-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FZowlZfUuzoDOfdp3C7ZHNKEG/KnK7ItfQm8cR5w0n1BFwBvTqQPw+/MvxXjPcuJ lSW+RYU8MIdiVP6snlmpQg== 0000912057-97-006112.txt : 19970222 0000912057-97-006112.hdr.sgml : 19970222 ACCESSION NUMBER: 0000912057-97-006112 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970219 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT HEALTH SERVICES CORP CENTRAL INDEX KEY: 0001012697 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 330702770 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-02935 FILM NUMBER: 97538210 BUSINESS ADDRESS: STREET 1: 4440 VON KARMAN AVENUE STE 320 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7144760733 MAIL ADDRESS: STREET 1: 4440 VON KARMAN AVE., STE 320 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-Q 1 FORM 10-Q 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 December 31, 1996 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 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (714) 476-0733 --------------------------------------------------------- (Registrant's telephone number including area code) N/A ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and; (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ---------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 2,714,725 shares of Common Stock as of February 14, 1997. The number of pages in this Form 10-Q is 18. 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, 1996 (unaudited) and June 30, 1996 3 Condensed Consolidated Statements of Operations (unaudited)for the three months ended December 31, 1996 and 1995 4 Condensed Consolidated Statements of Operations (unaudited)for the six months ended December 31, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 1996 and 1995 6 Notes to Condensed Consolidated Financial Statements 7 - 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 - 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 18 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
December 31, June 30, 1996 1996 ------------ ---------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,272 $ 6,864 Trade accounts receivable, net of allowances of $10,198 and $10,088, respectively 13,183 12,916 Other receivables, net 922 973 Other current assets 2,452 1,708 --------- --------- Total current assets 23,829 22,461 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $15,912 and $11,958, respectively 28,224 29,852 INVESTMENT IN PARTNERSHIPS 529 359 OTHER ASSETS 313 749 INTANGIBLE ASSETS, net 18,645 16,965 --------- --------- $ 71,540 $ 70,386 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and other accrued expenses $ 12,960 $ 13,352 Current portion of equipment and other notes 10,680 9,223 Current portion of deferred gain on debt restructure 896 1,053 --------- --------- Total current liabilities 24,536 23,628 --------- --------- LONG-TERM LIABILITIES: Equipment and other notes, less current portion 37,502 35,641 Deferred gain on debt restructure, less current portion 1,080 1,467 Other long-term liabilities 788 2,731 --------- --------- Total long-term liabilities 39,370 39,839 --------- --------- MINORITY INTEREST 1,862 1,515 --------- --------- STOCKHOLDERS' EQUITY: Convertible Series A preferred stock, $.001 par value, 3,500,000 shares authorized; 2,501,760 outstanding at December 31, 1996 and June 30, 1996, respectively, stated at 6,750 6,750 Common stock, $.001 par value, 25,000,000 shares authorized; 2,710,240 shares outstanding at December 31, 1996 and June 30, 1996, respectively 3 3 Additional paid-in capital 23,100 23,100 Accumulated deficit (24,081) (24,449) --------- --------- Total stockholders' equity 5,772 5,404 --------- --------- $ 71,540 $ 70,386 --------- --------- --------- ---------
The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except shares and per share data) Three Months Ended December 31, ----------------------- 1996 1995 ---------- -------- REVENUES: Contract services $ 11,867 $ 9,850 Patient services 10,477 2,666 Other 648 241 --------- -------- Total revenues 22,992 12,757 COSTS OF OPERATIONS: Cost of services 12,568 7,857 Provision for doubtful accounts 416 400 Equipment leases 4,571 3,739 Depreciation and amortization 2,389 637 --------- -------- Total costs of operations 19,944 12,633 --------- -------- GROSS PROFIT 3,048 124 CORPORATE OPERATING EXPENSES 1,886 1,427 --------- -------- INCOME (LOSS) FROM COMPANY OPERATIONS 1,162 (1,303) EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 138 86 --------- -------- OPERATING INCOME (LOSS) 1,300 (1,217) --------- -------- OTHER EXPENSES: Interest expense, net (934) (549) Provision for securities litigation settlement - (1,500) --------- -------- (934) (2,049) --------- -------- INCOME (LOSS) BEFORE INCOME TAXES 366 (3,266) INCOME TAX EXPENSE 104 - --------- -------- NET INCOME (LOSS) $ 262 $ (3,266) --------- -------- --------- -------- INCOME (LOSS) PER COMMON SHARE: Net income (loss) $ 0.05 $ (2.41) --------- -------- --------- -------- Weighted average number of common shares outstanding 5,432,977 1,357,306 --------- -------- --------- -------- The accompanying notes are an integral part of these condensed consolidated financial statements. 4 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except shares and per share data) Six Months Ended December 31, ------------------------ 1996 1995 ---------- --------- REVENUES: Contract services $ 23,590 $ 19,971 Patient services 20,470 4,488 Other 1,048 446 --------- --------- Total revenues 45,108 24,905 COSTS OF OPERATIONS: Cost of services 24,750 13,938 Provision for doubtful accounts 858 625 Equipment leases 9,091 7,471 Depreciation and amortization 4,732 1,694 --------- --------- Total costs of operations 39,431 23,728 --------- --------- GROSS PROFIT 5,677 1,177 CORPORATE OPERATING EXPENSES 3,655 2,251 --------- --------- INCOME (LOSS) FROM COMPANY OPERATIONS 2,022 (1,074) EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 245 212 --------- --------- OPERATING INCOME (LOSS) 2,267 (862) --------- --------- OTHER EXPENSES: Interest expense, net (1,795) (978) Provision for securities litigation settlement - (1,500) --------- --------- (1,795) (2,478) --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 472 (3,340) INCOME TAX EXPENSE 104 - --------- --------- NET INCOME (LOSS) $ 368 $ (3,340) --------- --------- --------- --------- INCOME (LOSS) PER COMMON SHARE: Net income (loss) $ 0.07 $ (2.46) --------- --------- --------- --------- Weighted average number of common shares outstanding 5,433,846 1,356,473 --------- --------- --------- --------- The accompanying notes are an integral part of these condensed consolidated financial statements. 5 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Six Months Ended December 31, ------------------------- 1996 1995 ---------- ----------- OPERATING ACTIVITIES: Net income (loss) $ 368 $ (3,340) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,857 2,481 Amortization of deferred gain on debt restructure (544) - Provision for securites litigation settlement - 1,500 Operating expenses financed by issuance of long-term debt - 1,212 Gain on disposal of assets - (73) Cash provided by (used in) changes in operating working capital: Receivables, net (45) (708) Other current assets (741) (227) Accounts payable and other current liabilities 109 521 -------- --------- Net cash provided by operating activities 4,004 1,366 -------- --------- INVESTING ACTIVITIES: Additions to property and equipment (1,393) (374) Proceeds from disposal of assets - 230 Acquisition of customer contracts and intangibles - (10) Acquisition of imaging center (2,766) (1,668) Other 588 157 -------- --------- Net cash used in investing activities (3,571) (1,665) -------- --------- FINANCING ACTIVITIES: Payments on debt and capital lease obligations (5,074) (2,720) Proceeds from issuance of debt 5,049 2,689 Other - 14 -------- --------- Net cash used in financing activities (25) (17) -------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 408 (316) CASH AND CASH EQUIVALENTS: Beginning of period 6,864 2,186 -------- --------- End of period $ 7,272 $ 1,870 -------- --------- -------- --------- SUPPLEMENTAL INFORMATION: Interest paid $ 1,811 $ 1,117 Securities litigation settlement paid with long-term debt 1,900 - Equipment purchased with long-term debt 871 4,090 Property taxes paid with long-term debt 572 -
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. MERGER InSight Health Services Corp. ("InSight" or the "Company") is a Delaware corporation formed on February 23, 1996 in connection with the Agreement and Plan of Merger, dated as of February 26, 1996 (the "Merger Agreement"), among American Health Services Corp., a Delaware corporation ("AHS"), Maxum Health Corp., a Delaware corporation ("MHC" or "Maxum"), InSight and two wholly owned subsidiaries of InSight, AHSC Acquisition Company, a Delaware corporation ("AHSC Acquisition"), and MXHC Acquisition Company, a Delaware corporation ("MXHC Acquisition"). Pursuant to the terms of the Merger Agreement, (i) AHSC Acquisition merged with and into AHS and MXHC Acquisition merged with and into Maxum (collectively, the "Merger"), (ii) each outstanding share of common stock, par value $.03 per share, of AHS ("AHS Common Stock") was converted into the right to receive one-tenth of a share of common stock, par value $ .001 per share, of InSight ("InSight Common Stock"), (iii) each outstanding share of Series B Senior Convertible Preferred Stock, par value $ .03 per share, of AHS ("AHS Series B Preferred Stock") which was convertible into 100 shares of AHS Common Stock was converted into the right to receive ten (10) shares of InSight Common Stock, (iv) each outstanding share of Series C Preferred Stock, par value $ .03 per share, of AHS (the "AHS Series C Preferred Stock"), which was issued immediately prior to the consummation of the Merger, was converted into the right to receive 1.25088 shares of Series A Preferred Stock, par value $ .001 per share, of InSight (the "InSight Series A Preferred Stock"), (v) each outstanding share of common stock, par value $ .01 per share, of Maxum ("Maxum Common Stock") was converted into the right to receive .598 of a share of InSight Common Stock, (vi) each outstanding share of Series B Preferred Stock, par value $.01 per share, of Maxum (the "Maxum Series B Preferred Stock"), which was issued immediately prior to the consummation of the Merger, was converted into the right to receive 83.392 shares of InSight Series A Preferred Stock, and (vii) each outstanding option, warrant or other right to purchase AHS Common Stock and Maxum Common Stock was converted into the right to acquire, on the same terms and conditions, shares of InSight Common Stock, with the number of shares and exercise price applicable to such option, warrant or other right adjusted based on the applicable exchange ratio for the underlying AHS Common Stock or Maxum Common Stock. Concurrent with the consummation of the Merger, AHS and MHC completed a debt restructuring with General Electric Company ("GE Medical"), the primary creditor of MHC and AHS, and General Electric Capital Corporation. This restructuring resulted in the reduction of certain debt and operating lease obligations and cancellation of certain stock warrants of MHC and AHS in exchange for, among other things, the issuance to GE Medical, immediately prior to the consummation of the Merger, of Maxum Series B Preferred Stock and AHS Series C Preferred Stock. In connection with this restructuring, MHC recorded the extinguishment of $9.0 million of long-term debt obligations and an extraordinary gain representing the difference in the carrying value ($9.0 million) of the debt obligations settled over the fair value ($3.4 million) of the Maxum Series B Preferred Stock issued to GE Medical. In accordance with the provisions of troubled debt accounting, a portion of the extraordinary gain, equal to the sum of the current and long-term portions of future interest payable on all remaining GE Medical debt and capital lease obligations of $1.0 million and $1.5 million, respectively, was deferred and will be reduced by future interest payments over the terms of the respective debt instruments. 7 At the effective time of the Merger, Maxum Series B Preferred Stock and AHS Series C Preferred Stock issued to GE Medical was converted into the right to receive such number of shares of InSight Series A Preferred Stock that is convertible into such number of shares of InSight Common Stock representing approximately 48% of InSight Common Stock outstanding at the effective time of the Merger (after giving effect to such conversion). Under an amended equipment maintenance service agreement, GE Medical will also be entitled to receive for ten years an annual supplemental service fee equal to 14% of the Company's pretax income, subject to certain adjustments. InSight may terminate the supplemental service fee at any time during such ten-year period by making a payment to GE Medical equal to $8.0 million less the discounted value of the aggregate amount of the supplemental service fee (calculated at a discount rate of 15% per annum) paid through the date of such termination payment. The Merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. MHC is treated as the acquiror for accounting purposes. The condensed consolidated financial statements presented herein for the six and three months ended December 31, 1995, respectively, represent the operating results of MHC only. The results of operations of AHS have been included in the consolidated financial statements since the acquisition date. The pro forma effects of the Merger, as if it had occurred as of July 1, 1995, are summarized as follows (amounts in thousands): Three Months Ended Six Months Ended December 31, 1995 December 31, 1995 ------------------ ----------------- (unaudited) (unaudited) Revenues $ 21,634 $ 42,838 Expenses 25,648 47,286 --------- --------- Net loss $ (4,014) $ (4,448) --------- --------- --------- --------- Loss per share $ (1.48) $ (1.64) --------- --------- --------- --------- The pro forma results of operations for the six and three months ended December 31, 1995 include $0.3 million and $0.2 million, respectively, of amortization of intangibles related to the Merger. The pro forma results do not include the interest and lease savings resulting from the Merger. On September 13, 1996, AHS changed its name to InSight Health Corp. ("IHC"). 8 2. INTERIM FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with generally accepted accounting principles for interim financial statements and do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included as part of the Company's Annual Report on Form 10-K for the period ended June 30, 1996 filed with the Securities and Exchange Commission on October 15, 1996. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for fair presentation of results for the period have been included. The results of operations for the six months ended December 31, 1996, 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, ------------------ ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ (unaudited) (unaudited) Net revenues $1,127 $1,135 $2,152 $2,278 Expenses 812 932 1,592 1,778 ------ ------ ------ ------ Net income $ 315 $ 203 $ 560 $ 500 ------ ------ ------ ------ ------ ------ ------ ------ Equity in earnings of partnerships $ 138 $ 86 $ 245 $ 212 ------ ------ ------ ------ ------ ------ ------ ------ 9 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): Three Months Ended Six Months Ended December 31, December 31, ------------------ -------------------- 1996 1995 1996 1995 ------ ---- ------ ---- (unaudited) (unaudited) Condensed Combined Statement of Operations Data: Net revenues $1,736 $ - $3,487 $ - Expenses 1,294 - 2,556 - Provision for center profit distribution 230 - 481 - ------ ---- ------ ----- Net income $ 212 $ - $ 450 $ - ------ ---- ------ ----- ------ ---- ------ ----- December 31, June 30, 1996 1996 ------------ -------- (unaudited) Condensed Combined Balance Sheet Data: Current assets $2,206 $2,523 Total assets 3,767 4,029 Current liabilities 673 895 Long-term debt 383 349 Minority interest equity 1,481 1,522 The provision for center profit distribution shown above represents the minority interest in the income of these combined entities. 4. INCOME (LOSS) PER COMMON SHARE The number of shares used in computing income (loss) per common share is equal to the weighted average number of common and common equivalent shares outstanding during the respective periods, adjusted retroactively for the conversion of Maxum Common Stock into InSight Common Stock as a result of the Merger. Common stock equivalents relating to options, warrants and convertible preferred stock are not included in 1995 due to their antidilutive effect. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUISITIONS InSight believes a consolidation in the diagnostic imaging industry is occurring and is necessary in order to provide surviving companies the opportunity to achieve operating and administrative efficiencies through the consolidation of duplicative infrastructures. Subject to its ability to obtain financing on terms reasonably acceptable to the Company, the strategy of InSight will be focused on four interrelated initiatives: (i) consolidation of the highly fragmented diagnostic imaging industry through acquisition of organizations which either strategically fit into its regional networking strategy or provide significant cost savings; (ii) development of a radiology co-source product where InSight will provide management services for radiology departments within hospitals; (iii) development of regional networks of radiology providers and physicians designed to provide the highest quality and most cost-effective unit of diagnostic information to the broadest population in a given market; and (iv) new business initiatives focused on broadening its range of services to managed care organizations, hospitals and physician management companies to include radiology management services; information management services; unbundling of current core services such as billing and collections, technician training and staffing, and asset management and continued evaluation of opportunities with emerging technologies. InSight believes that long-term viability is contingent upon its ability to successfully participate in this industry consolidation. InSight views the Merger of MHC and IHC as reflective of this consolidation and will continue to consider and pursue consolidation opportunities. In September 1996, InSight completed the acquisition of an open magnetic resonance imaging ("MRI") center in Hayward, California. In January 1997, InSight also entered into a definitive agreement to acquire three diagnostic imaging networks in the Northeast United States, subject to satisfaction of certain conditions. It is anticipated that this transaction will close during the last half of fiscal 1997. RESULTS OF OPERATIONS BECAUSE THE MERGER WAS ACCOUNTED FOR USING THE PURCHASE METHOD OF ACCOUNTING AND MHC WAS TREATED AS THE ACQUIROR, THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS THE HISTORICAL FINANCIAL DATA OF THE COMPANY (REFLECTING THE COMBINED OPERATIONS OF IHC AND MHC) FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 1996 AND THE HISTORICAL FINANCIAL DATA OF MHC ONLY FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 1995. SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995 REVENUES: Revenues increased approximately $20.2 million for the six months ended December 31, 1996, compared with the same period in 1995. The increase in revenues was due primarily to additional IHC revenues as a result of the Merger (approximately $18.1 million), increases in contract services, patient services and other revenues (approximately $1.6 million), and an increase in patient services revenues due to the acquisition of the open MRI center discussed above in September 1996 (approximately $0.5 million). Contract services revenues increased approximately $3.6 million for the six months ended December 31, 1996, compared with the same period in 1995. This increase was due primarily to additional IHC 11 revenues as a result of the Merger (approximately $3.1 million) and an increase in existing contract services revenues due to increased numbers of procedures (approximately $0.5 million) Patient services revenues increased approximately $16.0 million for the six months ended December 31, 1996, compared with the same period in 1995. The increase was due primarily to (i) additional IHC revenues as a result of the Merger (approximately $14.8 million), (ii) an increase at the Company's fixed site diagnostic imaging centers as a result of the acquisition of two diagnostic imaging centers in October 1995, and higher volumes at existing diagnostic imaging centers (approximately $0.7 million), and (iii) an increase due to the acquisition of the open MRI center (approximately $0.5 million). InSight's contract services revenues, primarily earned by its mobile facilities, represent approximately 52% of total revenues. Each year approximately one-quarter to one-third of the contract services agreements are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past where agreements have not been renewed, the Company has been able to obtain replacement customer accounts; however, it is not always possible to obtain replacement accounts and some replacement accounts have been smaller than the lost account. The non-renewal of a single customer agreement would not have a material impact on InSight's contract services revenues; however, non-renewal of several agreements could have a material impact on contract services revenues. In addition, the Company's contract services revenues with regard to its mobile facilities in certain markets depend in part on some customer accounts with high volume. If the future reimbursement levels of such customers were to decline or cease or if such customers were to become financially insolvent such events could have a material adverse effect on InSight's contract services revenues. If such agreements were not replaced with new accounts or with the expansion of services on existing accounts, InSight's contract services revenues would be adversely affected. No single source accounts for more than 10% of InSight's revenues. The Company, through IHC, has six individual contracts with the county of Los Angeles ("County") covering six separate sites. In the aggregate, these sites earn revenues which represent approximately 10% of InSight's annual revenues. From time to time, the County has experienced financial difficulties. If such difficulties caused the County to curtail or terminate InSight's services, the Company's business would be adversely affected. Management believes that any future increases in revenues can only be achieved by higher utilization and not by increases in procedure prices since reimbursement is declining; however, excess capacity of diagnostic imaging equipment, increased competition, anticipated healthcare reform and the expansion of managed care may impact utilization and make it difficult for the Company to achieve revenue increases in the future, absent the negotiation of provider agreements with managed care companies and other payors, acquisition of profitable diagnostic imaging centers and development of the radiology co-source product. COSTS OF OPERATIONS: Costs of operations increased approximately $15.7 million for the six months ended December 31, 1996, compared to the same period in 1995. The increase was due primarily to (i) additional IHC costs as a result of the Merger (approximately $14.0 million), (ii) increased amortization from the acquisition of IHC (approximately $0.3 million), (iii) an increase of approximately $0.4 million related to the acquisition of the open MRI center in September 1996, and (iv) an increase at existing diagnostic imaging centers (approximately $1.0 million), which was the result of the acquisition of the 12 diagnostic imaging centers in October 1995 discussed above and a sales tax refund (approximately $0.4 million) received during the six months ended December 31, 1995. To the extent that the Company has pretax income for the fiscal year ended June 30, 1997, under the terms of the amended equipment maintenance service agreement with GE Medical described above, GE Medical will be entitled to receive a payment equal to 14% of such pretax income, subject to certain adjustments. During the six months ended December 31, 1996, the Company recorded a provision of approximately $0.1 million in connection with this agreement. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately $1.4 million for the six months ended December 31, 1996, compared to the same period in 1995. The increase was partially related to maintaining duplicate staffing during the transition phase of the Merger. The Company has achieved annualized cost savings compared to the historical combined costs of MHC and IHC, primarily as a result of elimination of duplicate facilities including corporate headquarters, and synergies in staff and functional areas. No assurance can be given, however, that difficulties will not be encountered in integrating the operations of MHC and IHC or that the full benefits and attendant cost savings expected from such integration will be realized or achieved in the expected time frame. EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS: Equity in earnings of unconsolidated partnerships increased approximately $0.03 million for the six months ended December 31, 1996, compared with the same period in 1995, due to increased income at one of the Company's unconsolidated partnerships. INTEREST EXPENSE: Interest expense increased approximately $0.8 million for the six months ended December 31, 1996, compared to the same period in 1995. The increase was due primarily to additional debt assumed as a result of the Merger (approximately $1.4 million), offset by reduced interest as a result of (i) amortization of the deferred gain on the debt restructure with GE Medical (approximately $0.5 million) and (ii) amortization of long-term debt. PROVISION FOR SECURITIES LITIGATION SETTLEMENT: During the six months ended December 31, 1995, MHC recorded a provision of approximately $1.5 million for anticipated settlement costs related to certain securities litigation. There were no similar charges in 1996. INCOME (LOSS) PER COMMON SHARE: Net income per common share was $0.07 for the six months ended December 31, 1996, compared to a net loss per common share of $(2.46) for the six months ended December 31, 1995. The improvement in income per common share is the result of (i) increased gross profit due to the addition of IHC as a result of the Merger, and (ii) an increase in earnings from unconsolidated partnerships, offset by (i) increased corporate operating expenses, (ii) the provision for securities litigation settlement, and (iii) increased interest expense. THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995 REVENUES: Revenues increased approximately $10.2 million for the three months ended December 31, 1996, compared with the same period in 1995. The increase in revenues was due primarily to additional IHC revenues as a result of the Merger (approximately $8.9 million), increases in contract services, patient services and other revenues (approximately $0.9 million) and an increase in patient services revenues due to the acquisition of the open MRI center in September 1996 (approximately $0.4 million). 13 Contract services revenues increased approximately $2.0 million for the three months ended December 31, 1996, compared with the same period in 1995. This increase was due primarily to additional IHC revenues as a result of the Merger (approximately $1.6 million) and an increase in existing contract services revenues. Patient services revenues increased approximately $7.8 million for the three months ended December 31, 1996, compared with the same period in 1995. The increase was due primarily to (i) additional IHC revenues as a result of the Merger (approximately $7.3 million), (ii) an increase in patient services revenues due to the acquisition of the open MRI center in September 1996 (approximately $0.4 million), and (iii) a slight increase at the Company's fixed site diagnostic imaging centers. COSTS OF OPERATIONS: Costs of operations increased approximately $7.3 million for the three months ended December 31, 1996, compared to the same period in 1995. The increase was due primarily to (i) additional IHC costs as a result of the Merger (approximately $7.0 million), (ii) increased amortization from the acquisition of IHC (approximately $0.2 million), and (iii) an increase of approximately $0.4 million from the acquisition of the open MRI center in September 1996 , offset by a slight decrease from existing diagnostic imaging centers. To the extent that the Company has pretax income for the fiscal year ended June 30, 1997, under the terms of the amended equipment maintenance service agreement with GE Medical described above, GE Medical will be entitled to receive a payment equal to 14% of such pretax income, subject to certain adjustments. During the three months ended December 31, 1996, the Company recorded a provision of approximately $0.1 million in connection with this agreement. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately $0.4 million for the three months ended December 31, 1996, compared to the same period in 1995. The increase was partially related to maintaining duplicate staffing during the transition phase of the Merger. The Company has achieved annualized cost savings compared to the historical combined costs of MHC and IHC, primarily as a result of elimination of duplicate facilities including corporate headquarters, and synergies in staff and functional areas. No assurance can be given, however, that difficulties will not be encountered in integrating the operations of MHC and IHC or that the full benefits and attendant cost savings expected from such integration will be realized or achieved in the expected time frame. EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS: Equity in earnings of unconsolidated partnerships increased approximately $0.05 million for the three months ended December 31, 1996, compared with the same period in 1995, due to increased income at one of the Company's unconsolidated partnerships. INTEREST EXPENSE: Interest expense increased approximately $0.4 million for the three months ended December 31, 1996, compared to the same period in 1995. The increase was due primarily to additional debt assumed as a result of the Merger (approximately $0.7 million), offset by reduced interest as a result of (i) amortization of the deferred gain on the debt restructure with GE Medical (approximately $0.2 million) and (ii) amortization of long-term debt. PROVISION FOR SECURITIES LITIGATION SETTLEMENT: During the three months ended December 31, 1995, MHC recorded a provision of approximately $1.5 million for anticipated settlement costs related to certain securities litigation. There were no similar charges in 1996. 14 INCOME (LOSS) PER COMMON SHARE: Net income per common share was $0.05 for the three months ended December 31, 1996, compared to a net loss per common share of $(2.41) for the three months ended December 31, 1995. The improvement in income per common share is the result of increased gross profit due to the addition of IHC as a result of the Merger, and an increase in earnings from unconsolidated partnerships, offset by (i) increased corporate operating expenses, (ii) the provision for the securities litigation settlement, and (iii) increased interest expense. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES In connection with the Merger, certain financial accommodations with MHC's and IHC's primary creditor, GE Medical, became effective in June 1996. The financial accommodations with GE Medical restrict InSight's ability to raise capital, incur additional debt, enter into additional leases for equipment, complete acquisitions, or enter into other corporate transactions without first obtaining a waiver or consent from GE Medical. InSight operates in a capital intensive, high fixed cost industry that requires significant amounts of working capital to fund operations, particularly the initial start-up and development expenses of new operations and yet is constantly under external pressure to contain costs and reduce prices. Revenues and cash flows have been adversely affected by an increased collection cycle, increased competitive pressures and major restructurings within the healthcare industry. This adverse effect on revenues and cash flow is expected to continue, especially in the mobile diagnostic imaging business. Management believes that InSight's long-term viability and success is contingent upon its ability (through MHC and IHC, its principal operating subsidiaries) to successfully participate in the ongoing industry consolidation, the continuing expansion of managed care imaging networks and the development of the radiology co-source product. InSight continues to pursue acquisition opportunities. InSight believes that the expansion of its business through acquisitions is a key factor in achieving profitability. Generally, acquisition opportunities are aimed at increasing revenues and profits, and maximizing utilization of existing capacity. Incremental operating profit resulting from future acquisitions will vary depending on geographic location, whether facilities are mobile versus fixed, range of services provided and the Company's ability to integrate the acquired businesses into its existing infrastructure. The ability of the Company to capitalize on identified acquisition opportunities is dependent upon the availability of financing on terms reasonably acceptable to the Company. InSight completed the acquisition of the open MRI center in September 1996, and has entered into a definitive agreement to acquire three diagnostic imaging networks in the Northeast United States discussed above. InSight's operations are principally dependent on its ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other healthcare providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). Managed care contracting has become very competitive and reimbursement schedules are nearing Medicare reimbursement levels. A decline in referrals and/or reimbursement rates would adversely affect InSight's revenues and profits. Working capital increased to a deficit of approximately $0.7 million at December 31, 1996 from a deficit of approximately $1.2 million at June 30, 1996. This decrease in deficit of approximately $0.5 million is primarily due to principal payments on long-term debt, offset by net income before depreciation and 15 amortization. The Company has no lines of credit available to borrow against for working capital purposes. Notwithstanding the above, the Company believes that its current cash balances, including those acquired from IHC, and cash flows from operations, absent further declines in referrals, reimbursement and/or cancellation of contract services agreements, will be sufficient to finance its current operations; however, GE Medical loaned the Company approximately $2.7 million to purchase the open MRI center in September, 1996 and has agreed to loan the Company sufficient funds to complete the acquisition in the Northeast United States discussed above. Cash and cash equivalents increased to approximately $7.2 million at December 31, 1996 from approximately $6.8 million at June 30, 1996. This increase of approximately $0.4 million resulted from (i) net income before depreciation and amortization (approximately $5.2 million) and (ii) long-term borrowings (approximately $1.7 million), offset by (i) purchases of property and equipment (approximately $1.3 million), (ii) payments on debt and capital lease obligations (approximately $5.0 million), and (iii) payments of Merger transaction costs, including investment banking fees, legal fees, document printing, mailing and filing fees and severance costs of terminated employees (approximately $0.8 million). The Company has committed to purchase, at an aggregate cost of approximately $2.2 million, two open MRI systems for delivery and installation at two sites during the quarter ending March 31, 1997. GE Medical has agreed to finance the purchase or lease of such equipment. In addition, the Company may purchase, lease or upgrade other MRI systems in the last half of fiscal 1997, as opportunities arise to place new equipment into service when new contract services agreements are signed, existing agreements are renewed, acquisitions are completed, or new imaging centers are developed in accordance with the Company's development strategy. In February 1996, MHC and the other parties in a class action securities lawsuit reached a settlement. On July 29, 1996, following final court approval, MHC and the other parties collectively paid to the plaintiffs in the class action the balance of the agreed upon settlement amount. In anticipation of this settlement, MHC recorded a charge of $1.5 million in 1995 and as part of the Merger borrowed approximately $1.9 million from GE Medical to finance the settlement, which is payable over a five-year period beginning September 1, 1996. This Management's Discussion and Analysis contains forward-looking statements concerning the expected synergies from the Merger and the Company's ability to finance its current and future operations and acquisitions. These forward-looking statements involve a number of risks and uncertainties. In addition to the above-mentioned factors, among other factors that could cause actual results to differ materially are the following: availability of financing; limitations and delays in reimbursement by third-party payors; contract services renewals and financial stability of customers; technology changes; governmental regulation; conditions within the healthcare environment; adverse utilization trends for certain diagnostic imaging procedures; aggressive competition; general economic factors; InSight's inability to carry out its business strategy due to rising purchase prices of imaging centers and companies; and the risk factors listed from time to time in InSight's filings with the Securities and Exchange Commission ("SEC"). 16 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. There are none. (b) REPORTS ON FORM 8-K. No current reports on Form 8-K were filed by the Company for the quarter ended December 31, 1996. 17 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 19, 1997 18 EX-27 2 EX 27
5 1,000 6-MOS JUN-30-1996 DEC-31-1996 7,272 0 23,381 10,198 0 23,829 44,136 15,912 71,540 24,536 0 0 6,750 3 (981) 71,540 45,108 45,108 0 38,573 3,655 858 1,795 472 104 368 0 0 0 368 0.07 0
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