SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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
----------------------------------- -------------------------
(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)
(949) 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: 2,808,923 shares of Common
Stock as April 30, 1998.
The number of pages in this Form 10-Q is 21.
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 1998 (unaudited) and June 30, 1997 3-4
Condensed Consolidated Statements of Operations (unaudited)
for the nine months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended March 31, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13-19
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
March 31, June 30,
1998 1997
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 9,650 $ 7,135
Trade accounts receivable, net 21,674 15,645
Other receivables, net 330 358
Other current assets 2,149 1,554
--------- ---------
Total current assets 33,803 24,692
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $26,989 and $16,203, respectively 46,745 34,488
INVESTMENT IN PARTNERSHIPS 495 402
OTHER ASSETS 2,471 5,468
INTANGIBLE ASSETS, net 43,273 33,272
--------- ---------
$ 126,787 $ 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 data)
March 31, June 30,
1998 1997
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDER EQUITY
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 5,706 $ 15,462
Accounts payable and other accrued expenses 14,905 14,970
--------- ---------
Total current liabilities 20,611 30,432
--------- ---------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 67,781 57,733
Other long-term liabilities 680 1,472
--------- ---------
Total long-term liabilities 68,461 59,205
--------- ---------
MINORITY INTEREST 1,871 2,000
--------- ---------
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 as March 31, 1998 23,932 -
Convertible Series C preferred stock,
27,953 shares outstanding at March 31, 1998 13,173 -
Common stock, $.001 par value, 25,000,000 shares authorized:
2,799,463 and 2,714,725 shares outstanding at March 31, 1998
and June 30, 1997, respectively 3 3
Additional paid-in capital 23,366 23,100
Accumulated deficit (24,621) (23,168)
--------- ---------
Total stockholders' equity 35,844 6,685
--------- ---------
$ 126,787 $ 98,322
--------- ---------
--------- ---------
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)
Nine Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
REVENUES:
Contract services $ 39,186 $ 35,186
Patient services 43,855 31,153
Other 2,632 1,790
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Total revenues 85,673 68,129
--------- ---------
COSTS OF OPERATIONS:
Costs of services 44,513 37,386
Provision of doubtful accounts 1,525 1,116
Equipment leases 12,983 13,822
Depreciation and amortization 10,670 7,203
--------- ---------
Total costs of operations 69,691 59,527
--------- ---------
GROSS PROFIT 15,982 8,602
CORPORATE OPERATING EXPENSES 6,510 5,343
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION 6,309 -
--------- ---------
INCOME FROM COMPANY OPERATIONS 3,163 3,259
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 480 364
--------- ---------
OPERATING INCOME 3,643 3,623
INTEREST EXPENSE, net 4,665 2,741
--------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,022) 882
PROVISION FOR INCOME TAXES 431 134
--------- ---------
NET INCOME (LOSS) $ (1,453) $ 748
--------- ---------
--------- ---------
INCOME (LOSS) PER COMMON AND PREFERRED SHARE:
Basic $ (0.19) $ 0.14
--------- ---------
--------- ---------
Diluted $ (0.19) $ 0.14
--------- ---------
--------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND PREFERRED SHARES OUTSTANDING:
Basic 7,589,549 5,213,882
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--------- ---------
Diluted 7,589,549 5,444,308
--------- ---------
--------- ---------
The accompanying notes are an integral part of these
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
March 31,
--------------------------
1998 1997
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REVENUES:
Contract services $ 12,846 $ 11,596
Patient services 15,056 10,695
Other 657 742
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Total revenues 28,559 23,033
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COSTS OF OPERATIONS:
Costs of services 14,745 12,647
Provision for doubtful accounts 480 258
Equipment leases 3,981 4,732
Depreciation and amortization 3,905 2,471
--------- ---------
Total costs of operations 23,111 20,108
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GROSS PROFIT 5,448 2,925
CORPORATE OPERATING EXPENSES 2,254 1,688
--------- ---------
INCOME FROM COMPANY OPERATIONS 3,194 1,237
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 156 120
--------- ---------
OPERATING INCOME 3,350 1,357
INTEREST EXPENSE, net 1,420 947
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,930 410
PROVISION FOR INCOME TAXES - 30
--------- ---------
NET INCOME $ 1,930 $ 380
--------- ---------
--------- ---------
INCOME (LOSS) PER COMMON AND PREFERRED SHARE:
Basic $ 0.21 $ 0.07
--------- ---------
--------- ---------
Diluted $ 0.20 $ 0.07
--------- ---------
--------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND PREFERRED SHARES OUTSTANDING:
Basic 9,075,693 5,216,485
--------- ---------
--------- ---------
Diluted 9,493,304 5,438,545
--------- ---------
--------- ---------
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)
Nine Months Ended
March 31,
--------------------------
1998 1997
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OPERATING ACTIVITIES:
Net income (loss) $ (1,453) $ 748
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Total depreciation and amortization 10,786 7,360
Amortization of deferred gain on debt restructure (1,355) (797)
Provision for supplemental service fee termination 6,309 -
Cash provided by (used in) changes in operating working capital:
Receivables, net (4,720) (466)
Other current assets (695) (490)
Accounts payable and other current liabilities 1,189 281
--------- ---------
Net cash provided by operating activities 10,061 6,636
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (15,233) (2,407)
Acquisitions of imaging centers (12,890) (2,766)
Other (988) 351
--------- ---------
Net cash used in investing activities (29,111) (4,822)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 23,346 -
Stock options and warrants exercised 266 -
Payment of loan fees (2,210) -
Payments on debt and capital lease obligations (82,985) (7,727)
Proceeds from issuance of debt 83,277 5,139
Other (129) 414
--------- ---------
Net cash provided by (used in) financing activities 21,565 (2,174)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,515 (360)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,135 6,864
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End of period $ 9,650 $ 6,504
--------- ---------
--------- ---------
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,476 $ 1,969
--------- ---------
--------- ---------
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 was convertible into such number of shares of Common
Stock representing approximately 48% of Common Stock outstanding at the
effective time of the Merger (after giving effect to such conversion).
Under an amended equipment 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
8
at an exercise price of $10.00 per share; (b) GE (i) surrendered its rights
under the amended equipment service agreement to receive supplemental service
fee payments equal to 14% of pretax income 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 an 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 GE, 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 financing (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. On
December 19, 1997, the Bank Financing was increased to a total of $150
million by converting $10 million of outstanding debt under the acquisition
facility to the seven-year tranche (which was thereby increased to $40
million) and increasing the acquisition facility to $65 million.
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
9
achieve representation on the Board proportionate to their respective common
stock ownership percentages on an as-if-converted basis but would limit such
representation to less than two thirds of the Board of Directors for a certain
period of time. The Series D Preferred Stock has a liquidation preference of
$0.001 per share but no mandatory or optional redemption provision. It will
participate in any dividends paid with respect to the Common Stock and is
convertible into 6,322,660 shares of Common Stock.
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 (SEC) 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 nine months ended March 31, 1998, 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):
Nine Months Ended Three Months Ended
March 31, March 31,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
(unaudited) (unaudited)
Net revenues $ 3,685 $ 3,211 $ 1,205 $ 1,059
Expenses 2,567 2,376 847 784
--------- --------- --------- ---------
Net income $ 1,118 $ 835 $ 358 $ 275
--------- --------- --------- ---------
--------- --------- --------- ---------
Equity in earnings
of partnerships $ 480 $ 364 $ 156 $ 120
--------- --------- --------- ---------
--------- --------- --------- ---------
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):
March 31, June 30,
1998 1997
----------- ----------
(Unaudited)
Condensed Combined Balance Sheet Data:
Current assets $ 3,197 $ 2,596
Total assets 4,494 4,288
Current liabilities 1,149 727
Long-term debt 240 424
Minority interest equity 1,699 1,702
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited) (unaudited)
Condensed Combined Statement
of Operations Data:
Total revenues $ 4,988 $ 5,310 $ 1,340 $ 1,823
Costs of operations 3,614 3,825 1,040 1,269
Provision for center profit distribution 700 771 158 290
--------- --------- --------- ---------
Gross profit $ 674 $ 714 $ 142 $ 264
--------- --------- --------- ---------
--------- --------- --------- ---------
The provision for center profit distribution shown above represents the minority
interest in the income of these combined entities.
4. INCOME (LOSS) PER 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 EPS is equal to the weighted average
number of common and preferred shares outstanding during the respective
period. Since the Preferred Stock has no stated dividend rate and
participates in any cash dividends paid with respect to the Common Stock, the
convertible amounts are included in the computation of basic EPS. Dilution
relating to options and warrants are not included for the nine months ended
March 31, 1998 due to their antidilutive effect. There were no adjustments
to net income (loss) (the numerator) for purposes of computing EPS.
11
A reconciliation of basic and diluted share computations is as follows:
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Average common stock outstanding 2,731,105 2,712,122 2,753,037 2,714,725
Effect of preferred stock 4,858,444 2,501,760 6,322,656 2,501,760
---------- ---------- ---------- ----------
Denominator for basic EPS 7,589,549 5,213,882 9,075,693 5,216,485
Dilutive effect of stock options
and warrants - 230,426 417,611 222,060
---------- ---------- ---------- ----------
7,589,549 5,444,308 9,493,304 5,438,545
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
12
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 25 states throughout the United States. As of April 1, 1998, InSight's
services were provided through a network of 36 mobile magnetic resonance imaging
("MRI") facilities ("Mobile Facilities"), 28 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, Texas,
New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio).
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. The business strategy of
InSight is primarily focused on the following components: (i) expanding its
existing regional networks through geographically disciplined acquisitions; (ii)
pursuing opportunities within its existing regional networks to optimize
utilization and increase overall utilization; (iii) broadening its range of
services to managed care organizations; and (iv) introducing new products,
including development of a network of open MRI systems within its regional
networks and development of a radiology co-source product where InSight will
provide management services for radiology departments within hospitals and
multi-specialty physician groups. InSight believes that long-term viability is
contingent upon its ability to successfully execute its business strategy.
In fiscal 1997, InSight completed three acquisitions as follows: a Fixed
Facility in Hayward, California; Mobile Facilities in Maine and New
Hampshire; and a Center in Chattanooga, Tennessee. All three transactions
included the purchase of assets and assumption of certain equipment related
liabilities. The cumulative purchase price for these acquisitions was
approximately $18.6 million.
For the nine months ended March 31, 1998, InSight completed four acquisitions
as follows: a Center in Columbus, Ohio; a Center in Murfreesboro, Tennessee;
a Fixed Facility in Redwood City, California; and a Center in Las Vegas,
Nevada. In connection with the purchase of the Center in Columbus, Ohio,
InSight also acquired a majority ownership interest in a new Center in
Dublin, Ohio. All transactions included the purchase of assets and
assumption of certain equipment related liabilities. The cumulative purchase
price for these acquisitions was approximately $18.4 million.
On April 15, 1998, InSight signed a definitive agreement to purchase Signal
Medical Services, Inc. ("Signal") through the merger of Signal into a wholly
owned subsidiary of InSight. The transaction is subject to the satisfaction of
certain customary closing conditions, including the expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Bank
Financing will be used to finance the purchase price of approximately $46.0
million.
In addition, in fiscal 1998, InSight installed an open MRI Fixed Facility in
Atlanta, Georgia. This Fixed Facility was financed through GE. Effective
December 31, 1997, InSight terminated its agreement to operate a Gamma Knife
Center and entered into an agreement to dissolve a partnership related to a
Fixed Facility in Seattle, Washington.
13
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
REVENUES: Revenues increased approximately 25.8% from approximately $68.1
million for the nine months ended March 31, 1997, to approximately $85.7
million for the nine months ended March 31, 1998. This increase was due
primarily to the acquisitions discussed above (approximately $13.0 million)
and an increase in contract services, patient services and other revenues
(approximately $4.6 million) at existing facilities.
Contract services revenues increased approximately 11.4% from approximately
$35.2 million for the nine months ended March 31, 1997, to approximately
$39.2 million for the nine months ended March 31, 1998. This increase was
due primarily to the acquisitions discussed above (approximately $1.4
million) and an increase at existing facilities (approximately $2.6 million).
The increase at existing facilities was due to higher utilization
(approximately 6%) offset by nominal declines in reimbursement from
customers, primarily hospitals.
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 46% of total revenues for the nine months ended
March 31, 1998. 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. While some replacement accounts have
initially been smaller than the lost accounts such replacement accounts
revenues have generally increased over the term of the agreement. The
non-renewal of a single customer agreement would not have a material impact
on InSight's contract services revenues; however, non-renewal of several
agreements could have a material impact on contract services revenues.
In addition, the Company's contract services revenues with regard to its Mobile
Facilities in certain markets depend in part on some customer accounts with high
volume. If the future reimbursement levels of such customers were to decline or
cease or if such customers were to become financially insolvent and if such
agreements were not replaced with new accounts or with the expansion of services
on existing accounts, InSight's contract services revenues would be adversely
affected. No single source accounts for more than 10% of InSight's revenues.
Patient services revenues increased approximately 40.8% from approximately
$31.2 million for the nine months ended March 31, 1997, to approximately
$43.9 million for the nine months ended March 31, 1998. This increase was
due primarily to the acquisitions discussed above (approximately $11.5
million) and an increase in revenues at existing facilities (approximately
$1.8 million). The increase at existing facilities was due to higher
utilization (approximately 12%), partially offset by nominal declines in
reimbursement from third party payors and reduced revenues from the
termination of a Fixed Center and a Gamma Knife center in fiscal 1998
(approximately $0.6 million).
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; 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
business strategy, particularly acquisitions. 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 at or below Medicare reimbursement levels, and a
significant decline in referrals could have a material impact on the
Company's revenues.
COSTS OF OPERATIONS: Costs of operations increased approximately 17.1% from
approximately $59.5 million for the nine months ended March 31, 1997, to
approximately $69.7 million for the nine months ended March 31, 1998. This
increase was due primarily to an increase in costs due to the acquisitions
discussed above (approximately $8.9 million) and an increase in costs at
existing facilities (approximately $2.7 million), offset by
14
the elimination of costs at the two terminated facilities discussed above
(approximately $1.4 million). The increase at existing facilities was due
primarily to increases in costs of services and depreciation and amortization.
Costs of services, including the provision for doubtful accounts, increased
approximately 19.6% from approximately $38.5 million for the nine months
ended March 31, 1997, to approximately $46.0 million for the nine months
ended March 31, 1998. This increase was due primarily to the acquisitions
discussed above (approximately $6.7 million) and an increase in costs at
existing facilities (approximately $1.8 million), offset by the elimination
of costs at the two terminated facilities discussed above (approximately $1.0
million). The increase in costs at existing facilities was due primarily to
(i) salaries and benefits, (ii) occupancy and (iii) marketing costs, offset
by reduced costs in service supplies and equipment maintenance.
Equipment leases and depreciation and amortization increased approximately
12.5% from approximately $21.0 million for the nine months ended March 31,
1997, to approximately $23.7 million for the nine months ended March 31,
1998. This increase was due primarily to the acquisitions discussed above
(approximately $2.2 million) and an increase in costs at existing facilities
(approximately $0.8 million), offset by the elimination of costs at the two
terminated facilities discussed above (approximately $0.3 million). The
increase at existing facilities was due primarily to the Company upgrading
its existing diagnostic imaging equipment.
GROSS PROFIT: Gross profit increased approximately 85.8% from approximately
$8.6 million for the nine months ended March 31, 1997, to approximately $16.0
million for the nine months ended March 31, 1998. This increase was due to
the acquisitions discussed above (approximately $4.1 million), an increase at
existing facilities (approximately $2.5 million) and the elimination of
losses at the two terminated facilities discussed above (approximately $0.8
million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 21.8%, from approximately $5.3 million for the nine months
ended March 31, 1997, to approximately $6.5 million for the nine months ended
March 31, 1998. This increase was due primarily 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, to account for the Preferred Stock issuance.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 70.2% from
approximately $2.7 million for the nine months ended March 31, 1997, to
approximately $4.7 million for the nine months ended March 31, 1998. This
increase was due primarily to additional debt related to the acquisitions
discussed above (approximately $2.4 million) and additional debt related to the
Company upgrading its existing diagnostic imaging equipment, offset by reduced
interest as a result of (i) the reduction in interest rate and the
extinguishment of approximately $23.0 million in long-term debt relating to the
Recapitalization and Bank Financing discussed below (approximately $1.2
million) and (ii) amortization of long-term debt.
PROVISION FOR INCOME TAXES: For the nine months ended March 31, 1998, the
Company recorded a provision for income taxes of approximately $0.4 million.
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 diluted basis, net (loss) per common share
was ($0.19) for the nine months ended March 31, 1998, compared to net income per
common share of $0.14 for the same period in 1997. Excluding the one-time
provision for supplemental service fee termination, net income per common share
on a diluted basis would have been $0.62. The improvement in net income per
common share before provision for supplemental service fee termination is the
result of (i) increased gross profit and (ii) an increase in earnings from
unconsolidated partnerships, offset by (i) increased corporate operating
expenses, (ii) increased interest expense, and (iii) the provision for income
taxes.
15
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
REVENUES: Revenues increased approximately 24.0% from approximately $23.0
million for the three months ended March 31, 1997, to approximately $28.6
million for the three months ended March 31, 1998. This increase was due
primarily to the acquisitions discussed above (approximately $5.1 million)
and an increase in contract services, patient services and other revenues
(approximately $0.5 million) at existing facilities.
Contract services revenues increased approximately 10.8% from approximately
$11.6 million for the three months ended March 31, 1997, to approximately $12.8
million for the three months ended March 31, 1998. This increase was due
primarily to the acquisitions discussed above (approximately $0.4 million) and
an increase in revenues at existing facilities (approximately $0.8 million).
The increase at existing facilities was due to higher utilization (approximately
9%) offset by nominal declines in reimbursement from customers, primarily
hospitals.
Patient services revenues increased approximately 40.8% from approximately
$10.7 million for the three months ended March 31, 1997, to approximately
$15.1 million for the three months ended March 31, 1998. This increase was
due primarily to the acquisitions discussed above (approximately $4.6
million) and an increase in revenues at existing facilities (approximately
$0.7 million), offset by the elimination of revenues at the two terminated
facilities discussed above (approximately $0.9 million). The increase at
existing facilities was due to higher utilization (approximately 12%),
partially offset by nominal declines in reimbursement from third party payors.
COSTS OF OPERATIONS: Costs of operations increased approximately 14.9% from
approximately $20.1 million for the three months ended March 31, 1997, to
approximately $23.1 million for the three months ended March 31, 1998. This
increase was due primarily to an increase in costs due to the acquisitions
discussed above (approximately $3.7 million), an increase in costs at
existing facilities (approximately $0.8 million), offset by the elimination
of costs at the two terminated facilities discussed above (approximately $1.5
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 imaging equipment.
Costs of services, including the provision for doubtful accounts, increased
approximately 18.0% from approximately $12.9 million for the three months
ended March 31, 1997, to approximately $15.2 million for the three months
ended March 31, 1998. This increase was due primarily to the acquisitions
discussed above (approximately $2.8 million), an increase in costs at
existing facilities (approximately $0.8 million), offset by the elimination
of costs at the two terminated facilities discussed above (approximately $1.3
million). The increase in costs at existing facilities was due primarily to
(i) salaries and benefits and (ii) marketing costs, offset by reduced costs
in service supplies and equipment maintenance.
Equipment leases and depreciation and amortization increased approximately
9.5% from approximately $7.2 million for the three months ended March 31,
1997, to approximately $7.9 million for the three months ended March 31,
1998. This increase was due primarily to the acquisitions discussed above
(approximately $0.9 million), offset by the elimination of costs at the two
terminated facilities discussed above (approximately $0.2 million).
GROSS PROFIT: Gross profit increased approximately 86.3% from approximately
$2.9 million for the three months ended March 31, 1997, to approximately $5.4
million for the three months ended March 31, 1998. The increase was due to the
acquisitions discussed above (approximately $1.4 million), an increase at
existing facilities (approximately $0.4 million) and the elimination of losses
at the two terminated facilities discussed above (approximately $0.7 million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 33.5% from approximately $1.7 million for the three months ended
March 31, 1997, to approximately $2.3 million for the three months ended March
31, 1998. The increase was primarily due to (i) additional consulting and
travel costs associated with the Company's acquisition activities and (ii)
salaries and benefits.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 49.9%
from approximately $0.9 million for the three months ended March 31, 1997, to
approximately $1.4 million for the three months ended March 31, 1998. The
increase was due primarily to additional debt related to the acquisitions
discussed above (approximately $0.9 million) and additional debt related to the
Company upgrading its existing diagnostic imaging
16
equipment, offset by reduced interest as a result of (i) the reduction in
interest rate and the extinguishment of approximately $23.0 million in long-term
debt relating to the Recapitalization and Bank Financing discussed below
(approximately $0.7 million) and (ii) amortization of long-term debt.
PROVISION FOR INCOME TAXES: During the three months ended March 31, 1998, the
Company did not record a provision for income taxes due to the loss resulting
from the provision for supplemental service fee termination. The Company's
provision for income taxes reflects the anticipated tax rate for the full fiscal
year.
INCOME PER COMMON SHARE: On a diluted basis, net income per common share was
$0.20 for the three months ended March 31, 1998, compared to net income per
common share of $0.07 for the same period in 1997. The improvement in net
income per common share 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 business strategy.
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 the seven acquisitions discussed above.
On April 15, 1998, InSight signed a definitive agreement to purchase Signal
through the merger of Signal into a wholly owned subsidiary of InSight. The
transaction is subject to the satisfaction of certain customary closing
conditions, including the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Bank Financing will
be used to finance the purchase price of approximately $46.0 million.
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 Common Stock at an 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 pretax income, warrants to purchase 250,000 shares of
Common Stock at an exercise price of $10.00 per share, and 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 on 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. On
December 19, 1997, the Bank Financing was increased to a total of $150
million by converting $10 million of outstanding debt under the acquisition
facility to the seven-year tranche (which was thereby increased to $40
million) and increasing the acquisition facility to $65 million. 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. The terms of the Series B Preferred Stock and the
Series C Preferred Stock, as well as
17
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 $13.2 million at March 31, 1998 from
a deficit of approximately $5.7 million at June 30, 1997. This increase in
working capital of approximately $18.9 million is primarily due to (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 (i) the current portion of additional debt incurred as a result of the
Company's acquisition activities and (ii) principal payments on long-term debt.
As part of the Bank Financing, the Company has a $25 million working capital
facility, of which approximately $16.8 million was available to the Company as
of March 31, 1998. As discussed above, InSight has an acquisition facility in
the amount of $65 million, of which, after the amounts utilized to purchase
Signal discussed above, approximately $30.0 million will remain available to the
Company.
Cash and cash equivalents increased to approximately $9.6 million at March
31, 1998 from approximately $7.1 million at June 30, 1997. This increase of
approximately $2.5 million resulted primarily from the Company's operating
activities (approximately $10.0 million) and financing activities
(approximately $21.6 million), offset by a reduction in cash and cash
equivalents from investing activities (approximately $29.1 million).
Cash provided by operating activities for the nine months ended March 31,
1998 resulted primarily from net income before depreciation and amortization
and the provision for supplemental service fee termination (approximately
$15.6 million), offset by an increase in accounts receivable (approximately
$4.7 million). The increase in accounts receivable is due primarily to the
Company's acquisition activities.
Cash used in investing activities for the nine months ended March 31, 1998
resulted primarily from the Company's acquisition activities (approximately
$12.9 million) and the Company purchasing new diagnostic imaging equipment or
upgrading its existing diagnostic imaging equipment (approximately $15.2
million).
The Company generated approximately $21.6 million from financing activities
for the nine months ended March 31, 1998, primarily from the Carlyle
investment, which was used to refinance a portion of the Company's
outstanding indebtedness as discussed above. The decrease in cash from the
refinancing of debt was offset primarily by increased debt incurred in
connection with the Company's acquisition activities.
The Company has committed to purchase or lease, at an aggregate cost of
approximately $11.3 million, six MRI systems for delivery during the six
months ending September 30, 1998. The Bank Financing is expected to 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
$24.0 million, including siting costs, 20 open MRI systems for delivery and
installation over the next two years. As of March 31, 1998, the Company had
installed three of the open MRI systems, one at an existing Center, one at an
existing Fixed Facility and one in a newly opened Fixed Facility, and siting
improvements were under construction for installation of three other open MRI
systems. 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 business strategy.
The Company believes that, based on current levels of operations and
anticipated growth, its cash from operations, together with other available
sources of liquidity, including borrowings under the Bank Financing, will be
sufficient over the next several years to fund anticipated capital
expenditures and make required payments of principal and interest on its
debt, including its obligations under the Bank Financing. In addition, the
Company continually evaluates potential acquisitions and expects to fund such
acquisitions from its available sources of liquidity, including borrowings
under the Bank Financing. In order to implement the Company's business
strategy with respect to acquisitions, the Company will require additional
sources of capital in addition to that currently available to the Company.
To that end, the Company is currently negotiating an amendment to the Bank
Financing and intends to raise approximately $100.0 million pursuant to a
private placement of senior subordinated notes, subject to market and other
conditions. The Company intends to use the proceeds to pay certain
outstanding indebtedness under its Bank Financing. Amounts used to pay such
indebtedness may be reborrowed for general corporate purposes, including
acquisitions; however, no assurance can be given that the amendment to the
Bank Financing and the private placement will be completed.
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
18
process critical financial and operational information incorrectly. The
Company has developed a plan to modify existing computer systems and
applications. The Company has not determined the final amounts necessary to
modify existing computer systems and applications but believes such amounts
will not be material. 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, third party payors 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; Year
2000 issues; adverse utilization trends for certain diagnostic imaging
procedures; aggressive competition; general economic factors; InSight's
inability to carry out its business strategy; and the risk factors listed
from time to time in InSight's filings with the SEC.
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 January 26, 1998, the Company issued to Philip Green and
Elizabeth Cobbs, pursuant to the exercise of warrants and in
consideration of a cash payment of $8,528, 1,512 shares of Common
Stock.
2. On March 4, 1998, the Company issued to Roz Kovens, pursuant to
the exercise of warrants and in consideration of a cash payment
of $189,758, 33,645 shares of Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On February 17, 1998, the Company held its annual meeting of
stockholders at which the single matter to be acted upon was the
election of one director, E. Larry Atkins, as a Class I director
to serve for a three year term.
(b) Inapplicable.
(c) 2,409,855 shares were cast in favor of the election of Mr. Atkins
and 17,350 shares were withheld.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.32 Agreement and Plan of Merger dated as of April 15, 1998
among the Company, SMSI Acquisition Company, Signal
Medical Services, Inc. and its stockholders, filed
herewith.
(b) REPORTS ON FORM 8-K.
On February 17, 1998, the Company filed with the SEC a current
report on Form 8-K describing the Recapitalization under Item 5.
19
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
Date: May 13, 1998
20
EXHIBIT INDEX
TO FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 1998
EXHIBIT NO. DESCRIPTION AND REFERENCE
----------- -------------------------
10.32 Agreement and Plan of Merger dated as of April 15, 1998
among the Company, SMSI Acquisition Company, Signal Medical
Services, Inc. and its stockholders, filed herewith.
21