consent of Independent Public Accountants (filed herewith).
99.1 (a) Financial Statements of Signal Medical Services, Inc.
(filed herewith).
99.1 (b) Unaudited Pro Forma Combined Condensed Financial
Statements of InSight Health Services Corp (filed herewith).
</TABLE>
4
<PAGE>
EXHIBIT NO. 23
The Board of Directors and Stockholders
Signal Medical Services, Inc.:
We consent to the inclusion of our report dated January 9, 1998, with
respect to the balance sheets of Signal Medical Services, Inc. as of December
31, 1997 and 1996, and the related statements of income, stockholders'
equity, and cash flows for the years then ended, which report appears in the
Form 8-K of InSight Health Services Corp. dated July 21, 1998.
KPMG Peat Marwick, LLP
Hartford, Connecticut
July 21, 1998
5
<PAGE>
EXHIBIT 99.1(A)
SIGNAL MEDICAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report........................................................................ 7
Balance Sheets as of December 31, 1997 and 1996..................................................... 8
Statements of Income for the Years Ended December 31, 1997 and 1996................................. 9
Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996................... 10
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............................. 11
Notes to Financial Statements....................................................................... 12
Balance Sheets (unaudited) as of March 31, 1998 and 1997............................................ 20
Statements of Income and Retained Earnings (unaudited) for the Three Months Ended March 31, 1998 and
1997.............................................................................................. 21
Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 1998 and 1997............. 22
Notes to Financial Statements....................................................................... 23
</TABLE>
6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Signal Medical Services, Inc.:
We have audited the accompanying balance sheets of Signal Medical Services,
Inc. as of December 31, 1997 and 1996, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Signal Medical Services,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
January 9, 1998
7
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 1,847,000 667,000
Accounts receivables, net of allowance of $101,000 and $44,000..................... 3,219,000 2,388,000
Other receivables.................................................................. 52,000 11,000
Prepaid expenses and other assets.................................................. 93,000 90,000
------------- ------------
Total current assets............................................................. 5,211,000 3,156,000
------------- ------------
Property and equipment:
Medical equipment.................................................................. 23,607,000 18,430,000
Furniture, fixtures and other equipment............................................ 390,000 291,000
------------- ------------
23,997,000 18,721,000
Less accumulated depreciation and amortization..................................... 10,762,000 7,112,000
------------- ------------
Property and equipment, net...................................................... 13,235,000 11,609,000
------------- ------------
Other assets, net.................................................................... 580,000 488,000
------------- ------------
$ 19,026,000 15,253,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 627,000 425,000
Accrued compensation............................................................... 792,000 583,000
Accrued maintenance................................................................ 259,000 64,000
Other accrued expenses and other liabilities....................................... 869,000 838,000
Short-term borrowings.............................................................. -- 294,000
Current portion of long-term debt.................................................. 3,227,000 3,314,000
Current portion of capital lease obligation........................................ 309,000 --
------------- ------------
Total current liabilities........................................................ 6,083,000 5,518,000
Long-term debt....................................................................... 3,712,000 4,447,000
Accrued taxes........................................................................ 1,008,000 771,000
Deferred income taxes................................................................ 801,000 389,000
Other liabilities.................................................................... 380,000 140,000
Long-term portion of capital lease obligation........................................ 1,545,000 --
------------- ------------
Total liabilities................................................................ 13,529,000 11,265,000
------------- ------------
Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares
authorized, issued and outstanding, redeemable at $33.34 per share................. 2,000,000 2,000,000
Stockholders' equity:
Common stock, $.01 par value, 110,000 shares authorized, 33,500 shares issued...... -- --
Additional paid-in capital......................................................... 156,000 156,000
Retained earnings.................................................................. 3,841,000 2,332,000
Less cost of 17,580 treasury shares.................................................. (500,000) (500,000)
------------- ------------
Total stockholders' equity....................................................... 3,497,000 1,988,000
------------- ------------
Commitments and contingencies
$ 19,026,000 15,253,000
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revenues........................................................................... $ 20,704,000 17,852,000
------------- -------------
Operating costs and expenses:
Operating costs.................................................................. 7,455,000 6,592,000
Selling, general and administrative.............................................. 2,701,000 2,257,000
Lease expense.................................................................... 3,697,000 3,140,000
Depreciation and amortization.................................................... 3,676,000 3,200,000
Interest expense, net of interest income of $27,000 and $26,000.................. 654,000 827,000
------------- -------------
Total operating costs and expenses............................................. 18,183,000 16,016,000
------------- -------------
Income before income taxes..................................................... 2,521,000 1,836,000
Income Taxes 1,012,000 735,000
------------- -------------
Net Income..................................................................... $ 1,509,000 1,101,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......................... $ -- 156,000 1,231,000 (500,000) 887,000
Net Income.......................................... -- -- 1,101,000 -- 1,101,000
----------- ----------- ---------- ---------- ------------
Balance, December 31, 1996.......................... -- 156,000 2,332,000 (500,000) 1,988,000
Net Income.......................................... -- -- 1,509,000 -- 1,509,000
----------- ----------- ---------- ---------- ------------
Balance, December 31, 1997.......................... $ -- 156,000 3,841,000 (500,000) 3,497,000
----------- ----------- ---------- ---------- ------------
----------- ----------- ---------- ---------- ------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 1,509,000 1,101,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 3,676,000 3,200,000
Change in assets and liabilities:
Increase in accounts receivable............................................... (831,000) (288,000)
Decrease (increase) in other receivables...................................... (41,000) 56,000
Increase in prepaid expenses and other current assets......................... (3,000) (39,000)
Decrease (increase) in other assets........................................... 66,000 (84,000)
Increase in accounts payable, accrued expenses and other liabilities.......... 1,526,000 1,029,000
------------- -------------
Net cash provided by operating activities................................... 5,902,000 4,975,000
------------- -------------
Cash flows used in investing activities:
Additions to medical equipment, furniture and fixtures............................ (3,421,000) (2,918,000)
Investment in joint ventures...................................................... (185,000) --
------------- -------------
Net cash used in investing activities....................................... (3,606,000) (2,918,000)
------------- -------------
Cash flows used in financing activities:
Net decrease in short-term borrowings............................................. (294,000) (156,000)
Proceeds from long-term debt...................................................... 2,720,000 475,000
Repayment of long-term debt....................................................... (3,542,000) (3,151,000)
------------- -------------
Net cash used in financing activities....................................... (1,116,000) (2,832,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents................................ 1,180,000 (775,000)
Cash and cash equivalents, beginning of period...................................... 667,000 1,442,000
------------- -------------
Cash and cash equivalents, end of period............................................ $ 1,847,000 667,000
------------- -------------
------------- -------------
Cash paid for income taxes.......................................................... $ 807,000 381,000
------------- -------------
------------- -------------
Cash paid for interest.............................................................. $ 599,000 850,000
------------- -------------
------------- -------------
Capital lease obligation incurred................................................... $ 1,854,000 --
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Signal Medical Services, Inc. (the Company) provides fixed site and
mobile magnetic resonance imaging (MRI), computer tomography (CT),
general radiology and lithotripsy equipment and operations under
contracts with hospitals and other health care providers throughout the
United States. The Company's customer contracts at December 31, 1997 are
primarily with health care providers in the northeastern and southeastern
United States.
During 1997, the Company developed and began operating several new
ventures, which are jointly owned by the Company and its respective joint
venture partners. These joint ventures include a medical billing and
collection company, a mobile lithotripsy joint venture and a mobile x-ray
and ultrasound company. The Company's investment in these joint ventures
totaled $185,000 and is included in other assets. The Company also began
managing two newly developed multi-modality imaging centers in which the
Company expects to acquire a 50% ownership interest during the first
quarter of 1998. The Company's ownership interest in these joint ventures
varies from 35% to 60%, and the operating results of these joint ventures
was not material to the Company's 1997 financial statements.
(b) REVENUE RECOGNITION
Revenues are recognized at the time equipment and related services are
provided, generally on a fee-per-procedure or daily fee basis.
(c) MEDICAL EQUIPMENT AND FURNITURE AND FIXTURES
Medical equipment and furniture and fixtures are stated at cost.
Depreciation and amortization are provided on the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Medical equipment...................................... 2 to 7 years
Furniture, fixtures and other equipment................ 2 to 5 years
</TABLE>
Repairs and maintenance expenditures are charged to expense as incurred.
Leased property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability.
Amortization of capitalized leased assets is computed on the
straight-line method over the term of the lease or estimated useful life
of the equipment, whichever is shorter.
Property acquired under capital leases consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Medical Equipment....................................... $ 1,854,000 --
Accumulated Amortization................................ -- --
------------ ------------
$ 1,854,000 --
------------ ------------
------------ ------------
</TABLE>
(d) OTHER ASSETS
Other assets include deferred financing costs and certain deferred costs
incurred in connection with the Company's contracts with health care
providers. These assets are being amortized using the straight-line
method over the terms of the related debt and contracts which range from
5 to 7 years. Accumulated amortization amounted to $258,000 in 1997 and
$178,000 in 1996.
12
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid short-term investments with an original maturity of three
months or less to be cash equivalents. At December 31, 1997, cash and
cash equivalents consisted primarily of cash invested in a money market
account and overnight investment account.
(f) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(g) USE OF ESTIMATES
Management of the Company has made several estimates and assumptions
relating to the reporting of certain assets, including the allowance for
doubtful receivables, and liabilities and the disclosure of contingent
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
The components of the allowance for doubtful receivables for the years
ended December 31, 1997 and 1996 were as follows:
<TABLE>
<S> <C>
Balance at January 1, 1996................................ $ 55,000
Charged to operating costs............................ --
Write-offs............................................ (11,000)
---------
Balance at December 31, 1996.............................. 44,000
Charged to operating costs............................ 40,000
Write-offs............................................ --
Other................................................. 17,000
---------
Balance at December 31, 1997.............................. $ 101,000
---------
---------
</TABLE>
(h) RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified
to conform to the 1997 presentation.
(i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, on January 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the
13
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amount by which the carrying amount of the assets exceeds the fair value
of the assets. Adoption of this Statement did not have any impact on the
Company's financial position, results of operations, or liquidity.
(2) LEASES
The Company leases certain medical equipment, office space and fixed site
MRI operating space. Future minimum lease commitments under noncancelable
leases with a term of 12 months or more are as follows at December 31,
1997:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
1998.............................................................. $ 446,000 $ 1,166,000
1999.............................................................. 432,000 1,062,000
2000.............................................................. 405,000 565,000
2001.............................................................. 378,000 341,000
2002.............................................................. 351,000 94,000
Thereafter........................................................ 322,000 --
------------ ------------
Total minimum lease payments.................................... 2,334,000 $ 3,228,000
------------
------------
Amounts representing interest..................................... (480,000)
------------
Present value of net minimum payments........................... 1,854,000
Current portion................................................... (309,000)
------------
Long-term portion of capital lease obligation................. $ 1,545,000
------------
------------
</TABLE>
Total operating lease expense for medical equipment amounted to $3,697,000
in 1997 and $3,140,000 in 1996. Other rent expense, which is included in
selling, general and administrative expenses, totaled $125,000 for 1997 and
$122,000 for 1996, respectively.
(3) INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 CURRENT DEFERRED TOTAL
- ---------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
U.S. Federal.............................................. $ 451,000 355,000 806,000
State and Local........................................... 149,000 57,000 206,000
---------- --------- ----------
600,000 412,000 1,012,000
---------- --------- ----------
---------- --------- ----------
YEAR ENDED DECEMBER 31, 1996
- ----------------------------------------------------------
U.S. Federal.............................................. 341,000 296,000 637,000
State and Local........................................... 70,000 28,000 98,000
---------- --------- ----------
$ 411,000 324,000 735,000
---------- --------- ----------
---------- --------- ----------
</TABLE>
14
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) INCOME TAXES (CONTINUED)
Income tax expense differed from the amount computed by applying the U.S.
federal income tax rate of 34% to pretax income in 1997 and 1996. As a result of
the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ---------------------------
% OF PRETAX % OF PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS
------------ --------------- ---------- ---------------
<S> <C> <C> <C> <C>
"Expected" tax expense....................................... $ 857,000 34% $ 624,000 34%
State corporation taxes, net of federal tax benefit.......... 136,000 5% 65,000 4%
Other........................................................ 19,000 1% 46,000 2%
------------ --- ---------- --
$ 1,012,000 40% $ 735,000 40%
------------ --- ---------- ---
------------ --- ---------- ---
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful receivables.................................................. $ 33,000 17,000
Option compensation expense......................................................... 43,000 43,000
Unamortized start-up and organization costs incurred prior to inception of business
operations........................................................................ -- 5,000
Compensated absences, principally due to accrual for financial reporting purposes... 41,000 34,000
Alternative minimum tax credit carryforward......................................... -- 373,000
Net operating loss carryforwards.................................................... -- 27,000
Other liabilities................................................................... 346,000 190,000
State tax credit.................................................................... -- 34,000
Other............................................................................... 3,000 9,000
------------ ------------
Total gross deferred tax assets................................................... 466,000 732,000
------------ ------------
Deferred tax liabilities
Medical equipment, furniture and fixtures, and other assets principally due to
differences in depreciation and amortization.................................... 1,267,000 1,121,000
------------ ------------
Total gross deferred tax liabilities.............................................. 1,267,000 1,121,000
------------ ------------
Net deferred tax liability.......................................................... $ 801,000 389,000
------------ ------------
------------ ------------
</TABLE>
Management has concluded that it is more likely than not that the Company
will have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by current tax law to allow for the
utilization of the deductible amounts generating the deferred tax asset and,
therefore, no valuation allowance is required.
(4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK
On April 3, 1992, 60,000 shares of $.01 par value series A redeemable
convertible cumulative preferred stock were issued to SMSI Holding, Inc., a
wholly owned subsidiary of Anthem Blue Cross and Blue Shield of Connecticut,
Inc. at $33.34 per share. Each share of series A preferred stock is
convertible
15
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK (CONTINUED)
into one share of common stock at any time after
the date of issuance. In the event of a public offering of common stock by the
Company, the preferred stock will automatically be converted into shares of
common stock, provided that the offering price per share and gross proceeds from
the offering are not less than $66.68 and $5,000,000 respectively.
On or after April 1, 1997, the series A preferred stock is redeemable at
$33.34 per share plus any unpaid dividends at the option of SMSI Holding,
Inc. Upon liquidation, dissolution or winding up of the Company, the holders
of the series A preferred stock shall be entitled to receive, before any
distribution is made to the holders of common stock of the Company, a
distribution of $33.34 per share plus any unpaid dividends. The series A
preferred stock accumulates a dividend at an annual rate of $2.33 per share
through March 31, 1994 and $3.00 per share from April 1, 1994 to March 31,
1997 payable upon a liquidation, dissolution or winding up, conversion or
redemption, consolidation or merger of the Company. The amount of accumulated
and unpaid series A preferred stock dividends was $820,000 at December 31,
1997. The holders of the series A preferred stock are entitled to one vote
per share of common stock into which the preferred stock is convertible.
(5) STOCKHOLDERS' EQUITY
On April 3, 1992, 33,500 shares of $.01 par value common stock were issued
to the founders of the Company.
The Company has a fixed option plan. Under the 1994 Employee Stock Option
Plan, the Company may grant options to its employees for up to 18,000 shares of
common stock. The exercise price of each option equals the fair value of the
Company's stock on the date of grant, and an option's maximum term is ten years.
Options generally vest over a period of one to three years. At December 31,
1997, all options were fully vested.
The Company has elected to adopt the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Accordingly, no compensation cost has been recognized for stock
options issued. The impact on net income in 1997 and 1996 had the Company
adopted FAS 123 would have been immaterial. Options granted, exercised and
outstanding under this plan were as follows:
<TABLE>
<CAPTION>
EXERCISE EXERCISE
1997 PRICE 1996 PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........................................ 14,790 -- 13,790 $ 18.00
Granted................................................................. -- -- 1,000 83.00
Exercised............................................................... -- -- -- --
--------- --------- -----------
Outstanding at end of year.............................................. 14,790 14,790
--------- ---------
--------- ---------
Fair value of options granted during the year........................... $ -- $ 36.65
--------- ---------
--------- ---------
</TABLE>
The fair value of stock options granted during 1996 were estimated on the
date of grant using the minimum value method with the following assumptions:
risk-free interest rate of 6.0 percent, expected life of 10 years, and no
dividends.
16
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) RELATED PARTY TRANSACTION
On April 3, 1992, the Company loaned $35,000, at an interest rate of 9%, to
an officer and common stockholder of the Company. Interest is due April 1st of
each year and 34% of the officer's annual bonus, if any, must be paid toward the
outstanding principal balance. The remaining balance of the note at December 31,
1997 and 1996 was $0 and $9,000, respectively, and is included in other
receivables.
The Company made advances to its employees and joint ventures which totaled
approximately $32,000 and $21,000 as of December 31, 1997 and 1996,
respectively. These advances are included in other receivables.
(7) SHORT-TERM BORROWINGS
The Company has a $1,500,000 line of credit from Anthem Blue Cross and Blue
Shield of Connecticut, Inc. Borrowings under this line bear interest at the
three-month LIBOR rate plus 2% (7.81% at December 31, 1997). The amounts
outstanding at December 31, 1997 and 1996 were $0 and $294,000, respectively.
The weighted average interest rate on the line of credit during 1997 and 1996
was 8.57%, respectively.
17
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) LONG-TERM DEBT
The following schedule summarizes long-term debt at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Term notes with banks:
$450,000, interest fixed at 7.90%; due in 48 equal monthly principal payments through
May 1, 1997......................................................................... $ -- 38,000
$2,500,000, interest fixed at 7.90% through November 1998, variable thereafter; due in
84 equal monthly principal payments through December 1, 2000........................ 1,071,000 1,429,000
$3,000,000, interest fixed at 9.50%; due in 60 equal monthly principal payments
through June 1, 1999................................................................ 900,000 1,500,000
$824,444, interest fixed at 9.65% through December 1, 1996, variable thereafter; due
in 47 equal monthly principal payments through October 1, 1998...................... 176,000 386,000
$1,950,000, interest fixed at 9.95% through January 1, 1998, variable thereafter; due
in 48 equal monthly principal payments through December 1, 1998..................... 487,000 975,000
$750,000, interest fixed at 9.40%; due in 36 equal monthly principal payments through
January 10, 1998.................................................................... -- 250,000
$900,000, interest fixed at 9.40%; due in 35 equal monthly principal payments through
January 10, 1998.................................................................... -- 308,000
$1,200,000, interest fixed at 8.75%; due in 48 equal monthly principal payments
through September 11, 1999.......................................................... 525,000 825,000
$2,100,000, interest fixed at 8.40%; due in 48 equal monthly principal payments
through December 14, 1999........................................................... 1,050,000 1,575,000
$475,000, interest fixed at 8.46%; due in 24 equal monthly principal payments through
December 31, 1998................................................................... 237,000 475,000
$795,000, interest fixed at 8.95%; due in 60 equal monthly principal payments through
February 28, 2002................................................................... 663,000 --
$950,000, interest fixed at 8.90%; due in 60 equal monthly principal payments through
August 1, 2002...................................................................... 887,000 --
$975,000, interest fixed at 8.49%; due in 60 equal monthly principal payments through
October 31, 2002.................................................................... 943,000 --
------------ ------------
6,939,000 7,761,000
Less current maturities............................................................... 3,227,000 3,314,000
------------ ------------
$ 3,712,000 4,447,000
------------ ------------
------------ ------------
</TABLE>
18
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998........................................................... $3,227,000
1999........................................................... 1,951,000
2000........................................................... 901,000
2001........................................................... 544,000
2002........................................................... 316,000
Thereafter..................................................... --
---------
$6,939,000
---------
---------
</TABLE>
The term notes contain covenants which, among other things, require
maintenance of certain ratios of liabilities to tangible net worth, debt service
coverage and minimum levels of liquid investments and profitability.
The term notes are secured by the medical equipment purchased with the note
proceeds, the related service contacts with hospital customers and other assets
of the Company.
The Company has a $5,000,000 capital expenditure line of credit with a
financial institution under which it finances equipment acquisitions on a
long-term basis. Interest is at market rates determined at the time of each
drawdown under the line. The unused portion of this line at December 31, 1997
was $5,000,000.
(9) CONTINGENCIES
The Company entered into an agreement in 1993 in which it became the
guarantor of a loan between Citrus Memorial Health Foundation, Inc., a customer,
and a bank. This loan had an outstanding principal balance of approximately
$577,000 at December 31, 1997. In September 1994, the Company entered into a
similar loan guarantee with Manchester Memorial Hospital and the same bank. This
loan had an outstanding principal balance of approximately $1,027,000 at
December 31, 1997.
On December 29, 1997, the Company entered in an agreement under which it
became a guarantor of a credit facility between Whitney Imaging Center, LLC
(WIC) and Shoreline Imaging Center, LLC (SIC) as the borrowers and a bank.
Proceeds from the credit facility are being used to finance the development of
the two multi-modality imaging centers owned by WIC and SIC and managed by the
Company. The credit facility is also guaranteed by the owners of WIC and SIC and
is secured by the assets of WIC, SIC and their owners. The Company's guaranty is
unsecured. The total amount committed by the bank under the credit facility is
$2,450,000. Outstanding borrowings under the facility at December 31, 1997
totaled $1,319,000.
In the event that the debtors default under these loans, the Company could
become liable for all unpaid interest and principal. As of December 31, 1997,
the debtors were current as to interest and principal payments under the loans.
19
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 1,642,000 1,013,000
Accounts receivables, net........................................................ 3,397,000 2,571,000
Other receivables................................................................ 239,000 6,000
Prepaid expenses and other assets................................................ 121,000 139,000
------------- -------------
Total current assets........................................................... 5,399,000 3,729,000
------------- -------------
Property and equipment:
Medical equipment, net........................................................... 12,174,000 10,705,000
Furniture, fixtures and other equipment, net..................................... 112,000 91,000
------------- -------------
Property and equipment, net.................................................... 12,286,000 10,796,000
------------- -------------
Other assets, net.................................................................. 660,000 546,000
------------- -------------
$ 18,345,000 15,071,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 235,000 326,000
Accrued compensation............................................................. 516,000 371,000
Accrued maintenance.............................................................. 258,000 126,000
Other accrued expenses and other liabilities..................................... 1,112,000 778,000
Current portion of long-term debt................................................ 2,993,000 3,304,000
Current portion of capital lease obligation...................................... 309,000 --
------------- -------------
Total current liabilities...................................................... 5,423,000 4,905,000
------------- -------------
Long-term debt..................................................................... 3,130,000 4,391,000
Accrued taxes...................................................................... 1,307,000 838,000
Deferred income taxes.............................................................. 912,000 419,000
Other liabilities.................................................................. 139,000 176,000
Long-term portion of capital lease obligation...................................... 1,468,000 --
------------- -------------
Total liabilities.............................................................. 12,379,000 10,729,000
------------- -------------
Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares
authorized, issued and outstanding, redeemable at $33.34 per share............... 2,000,000 2,000,000
Stockholders' equity:
Common stock..................................................................... -- --
Additional paid-in capital....................................................... 156,000 156,000
Retained earnings................................................................ 4,310,000 2,686,000
Less cost of treasury shares....................................................... (500,000) (500,000)
------------- -------------
Total stockholders' equity..................................................... 3,966,000 2,342,000
------------- -------------
$ 18,345,000 15,071,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues.............................................................................. $ 5,622,000 $ 5,085,000
------------ ------------
Operating costs and expenses:
Operating costs..................................................................... 2,067,000 1,735,000
Selling, general and administrative................................................. 845,000 706,000
Lease expense....................................................................... 686,000 989,000
Depreciation and amortization....................................................... 1,058,000 888,000
Interest expense, net of interest income of $15,000 and $1,000...................... 171,000 178,000
------------ ------------
Total operating costs and expenses................................................ 4,827,000 4,496,000
------------ ------------
Income before income taxes........................................................ 795,000 589,000
Income Taxes.......................................................................... 326,000 235,000
------------ ------------
Net Income........................................................................ $ 469,000 $ 354,000
------------ ------------
Retained earnings, beginning of period................................................ 3,841,000 2,332,000
------------ ------------
Retained earnings, end of period...................................................... 4,310,000 2,686,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 469,000 354,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 1,058,000 888,000
Change in assets and liabilities:
Increase in accounts receivable................................................. (178,000) (183,000)
Decrease (increase) in other receivables........................................ (187,000) 5,000
Increase in prepaid expenses and other current assets........................... (28,000) (49,000)
Increase in other assets........................................................ (82,000) (65,000)
Increase in accounts payable, accrued expenses and other liabilities............ (257,000) (176,000)
------------ ------------
Net cash provided by operating activities..................................... 795,000 774,000
------------ ------------
Cash flows used in investing activities:
Additions to medical equipment, furniture and fixtures.............................. (107,000) (68,000)
------------ ------------
Net cash used in investing activities......................................... (107,000) (68,000)
------------ ------------
Cash flows used in financing activities:
Net decrease in short-term borrowings............................................... -- (294,000)
Proceeds from long-term debt........................................................ -- 795,000
Repayment of long-term debt......................................................... (893,000) (861,000)
------------ ------------
Net cash used in financing activities......................................... (893,000) (360,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents.................................. (205,000) 346,000
Cash and cash equivalents, beginning of period........................................ 1,847,000 667,000
------------ ------------
Cash and cash equivalents, end of period.............................................. $ 1,642,000 1,013,000
------------ ------------
------------ ------------
Cash paid for income taxes............................................................ $ 68,000 236,000
------------ ------------
------------ ------------
Cash paid for interest................................................................ 159,000 170,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(1) BASIS OF PRESENTATION
In the opinion of management, the financial information reflects all
adjustments which are necessary to a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented and are of a normal recurring nature, unless otherwise disclosed
in this report.
The statements should be read in conjunction with the notes to the financial
statements of Signal Medical Services, Inc. (the Company) as of and for the
years ended December 31, 1997 and 1996.
(2) ACQUISITION BY INSIGHT HEALTH SERVICES CORP.
On May 18, 1998, the stock of the Company was acquired by InSight Health
Services Corp., a leading provider of diagnostic imaging and related
information services based in Newport Beach, California. The purchase price
consisted of $46 million (subject to certain post-closing adjustments),
including the assumption of indebtedness.
(3) NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about
Segments of an Enterprise and Related Information." FASB Nos. 130 and 131
are effective for fiscal years beginning after December 15, 1997, with
earlier adoption permitted. The Company believes that adoption of these
standards will not have a material impact on the Company.
23
<PAGE>
EXHIBIT 99.1 (B)
(b) (i) PRO FORMA FINANCIAL INFORMATION
INSIGHT HEALTH SERVICES CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Signal Pro
Historical Historical Acquisition Forma
InSight Signal Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 9,650 $ 1,642 $ - $ 11,292
Trade accounts receivable, net 21,674 3,397 - 25,071
Other receivables, net 330 239 - 569
Other current assets 2,149 121 - 2,270
--------- --------- --------- ---------
Total current assets 33,803 5,399 - 39,202
Property and equipment, net 46,745 12,286 4,309 (2) 63,340
Investment in partnerships 495 - - 495
Other assets net 2,471 660 3,131
Intangible assets, net 43,273 - 26,189 (1) 69,462
--------- --------- --------- ---------
$ 126,787 $ 18,345 $ 30,498 $ 175,630
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of equipment and other notes $ 5,706 $ 3,302 $ - $ 9,008
Accounts payable and accrued expenses 14,905 2,121 - 17,026
--------- --------- --------- ---------
Total current liabilities 20,611 5,423 - 26,034
Long term portion of equipment and other note 67,781 4,598 32,155 (1)
4,309 (2) 108,843
Other 680 2,358 - 3,038
--------- --------- --------- ---------
Total liabilities 89,072 12,379 36,464 137,915
--------- --------- --------- ---------
Minority interest 1,871 - - 1,871
--------- --------- --------- ---------
Redeemable convertible cumulative
preferred stock - 2,000 (2,000)(1) -
--------- --------- --------- ---------
Stockholders' equity
Convertible Series B preferred stock 23,923 - - 23,923
Convertible Series C preferred stock 13,173 - - 13,173
Common Stock 3 - - 3
Additional paid-in capital 23,366 156 (156)(1) 23,366
(Accumulated deficit) retained earnings (24,621) 4,310 (4,310)(1) (24,621)
Treasury stock - (500) 500 (1) -
--------- --------- --------- ---------
Total stockholders' equity 35,844 3,966 (3,966) 35,844
--------- --------- --------- ---------
$ 126,787 $ 18,345 $ 30,498 $ 175,630
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The pro forma condensed combined balance sheet as of March 31, 1998 reflects
the following pro forma adjustments:
(1) To record the acquisition of common stock of Signal for $32,155 in
borrowed funds and the resulting goodwill of $26,189.
(2) To record the acquisition of equipment for debt on equipment that is
currently under operating leases.
The above reflects the acquisition of Signal by InSight using the purchase
method of accounting. Under the principles of purchase accounting, the assets
and liabilities of Signal are stated at fair market value (FMV). For purposes
of these pro forma financial statements, the book value of Signal's assets
and liabilities are assumed to approximate FMV. The excess purchase price is
allocated to goodwill.
24
<PAGE>
(b) (ii)
INSIGHT HEALTH SERVICES CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Signal
Historical Historical Acquisition Pro Forma
InSight Signal Adjustments Combined
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 93,063 $ 19,331 $ - $ 112,394
----------- --------- ---------- ---------
Costs of services 52,070 9,390 - 61,460
Equipment leases 18,396 3,651 (1,518)(4) 20,529
Depreciation and amortization 9,871 3,354 1,309 (1) 15,396
---------
862 (2)
----------- --------- ---------- ---------
Costs of operations 80,337 16,395 653 97,385
----------- --------- ---------- ---------
Gross profit 12,726 2,936 (653) 15,009
Corporate operating expenses 7,431 - - 7,431
----------- --------- ---------- ---------
Income (loss) from company operations 5,295 2,936 (653) 7,578
Equity in earnings of unconsolidated
partnerships 468 - - 468
----------- --------- ---------- ---------
Operating income (loss) 5,763 2,936 (653) 8,046
Interest expense 4,055 720 2,894 (3) 7,669
----------- --------- ---------- ---------
Income (loss) before provision for taxes 1,708 2,216 (3,547) 377
Provision (benefit) for income taxes 427 887 (1,220)(5) 94
----------- --------- ---------- ---------
Net income (loss) $ 1,281 $ 1,329 $ (2,327) $ 283
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Income (loss) per common and preferred share:
Basic $ 0.25 $ 0.05
Diluted $ 0.24 $ 0.05
Weighted average common shares
outstanding:
Basic 5,215 5,215
Diluted 5,440 5,440
</TABLE>
The pro forma combined condensed statement of operations for the year ended
June 30, 1997 reflects the following acquisition adjustments:
(1) To record amortization of goodwill over 20 years.
(2) To record depreciation expense on operating leases purchased.
(3) To record interest expense for acquisition financing.
(4) To record the reversal of lease expense on operating leases purchased.
(5) To record the tax effect on the above entries at estimated effective
rates.
25
<PAGE>
(b) (iii)
INSIGHT HEALTH SERVICES CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Signal
Historical Historical Acquisition Pro Forma
InSight Signal Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 85,673 $ 16,095 $ - $ 101,768
--------- --------- --------- ---------
Costs of services 46,038 5,993 - 52,031
Equipment leases 12,983 2,412 (1,138)(4) 14,257
Depreciation and amortization 10,670 2,989 982 (1) 15,287
646 (2)
--------- --------- --------- ---------
Costs of operations 69,691 11,394 490 81,575
--------- --------- --------- ---------
Gross profit 15,982 4,701 (490) 20,193
Provision for supplemental service
fee termination 6,309 - 6,309
Corporate operating expenses 6,510 2,165 - 8,675
--------- --------- --------- ---------
Income (loss) from company operations 3,163 2,536 (490) 5,209
Equity in earnings of unconsolidated
partnerships 480 - - 480
--------- --------- --------- ---------
Operating income (loss) 3,643 2,536 (490) 5,689
Interest expense 4,665 492 2,170 (3) 7,327
--------- --------- --------- ---------
Income (loss) before provision for taxes (1,022) 2,044 (2,660) (1,638)
Provision (benefit) for income taxes 431 829 (997)(5) 263
--------- --------- --------- ---------
Net income (loss) $ (1,453) $ 1,215 $ (1,663) $ (1,901)
--------- --------- --------- ---------
--------- --------- --------- ---------
Income (loss) per common and preferred share:
Basic $ (0.19) $ (0.25)
Diluted $ (0.19) $ (0.25)
Weighted average common shares
outstanding:
Basic 7,590 7,590
Diluted 7,590 7,590
</TABLE>
The pro forma combined condensed statement of operations for the nine months
ended March 31, 1998 reflects the following acquisition adjustments:
(1) To record amortization of goodwill over 20 years.
(2) To record depreciation expense on operating leases purchased.
(3) To record interest expense for acquisition financing.
(4) To record the reversal of lease expense on operating leases purchased.
(5) To record the tax effect on the above entries at estimated
effective rates.
26
