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 December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________.
Commission file number 0-28622
INSIGHT HEALTH SERVICES CORP.
(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
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 2,738,637
shares of Common Stock as of February 17, 1998.
The number of pages in this Form 10-Q is 19.
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1997
(unaudited) and June 30, 1997 3-4
Condensed Consolidated Statements of Operations (unaudited)
for the six months ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended December 31, 1997 and 1996 6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended December 31, 1997 and 1996 7
Notes to Condensed Consolidated Financial Statements 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31, June 30,
1997 1997
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ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 11,785 $ 7,135
Trade accounts receivable, net 20,806 15,645
Other receivables, net 283 358
Other current assets 2,645 1,554
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Total current assets 35,519 24,692
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $20,010 and $16,203, respectively 47,860 34,488
INVESTMENT IN PARTNERSHIPS 463 402
OTHER ASSETS 2,507 5,468
INTANGIBLE ASSETS, net 44,271 33,272
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$ 130,620 $ 98.322
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The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
December 31, June 30,
1997 1997
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(Unaudited)
LIABILITIES, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 6,107 $ 15,462
Accounts payable and other accrued expenses 16,306 14,970
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Total current liabilities 22,413 30,432
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LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 71,792 57,733
Other long-term liabilities 702 1,472
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Total long-term liabilities 72,494 59,205
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MINORITY INTEREST 2,015 2,000
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STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series A preferred stock,
2,501,760 shares outstanding at June 30, 1997 - 6,750
Convertible Series B preferred stock,
25,000 shares outstanding at December 31, 1997 23,923 -
Convertible Series C preferred stock,
27,953 shares outstanding at December 31, 1997 13,173 -
Common stock, $.001 par value, 25,000,000 shares authorized:
2,734,725 and 2,714,725 shares outstanding at December 31, 1997
and June 30, 1997, respectively 3 3
Additional paid-in capital 23,150 23,100
Accumulated deficit (26,551) (23,168)
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Total stockholders' equity 33,698 6,685
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$ 130,620 $ 98,322
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---------- ----------
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
4
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share and per share data)
Six Months Ended
December 31,
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1997 1996
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REVENUES:
Contract services $ 26,340 $ 23,590
Patient services 28,800 20,470
Other 1,975 1,048
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Total revenues 57,115 45,108
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COSTS OF OPERATIONS:
Costs of services 29,767 24,750
Provision for doubtful accounts 1,046 858
Equipment leases 9,002 9,091
Depreciation and amortization 6,766 4,732
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Total costs of operations 46,581 39,431
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GROSS PROFIT 10,534 5,677
CORPORATE OPERATING EXPENSES 4,256 3,655
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION 6,309 -
---------- ----------
INCOME (LOSS) FROM COMPANY OPERATIONS (31) 2,022
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 324 245
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OPERATING INCOME 293 2,267
INTEREST EXPENSE, Net 3,245 1,795
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INCOME (LOSS) BEFORE INCOME TAXES (2,952) 472
PROVISION FOR INCOME TAXES 431 104
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NET INCOME (LOSS) $ (3,383) $ 368
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BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.49) $ 0.07
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 6,862,631 5,433,846
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share and per share data)
Three Months Ended
December 31,
-------------------------
1997 1996
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REVENUES:
Contract services $ 12,928 $ 11,867
Patient services 14,987 10,477
Other 1,364 648
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Total revenues 29,279 22,992
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COSTS OF OPERATIONS:
Costs of services 15,577 12,568
Provision for doubtful accounts 544 416
Equipment leases 4,490 4,571
Depreciation and amortization 3,559 2,389
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Total costs of operations 24,170 19,944
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GROSS PROFIT 5,109 3,048
CORPORATE OPERATING EXPENSES 1,898 1,886
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION 6,309 -
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INCOME (LOSS) FROM COMPANY OPERATIONS (3,098) 1,162
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 170 138
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OPERATING INCOME (LOSS) (2,928) 1,300
INTEREST EXPENSE, Net 1,559 934
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INCOME (LOSS) BEFORE INCOME TAXES (4,487) 366
PROVISION FOR INCOME TAXES - 104
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NET INCOME (LOSS) $ (4,487) $ 262
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BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.53) $ 0.05
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 8,508,776 5,432,977
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
Six Months Ended
December 31,
-------------------------
1997 1996
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OPERATING ACTIVITIES:
Net income (loss) $ (3,383) $ 368
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Total depreciation and amortization 6,839 4,857
Amortization of deferred gain on debt restructure (1,319) (544)
Provision for supplemental service fee termination 6,309 -
Cash provided by (used in) changes in operating working capital:
Receivables, net (3,805) (45)
Other current assets (1,191) (741)
Accounts payable and other current liabilities 2,576 109
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Net cash provided by operating activities 6,026 4,004
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INVESTING ACTIVITIES:
Additions to property and equipment (13,452) (1,393)
Acquisitions of imaging centers (12,890) (2,766)
Other (939) 588
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Net cash used in investing activities (27,281) (3,571)
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FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 23,346 -
Stock options and warrants exercised 50 -
Payment of loan fees (2,210) -
Payments on debt and capital lease obligations (78,455) (5,074)
Proceeds from issuance of debt 83,159 5,049
Other 15 -
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Net cash provided by (used in) financing activities 25,905 (25)
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INCREASE IN CASH AND CASH EQUIVALENTS 4,650 408
CASH AND CASH EQUIVALENTS:
Beginning of period 7,135 6,864
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End of period $ 11,785 $ 7,272
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SUPPLEMENTAL INFORMATION:
Interest paid $ 3,300 $ 1,881
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. MERGER AND RECAPITALIZATION
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 (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 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
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 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 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 described below, GE surrendered its rights under the
amended equipment service agreement to receive the supplemental service fee.
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).
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
8
service agreement to receive supplemental service fee payments equal to 14%
of pretax income 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, and (iii) exchanged all of its InSight
Series A Preferred Stock 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 was increased
by an additional $25 million on December 19, 1997.
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.
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 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 be initially appointed by the Board, and will
thereafter be elected by the common stockholders. The Board currently
consists 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.
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
9
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.
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.
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 six months ended December 31, 1997, are not necessarily
indicative of the results to be achieved for the full fiscal year.
Certain reclassifications have been made to conform prior year amounts to the
current year presentation.
3. INVESTMENTS IN PARTNERSHIPS
Set forth below is the summarized income statement data of the Company's
unconsolidated partnerships (amounts in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(unaudited) (unaudited)
Net revenues $ 1,188 $ 1,127 $ 2,480 $ 2,152
Expenses 825 812 1,720 1,592
-------- -------- -------- --------
Net income $ 363 $ 315 $ 760 $ 560
-------- -------- -------- --------
-------- -------- -------- --------
Equity in earnings
of partnerships $ 170 $ 138 $ 324 $ 245
-------- -------- -------- --------
-------- -------- -------- --------
10
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):
December 31, June 30,
1997 1997
------------ ------------
(unaudited)
Condensed Combined
Balance Sheet Data:
Current assets $ 2,804 $ 2,596
Total assets 4,083 4,288
Current liabilities 794 727
Long-term debt 240 424
Minority interest equity 1,663 1,702
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(unaudited) (unaudited)
Condensed Combined Statement
of Operations Data:
Net revenues $ 1,820 $ 1,736 $ 3,648 $ 3,487
Expenses 1,340 1,294 2,574 2,556
Provision for center profit distribution 238 230 542 481
-------- -------- -------- --------
Net income $ 242 $ 212 $ 532 $ 450
-------- -------- -------- --------
-------- -------- -------- --------
The provision for center profit distribution shown above represents the minority
interest in the income of these combined entities.
5. INCOME PER COMMON SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), Earnings Per Share (EPS). SFAS No. 128 replaces primary
EPS and fully diluted EPS with basic EPS and diluted EPS. Basic EPS is computed
by dividing reported earnings by weighted average shares outstanding. Diluted
EPS is computed in the same way as the previously used fully diluted EPS, except
that the calculation now uses the average share price for the reporting period
to compute dilution from options and warrants under the treasury stock method.
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. For the periods ended December 31, 1996, basic
EPS is equal to diluted EPS. Common stock equivalents relating to options,
warrants and convertible preferred stock are not included for the periods ended
December 31, 1997 due to their antidilutive effect.
11
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 36 mobile magnetic resonance imaging ("MRI") facilities
("Mobile Facilities"), 29 fixed-site MRI facilities ("Fixed Facilities"), 13
multi-modality imaging centers ("Centers"), one Leksell Stereotactic Gamma Unit
treatment center ("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 four to date 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 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 $2.3 million.
In November 1997, InSight completed the acquisition of a Fixed Facility in
Redwood City, California. The transaction included the purchase of certain
assets, primarily diagnostic equipment. The Bank Financing discussed below
was used to finance the purchase price of approximately $0.3 million.
12
In November, 1997, the Company completed the acquisition of a Center in Las
Vegas, Nevada. The transaction included the purchase of certain assets,
primarily land, building and diagnostic equipment. The Bank Financing discussed
below was used to finance the purchase price of approximately $10.3 million.
As discussed below, InSight has an acquisition facility in the amount of $75
million, of which approximately $62 million remains available to the Company.
InSight believes this facility will enhance its ability to participate in the
industry consolidation.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
REVENUES: Revenues increased approximately $12.0 million, or approximately
26.6%, for the six months ended December 31, 1997, compared to the same period
in 1996. The increase in revenues was due primarily to the acquisitions
discussed above (approximately $7.8 million) and an increase in contract
services, patient services and other revenues at existing facilities
(approximately $4.2 million).
Contract services revenues increased approximately $2.8 million, or
approximately 11.7%, for the six months ended December 31, 1997, compared to the
same period in 1996. This increase was due primarily to the acquisitions
discussed above (approximately $1.0 million) and an increase in revenues at
existing facilities (approximately $1.8 million). The increase at existing
facilities was due to higher utilization (approximately 8%) offset by reductions
in reimbursement (approximately 2%) from customers, primarily hospitals.
InSight's contract services revenues, primarily earned by its Mobile
Facilities, represent approximately 46% 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 $8.3 million, or approximately
40.7%, for the six months ended December 31, 1997, compared to the same period
in 1996. The increase in revenues was due primarily to the acquisitions
discussed above (approximately $6.8 million), and an increase in revenues at
existing facilities (approximately $1.5 million). The increase at existing
facilities was due to higher utilization (approximately 11%) partially offset by
nominal 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 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 $7.2
million, or approximately 18.1%, for the six months ended December 31, 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 $5.0
million), and an increase in costs at existing facilities (approximately $2.2
million). The increase at existing facilities was due primarily to increases
in
13
costs of services and depreciation and amortization.
Costs of services, including the provision for doubtful accounts, increased
approximately $5.2 million, or approximately 20.3%, for the six months ended
December 31, 1997, compared to the same period in 1996. The increase in costs
was due primarily to the acquisitions discussed above (approximately $3.8
million) and an increase in costs at existing facilities (approximately $1.4
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 $1.9
million, or approximately 14.1%, for the six months ended December 31, 1997,
compared to the same period in 1996. The increase was due primarily to the
acquisitions discussed above (approximately $1.3 million) and an increase in
costs at existing facilities (approximately $0.6 million). The increase at
existing facilities was primarily due to the Company upgrading its existing
diagnostic medical equipment.
GROSS PROFIT: Gross profit increased approximately $4.9 million during the six
months ended December 31, 1997, compared to the same period in 1996. The
increase was due to the acquisitions discussed above (approximately $2.8
million), and an increase at existing facilities (approximately $2.1 million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately $0.6 million for the six months ended December 31, 1997, compared
to the same period in 1996. The increase was primarily due to additional
consulting, legal and travel costs associated with the Company's acquisition
activities.
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the
Recapitalization and Bank Financing discussed below, the Company issued to GE
7,000 shares of Series C Preferred Stock to terminate GE's rights to receive
supplemental service fee payments equal to 14% of InSight's pre-tax income. The
Series C Preferred Stock was valued at $7.0 million and the Company recorded a
one-time provision of approximately $6.3 million, net of amounts previously
accrued, for the Preferred Stock issuance.
INTEREST EXPENSE NET: Interest expense, net increased approximately $1.5
million for the six months ended December 31, 1997, compared to the same
period in 1996. The increase was due primarily to additional debt related to
the acquisitions discussed above (approximately $1.5 million) and additional
debt related to the Company upgrading its existing diagnostic medical
equipment, offset by reduced interest as a result of (i) the reduction in
interest rate and the extinguishment of approximately $23 million in
long-term debt as a result of the Recapitalization and Bank Financing
discussed below (approximately $0.5 million), and (ii) amortization of
long-term debt.
PROVISION FOR INCOME TAXES: During the six months ended December 31, 1997,
the Company recorded a provision for income taxes of approximately $431,000.
The provision was due primarily to increased income from the Company's
operations and reflects the anticipated tax rate for the full fiscal year.
INCOME (LOSS) PER COMMON SHARE: On a basic and diluted basis, net (loss) per
common share was ($0.49) for the six months ended December 31, 1997, compared
to net income per common share of $0.07 for the same period in 1996.
Excluding the one-time provision for supplemental service fee termination,
net income per common share on a diluted basis would have been $0.42. The
improvement in net income per common share before provision for supplemental
service fee termination is the result of (i) increased gross profit, (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.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
REVENUES: Revenues increased approximately $6.3 million, or approximately
27.3%, for the three months ended December 31, 1997, compared to the same period
in 1996. The increase in revenues was due primarily to the acquisitions
discussed above (approximately $4.3 million) and an increase in contract
services, patient services and other revenues at existing facilities
(approximately $2.0 million).
Contract services revenues increased approximately $1.1 million, or
approximately 8.9%, for the three months
14
ended December 31, 1997, compared to the same period in 1996. This increase
was due primarily to the acquisitions discussed above (approximately $0.6
million) and an increase in revenues at existing facilities (approximately
$0.5 million). The increase at existing facilities was due to higher
utilization (approximately 6%) offset by reductions in reimbursement
(approximately 2%) from customers, primarily hospitals.
Patient services revenues increased approximately $4.5 million, or approximately
43.0%, for the three months ended December 31, 1997, compared to the same period
in 1996. The increase in revenues was due primarily to the acquisitions
discussed above (approximately $3.8 million), and an increase in revenues at
existing facilities (approximately $0.7 million). The increase at existing
facilities was due to higher utilization (approximately 6%) partially offset by
nominal declines in reimbursement from third party payors.
COSTS OF OPERATIONS: Costs of operations increased approximately $4.2 million,
or approximately 21.2%, for the three months ended December 31, 1997, compared
to the same period in 1996. This increase was due primarily to the acquisitions
discussed above (approximately $2.9 million), and an increase in costs at
existing facilities (approximately $1.3 million). The increase at existing
facilities was due primarily to increases in costs of services and depreciation
expense, primarily related to the Company upgrading its existing diagnostic
medical equipment.
Costs of services, including the provision for doubtful accounts, increased
approximately $3.1 million, or approximately 24.2%, for the three months ended
December 31, 1997, compared to the same period in 1996. The increase in costs
was due primarily to the acquisitions discussed above (approximately $2.1
million) and an increase in costs at existing facilities (approximately $1.0
million). The increase in costs at existing facilities was due primarily to (i)
salary and benefits and (ii) an increase in service supplies, offset by reduced
costs in equipment maintenance.
Equipment leases and depreciation and amortization increased approximately $1.1
million, or approximately 15.6%, for the three months ended December 31, 1997,
compared to the same period in 1996. The increase was due primarily to the
acquisitions discussed above (approximately $0.7 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
diagnostic medical equipment.
GROSS PROFIT: Gross profit increased approximately $2.1 million during the
three months ended December 31, 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 $0.7 million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately $0.1 million for the three months ended December 31, 1997,
compared to the same period in 1996. The increase was primarily due to
additional consulting and travel costs associated with the Company's acquisition
activities.
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the
Recapitalization and Bank Financing discussed below, the Company issued to GE
7,000 shares of Series C Preferred Stock to terminate GE's rights to receive
supplemental service fee payments equal to 14% of InSight's pre-tax income.
The Series C Preferred Stock was valued at $7.0 million and the Company
recorded a one-time provision of approximately $6.3 million , net of amounts
previously accrued, for the Preferred Stock issuance.
INTEREST EXPENSE, NET: Interest expense, net increased approximately $0.6
million for the three months ended December 31, 1997, compared to the same
period in 1996. The increase was due primarily to additional debt related to
the acquisitions discussed above (approximately $0.8 million) and additional
debt related to the Company upgrading its existing diagnostic medical
equipment, offset by reduced interest as a result of (i) the reduction in
interest rate and the extinguishment of approximately $23 million in
long-term debt as a result of the Recapitalization and Bank Financing
discussed below (approximately $0.5 million), and (ii) amortization of
long-term debt.
PROVISION FOR INCOME TAXES: During the three months ended December 31, 1997,
the Company did not record a provision for income taxes due to the loss
resulting from the provision for supplemental service fee termination.
15
INCOME (LOSS) PER COMMON SHARE: On a basic and diluted basis, net income
(loss) per common share was ($0.53) for the three months ended December 31,
1997, compared to net income per common share of $0.05 for the same period in
1996. Excluding the one-time provision for supplemental service fee
termination, net income per common share on a diluted basis would have been
$0.21. The improvement in net income per common share before the provision
for supplemental service fee termination is the result of (i) increased gross
profit, (ii) an increase in earnings from unconsolidated partnerships, and
(iii) a reduction in the provision for income taxes offset by (i) increased
corporate operating expenses and (ii) increased interest expense.
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 six 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, and issued to GE an additional
20,953 shares of Series C Preferred Stock 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 was
increased by an additional $25 million on December 19, 1997. 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.
Working capital increased to approximately $13.1 million at December 31, 1997
from a deficit of approximately $5.7 million at June 30, 1997. This increase in
working capital of approximately $18.8 million is primarily due to
16
(i) net income before depreciation and amortization, (ii) the repayment of
approximately $23.0 million in long-term debt, and (iii) 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, of which $14 million
was available to the Company as of December 31, 1997.
Cash and cash equivalents increased to approximately $11.8 million at December
31, 1997 from approximately $7.1 million at June 30, 1997. This increase of
approximately $4.7 million resulted primarily from (i) net income before
depreciation, amortization and provision for supplemental service fee
(approximately $8.4 million), (ii) proceeds from issuance of preferred stock
(approximately $23.3 million), (iii) proceeds from issuance of debt, net of loan
fees (approximately $80.9 million), and (iv) an increase in accounts payable and
other current liabilities. The increase was offset by (i) payments on long-term
debt (approximately $78.4 million), (ii) additions to property and equipment
(approximately $13.5 million), (iii) acquisitions of imaging centers
(approximately $12.9 million), and (iv) an increase in receivables and other
current assets.
The Company has committed to purchase, at an aggregate cost of approximately
$5.6 million, three MRI systems for delivery during the quarter ending March
31, 1998. 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 $24 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. As of December 31, 1997, the Company has
installed three of the open MRI systems.
The Company has assessed and continues to assess the impact of the Year 2000
Issue on its reporting systems and operations. The Year 2000 Issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. As the century date occurs, date sensitive systems
may recognize the Year 2000 as 1900 or not at all. This inability to recognize
or properly treat Year 2000 may cause the Company's systems to process critical
financial and operational information incorrectly. The Company has developed a
plan to modify existing computer systems and applications, but the Company has
not determined the final amounts necessary to modify existing computer systems
and applications. If the Company's remediation plan is not successful, there
could be a significant disruption of the Company's ability to transact business
with its customers and suppliers.
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 ("SEC").
17
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) The following is a list of securities sold by the Company during
the period covered by this report on Form 10-Q which, pursuant to the
exemption provided under Section 4(2) of the Securities Act of 1933, as
amended ("Securities Act"), were not registered under the Securities Act:
1. On October 14, 1997, the Company issued to Carlyle, in
consideration of a $25 million cash investment in the Company, 25,000 shares
of Series B Preferred Stock and warrants to purchase up to 250,000 shares of
Common Stock at the current exercise price of $10.00 per share. The Company
also issued to GE (i) on October 14, 1997, in consideration of the surrender
of GE's rights to the supplemental service fee described in Part I, Item 2
above, 7,000 shares of Series C Preferred Stock and warrants to purchase up
to 250,000 shares of Common Stock at the current exercise price of $10.00 per
share, and (ii) on November 20, 1997, in exchange for all of GE's InSight
Series A Preferred Stock, an additional 20,953 shares of Series C Preferred
Stock.
2. On November 6, 1997, the Company issued to the Estate of Cal
Kovens, pursuant to the exercise of warrants and in consideration of a cash
payment of $50,000, 20,000 shares of Common Stock.
3. On October 14, 1997, in lieu of an automatic grant under the
Company's 1996 Directors' Stock Option Plan to the two directors elected by
the holders of the Series B Preferred Stock, at the request of such directors
the Company issued to TC Group, LLC, a Carlyle affiliate, a warrant to
purchase 30,000 shares of Common Stock at an exercise price of $7.25 per
share, which vests cumulatively at the rate of 833.33 shares per month and is
exercisable at any time up to October 14, 2007. On November 20, 1997, in lieu
of an automatic grant under the Company's 1996 Directors' Stock Option Plan to
the director elected by the holder of the Series C Preferred Stock, at the
request of such director the Company issued to GE a warrant to purchase
15,000 shares of Common Stock at an exercise price of $10.00 per share, which
vests cumulatively at the rate of 416.67 shares per month and is exercisable
at any time up to November 20, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)-(c) On October 14, 1997, in accordance with the terms of the Series
B Preferred Stock, each of David W. Dupree and Glenn A. Youngkin was elected a
director by the holders of the Series B Preferred Stock acting by written
consent. On November 20, 1997, in accordance with the terms of the Series C
Preferred Stock, Michael E. Aspinwall was elected a director by the holder of
the Series C Preferred Stock acting by written consent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.29 Credit Agreement dated as of October 14, 1997 among the
Company as Borrower, certain subsidiaries of the Company
as Guarantors, the several lenders named therein and
NationsBank, N.A. as lender and agent, filed herewith.
10.30 First Amendment to Credit Agreement dated as of November 17,
1997, filed herewith.
10.31 Second Amendment to Credit Agreement and Assignment dated as
December 19, 1997, file herewith.
(b) REPORTS ON FORM 8-K.
Amendments to current reports on Form 8-K/A were filed with the SEC
by the Company on August 15, 1997 and September 15, 1997 relating
to the acquisition of certain assets of Mobile Imaging Consortium,
Limited Partnership and Mobile Imaging Consortium, New Hampshire,
and relating to the acquisition of certain assets of Desmond L.
Fischer, M.D. (d/b/a/ Chattanooga Outpatient Center), respectively.
18
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
February 17, 1998
19