-----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, WNOTEgYG/ExgkngcIKPIk9bigQenGt07PJoVKMKdXVAWGZORgDr/zgDP2l9vAc5y qJJwqmgiqmQh5a2nU9shzA== 0001047469-98-027930.txt : 19980723 0001047469-98-027930.hdr.sgml : 19980723 ACCESSION NUMBER: 0001047469-98-027930 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980721 ITEM INFORMATION: FILED AS OF DATE: 19980721 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: 8-K/A SEC ACT: SEC FILE NUMBER: 333-02935 FILM NUMBER: 98669324 BUSINESS ADDRESS: STREET 1: 4440 VON KARMAN AVENUE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4440 VON KARMAN AVE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 8-K/A 1 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) July 21, 1998 ------------------------------ InSight Health Services Corp. - ------------------------------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) Delaware 0-28622 33-0702770 - ------------------------------------------------------------------------------ (STATE OR OTHER JURISDICTION (COMMISSION (I.R.S EMPLOYER OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.) 4400 MacArthur Boulevard, Suite 800, Newport Beach, CA 92660 -------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (949) 476-0733 -------------------------------------------------------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE N/A -------------------------------------------------------------- (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial statements of businesses acquired. The financial statements of Signal Medical Services, Inc. ("Signal") required by this item are attached as Exhibit 99.1 (a). (b) Pro forma financial information (unaudited). The unaudited pro forma combined condensed financial statements are presented which reflect the acquisition by merger of Signal by InSight Health Services Corp. ("Registrant") through its wholly owned subsidiary, SMSI Acquisition Company. The unaudited pro forma combined condensed financial statements are provided for informational purposes only and are not necessarily indicative of the results that actually would have occurred had the acquisition been in effect for the period presented. The unaudited pro forma combined condensed balance sheet is based on the historical balance sheet as of March 31, 1998 and is presented as if the acquisition had been consummated at that date. The unaudited proforma combined condensed consolidated statements of operations are based on the historical statements of operations of each of Registrant and Signal for the nine months ended March 31, 1998, and reflect certain adjustments to give effect to the acquisition as if it had occurred on July 1, 1997, and for the year ended June 30, 1997, and reflect certain adjustments to give effect to the acquisition as if it had occurred on July 1, 1996. Pro forma adjustments are based on the purchase method of accounting and a preliminary allocation of the purchase price. However, changes to the adjustments included in the unaudited pro forma combined condensed financial statements are expected as evaluations of assets and liabilities are completed and additional information becomes available. Accordingly, the final allocated values will differ from the amounts used to calculate the adjustment in the unaudited pro forma combined condensed consolidated statements of operations. (c) Exhibits. 23 Consent of Independent Public Accountant (filed herewith). 99.1 (a) Financial Statements of Signal Medical Services, Inc. (filed herewith). 99.1 (b) Unaudited Pro Forma Combined Condensed Financial Statements of InSight Health Services Corp (filed herewith). 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: July 21, 1998 INSIGHT HEALTH SERVICES CORP. /s/ E. Larry Atkins ------------------------------- E. Larry Atkins President and Chief Executive Officer 3 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NO. DOCUMENT DESCRIPTION NUMBERED PAGE - ----------- -------------------- ------------- 23 Consent of Independent Public Accountants (filed herewith). 99.1 (a) Financial Statements of Signal Medical Services, Inc. (filed herewith). 99.1 (b) Unaudited Pro Forma Combined Condensed Financial Statements of InSight Health Services Corp (filed herewith).
4 EX-23 2 EXHIBIT 23 EXHIBIT NO. 23 The Board of Directors and Stockholders Signal Medical Services, Inc.: We consent to the inclusion of our report dated January 9, 1998, with respect to the balance sheets of Signal Medical Services, Inc. as of December 31, 1997 and 1996, and the related statements of income, stockholders' equity, and cash flows for the years then ended, which report appears in the Form 8-K of InSight Health Services Corp. dated July 21, 1998. KPMG Peat Marwick, LLP Hartford, Connecticut July 21, 1998 5 EX-99.1(A) 3 EXHIBIT 99.1(A) EXHIBIT 99.1(A) SIGNAL MEDICAL SERVICES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ----------- Independent Auditors' Report........................................................................ 7 Balance Sheets as of December 31, 1997 and 1996..................................................... 8 Statements of Income for the Years Ended December 31, 1997 and 1996................................. 9 Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996................... 10 Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............................. 11 Notes to Financial Statements....................................................................... 12 Balance Sheets (unaudited) as of March 31, 1998 and 1997............................................ 20 Statements of Income and Retained Earnings (unaudited) for the Three Months Ended March 31, 1998 and 1997.............................................................................................. 21 Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 1998 and 1997............. 22 Notes to Financial Statements....................................................................... 23
6 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Signal Medical Services, Inc.: We have audited the accompanying balance sheets of Signal Medical Services, Inc. as of December 31, 1997 and 1996, and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Signal Medical Services, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Hartford, Connecticut January 9, 1998 7 SIGNAL MEDICAL SERVICES, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS
1997 1996 ------------- ------------ Current assets: Cash and cash equivalents.......................................................... $ 1,847,000 667,000 Accounts receivables, net of allowance of $101,000 and $44,000..................... 3,219,000 2,388,000 Other receivables.................................................................. 52,000 11,000 Prepaid expenses and other assets.................................................. 93,000 90,000 ------------- ------------ Total current assets............................................................. 5,211,000 3,156,000 ------------- ------------ Property and equipment: Medical equipment.................................................................. 23,607,000 18,430,000 Furniture, fixtures and other equipment............................................ 390,000 291,000 ------------- ------------ 23,997,000 18,721,000 Less accumulated depreciation and amortization..................................... 10,762,000 7,112,000 ------------- ------------ Property and equipment, net...................................................... 13,235,000 11,609,000 ------------- ------------ Other assets, net.................................................................... 580,000 488,000 ------------- ------------ $ 19,026,000 15,253,000 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 627,000 425,000 Accrued compensation............................................................... 792,000 583,000 Accrued maintenance................................................................ 259,000 64,000 Other accrued expenses and other liabilities....................................... 869,000 838,000 Short-term borrowings.............................................................. -- 294,000 Current portion of long-term debt.................................................. 3,227,000 3,314,000 Current portion of capital lease obligation........................................ 309,000 -- ------------- ------------ Total current liabilities........................................................ 6,083,000 5,518,000 Long-term debt....................................................................... 3,712,000 4,447,000 Accrued taxes........................................................................ 1,008,000 771,000 Deferred income taxes................................................................ 801,000 389,000 Other liabilities.................................................................... 380,000 140,000 Long-term portion of capital lease obligation........................................ 1,545,000 -- ------------- ------------ Total liabilities................................................................ 13,529,000 11,265,000 ------------- ------------ Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares authorized, issued and outstanding, redeemable at $33.34 per share................. 2,000,000 2,000,000 Stockholders' equity: Common stock, $.01 par value, 110,000 shares authorized, 33,500 shares issued...... -- -- Additional paid-in capital......................................................... 156,000 156,000 Retained earnings.................................................................. 3,841,000 2,332,000 Less cost of 17,580 treasury shares.................................................. (500,000) (500,000) ------------- ------------ Total stockholders' equity....................................................... 3,497,000 1,988,000 ------------- ------------ Commitments and contingencies $ 19,026,000 15,253,000 ------------- ------------ ------------- ------------
See accompanying notes to financial statements. 8 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ------------- ------------- Revenues........................................................................... $ 20,704,000 17,852,000 ------------- ------------- Operating costs and expenses: Operating costs.................................................................. 7,455,000 6,592,000 Selling, general and administrative.............................................. 2,701,000 2,257,000 Lease expense.................................................................... 3,697,000 3,140,000 Depreciation and amortization.................................................... 3,676,000 3,200,000 Interest expense, net of interest income of $27,000 and $26,000.................. 654,000 827,000 ------------- ------------- Total operating costs and expenses............................................. 18,183,000 16,016,000 ------------- ------------- Income before income taxes..................................................... 2,521,000 1,836,000 Income Taxes 1,012,000 735,000 ------------- ------------- Net Income..................................................................... $ 1,509,000 1,101,000 ------------- ------------- ------------- -------------
See accompanying notes to financial statements. 9 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
ADDITIONAL TOTAL COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK EQUITY ----------- ----------- ---------- ---------- ------------ Balance, December 31, 1995.......................... $ -- 156,000 1,231,000 (500,000) 887,000 Net Income.......................................... -- -- 1,101,000 -- 1,101,000 ----------- ----------- ---------- ---------- ------------ Balance, December 31, 1996.......................... -- 156,000 2,332,000 (500,000) 1,988,000 Net Income.......................................... -- -- 1,509,000 -- 1,509,000 ----------- ----------- ---------- ---------- ------------ Balance, December 31, 1997.......................... $ -- 156,000 3,841,000 (500,000) 3,497,000 ----------- ----------- ---------- ---------- ------------ ----------- ----------- ---------- ---------- ------------
See accompanying notes to financial statements. 10 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ------------- ------------- Cash flows from operating activities: Net income........................................................................ $ 1,509,000 1,101,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................... 3,676,000 3,200,000 Change in assets and liabilities: Increase in accounts receivable............................................... (831,000) (288,000) Decrease (increase) in other receivables...................................... (41,000) 56,000 Increase in prepaid expenses and other current assets......................... (3,000) (39,000) Decrease (increase) in other assets........................................... 66,000 (84,000) Increase in accounts payable, accrued expenses and other liabilities.......... 1,526,000 1,029,000 ------------- ------------- Net cash provided by operating activities................................... 5,902,000 4,975,000 ------------- ------------- Cash flows used in investing activities: Additions to medical equipment, furniture and fixtures............................ (3,421,000) (2,918,000) Investment in joint ventures...................................................... (185,000) -- ------------- ------------- Net cash used in investing activities....................................... (3,606,000) (2,918,000) ------------- ------------- Cash flows used in financing activities: Net decrease in short-term borrowings............................................. (294,000) (156,000) Proceeds from long-term debt...................................................... 2,720,000 475,000 Repayment of long-term debt....................................................... (3,542,000) (3,151,000) ------------- ------------- Net cash used in financing activities....................................... (1,116,000) (2,832,000) ------------- ------------- Net increase (decrease) in cash and cash equivalents................................ 1,180,000 (775,000) Cash and cash equivalents, beginning of period...................................... 667,000 1,442,000 ------------- ------------- Cash and cash equivalents, end of period............................................ $ 1,847,000 667,000 ------------- ------------- ------------- ------------- Cash paid for income taxes.......................................................... $ 807,000 381,000 ------------- ------------- ------------- ------------- Cash paid for interest.............................................................. $ 599,000 850,000 ------------- ------------- ------------- ------------- Capital lease obligation incurred................................................... $ 1,854,000 -- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. 11 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) NATURE OF BUSINESS Signal Medical Services, Inc. (the Company) provides fixed site and mobile magnetic resonance imaging (MRI), computer tomography (CT), general radiology and lithotripsy equipment and operations under contracts with hospitals and other health care providers throughout the United States. The Company's customer contracts at December 31, 1997 are primarily with health care providers in the northeastern and southeastern United States. During 1997, the Company developed and began operating several new ventures, which are jointly owned by the Company and its respective joint venture partners. These joint ventures include a medical billing and collection company, a mobile lithotripsy joint venture and a mobile x-ray and ultrasound company. The Company's investment in these joint ventures totaled $185,000 and is included in other assets. The Company also began managing two newly developed multi-modality imaging centers in which the Company expects to acquire a 50% ownership interest during the first quarter of 1998. The Company's ownership interest in these joint ventures varies from 35% to 60%, and the operating results of these joint ventures was not material to the Company's 1997 financial statements. (b) REVENUE RECOGNITION Revenues are recognized at the time equipment and related services are provided, generally on a fee-per-procedure or daily fee basis. (c) MEDICAL EQUIPMENT AND FURNITURE AND FIXTURES Medical equipment and furniture and fixtures are stated at cost. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: Medical equipment...................................... 2 to 7 years Furniture, fixtures and other equipment................ 2 to 5 years
Repairs and maintenance expenditures are charged to expense as incurred. Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on the straight-line method over the term of the lease or estimated useful life of the equipment, whichever is shorter. Property acquired under capital leases consists of the following:
1997 1996 ------------ ------------ Medical Equipment....................................... $ 1,854,000 -- Accumulated Amortization................................ -- -- ------------ ------------ $ 1,854,000 -- ------------ ------------ ------------ ------------
(d) OTHER ASSETS Other assets include deferred financing costs and certain deferred costs incurred in connection with the Company's contracts with health care providers. These assets are being amortized using the straight-line method over the terms of the related debt and contracts which range from 5 to 7 years. Accumulated amortization amounted to $258,000 in 1997 and $178,000 in 1996. 12 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. At December 31, 1997, cash and cash equivalents consisted primarily of cash invested in a money market account and overnight investment account. (f) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) USE OF ESTIMATES Management of the Company has made several estimates and assumptions relating to the reporting of certain assets, including the allowance for doubtful receivables, and liabilities and the disclosure of contingent liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. The components of the allowance for doubtful receivables for the years ended December 31, 1997 and 1996 were as follows: Balance at January 1, 1996................................ $ 55,000 Charged to operating costs............................ -- Write-offs............................................ (11,000) --------- Balance at December 31, 1996.............................. 44,000 Charged to operating costs............................ 40,000 Write-offs............................................ -- Other................................................. 17,000 --------- Balance at December 31, 1997.............................. $ 101,000 --------- ---------
(h) RECLASSIFICATIONS Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 presentation. (i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the 13 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) amount by which the carrying amount of the assets exceeds the fair value of the assets. Adoption of this Statement did not have any impact on the Company's financial position, results of operations, or liquidity. (2) LEASES The Company leases certain medical equipment, office space and fixed site MRI operating space. Future minimum lease commitments under noncancelable leases with a term of 12 months or more are as follows at December 31, 1997:
CAPITALIZED OPERATING LEASES LEASES ------------ ------------ 1998.............................................................. $ 446,000 $ 1,166,000 1999.............................................................. 432,000 1,062,000 2000.............................................................. 405,000 565,000 2001.............................................................. 378,000 341,000 2002.............................................................. 351,000 94,000 Thereafter........................................................ 322,000 -- ------------ ------------ Total minimum lease payments.................................... 2,334,000 $ 3,228,000 ------------ ------------ Amounts representing interest..................................... (480,000) ------------ Present value of net minimum payments........................... 1,854,000 Current portion................................................... (309,000) ------------ Long-term portion of capital lease obligation................. $ 1,545,000 ------------ ------------
Total operating lease expense for medical equipment amounted to $3,697,000 in 1997 and $3,140,000 in 1996. Other rent expense, which is included in selling, general and administrative expenses, totaled $125,000 for 1997 and $122,000 for 1996, respectively. (3) INCOME TAXES Income tax expense consisted of the following:
YEAR ENDED DECEMBER 31, 1997 CURRENT DEFERRED TOTAL - ---------------------------------------------------------- ---------- --------- ---------- U.S. Federal.............................................. $ 451,000 355,000 806,000 State and Local........................................... 149,000 57,000 206,000 ---------- --------- ---------- 600,000 412,000 1,012,000 ---------- --------- ---------- ---------- --------- ---------- YEAR ENDED DECEMBER 31, 1996 - ---------------------------------------------------------- U.S. Federal.............................................. 341,000 296,000 637,000 State and Local........................................... 70,000 28,000 98,000 ---------- --------- ---------- $ 411,000 324,000 735,000 ---------- --------- ---------- ---------- --------- ----------
14 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (3) INCOME TAXES (CONTINUED) Income tax expense differed from the amount computed by applying the U.S. federal income tax rate of 34% to pretax income in 1997 and 1996. As a result of the following:
1997 1996 ----------------------------- --------------------------- % OF PRETAX % OF PRETAX AMOUNT EARNINGS AMOUNT EARNINGS ------------ --------------- ---------- --------------- "Expected" tax expense....................................... $ 857,000 34% $ 624,000 34% State corporation taxes, net of federal tax benefit.......... 136,000 5% 65,000 4% Other........................................................ 19,000 1% 46,000 2% ------------ --- ---------- -- $ 1,012,000 40% $ 735,000 40% ------------ --- ---------- --- ------------ --- ---------- ---
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ------------ ------------ Deferred tax assets: Allowance for doubtful receivables.................................................. $ 33,000 17,000 Option compensation expense......................................................... 43,000 43,000 Unamortized start-up and organization costs incurred prior to inception of business operations........................................................................ -- 5,000 Compensated absences, principally due to accrual for financial reporting purposes... 41,000 34,000 Alternative minimum tax credit carryforward......................................... -- 373,000 Net operating loss carryforwards.................................................... -- 27,000 Other liabilities................................................................... 346,000 190,000 State tax credit.................................................................... -- 34,000 Other............................................................................... 3,000 9,000 ------------ ------------ Total gross deferred tax assets................................................... 466,000 732,000 ------------ ------------ Deferred tax liabilities Medical equipment, furniture and fixtures, and other assets principally due to differences in depreciation and amortization.................................... 1,267,000 1,121,000 ------------ ------------ Total gross deferred tax liabilities.............................................. 1,267,000 1,121,000 ------------ ------------ Net deferred tax liability.......................................................... $ 801,000 389,000 ------------ ------------ ------------ ------------
Management has concluded that it is more likely than not that the Company will have sufficient taxable income of an appropriate character within the carryback and carryforward period permitted by current tax law to allow for the utilization of the deductible amounts generating the deferred tax asset and, therefore, no valuation allowance is required. (4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK On April 3, 1992, 60,000 shares of $.01 par value series A redeemable convertible cumulative preferred stock were issued to SMSI Holding, Inc., a wholly owned subsidiary of Anthem Blue Cross and Blue Shield of Connecticut, Inc. at $33.34 per share. Each share of series A preferred stock is convertible 15 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK (CONTINUED) into one share of common stock at any time after the date of issuance. In the event of a public offering of common stock by the Company, the preferred stock will automatically be converted into shares of common stock, provided that the offering price per share and gross proceeds from the offering are not less than $66.68 and $5,000,000 respectively. On or after April 1, 1997, the series A preferred stock is redeemable at $33.34 per share plus any unpaid dividends at the option of SMSI Holding, Inc. Upon liquidation, dissolution or winding up of the Company, the holders of the series A preferred stock shall be entitled to receive, before any distribution is made to the holders of common stock of the Company, a distribution of $33.34 per share plus any unpaid dividends. The series A preferred stock accumulates a dividend at an annual rate of $2.33 per share through March 31, 1994 and $3.00 per share from April 1, 1994 to March 31, 1997 payable upon a liquidation, dissolution or winding up, conversion or redemption, consolidation or merger of the Company. The amount of accumulated and unpaid series A preferred stock dividends was $820,000 at December 31, 1997. The holders of the series A preferred stock are entitled to one vote per share of common stock into which the preferred stock is convertible. (5) STOCKHOLDERS' EQUITY On April 3, 1992, 33,500 shares of $.01 par value common stock were issued to the founders of the Company. The Company has a fixed option plan. Under the 1994 Employee Stock Option Plan, the Company may grant options to its employees for up to 18,000 shares of common stock. The exercise price of each option equals the fair value of the Company's stock on the date of grant, and an option's maximum term is ten years. Options generally vest over a period of one to three years. At December 31, 1997, all options were fully vested. The Company has elected to adopt the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost has been recognized for stock options issued. The impact on net income in 1997 and 1996 had the Company adopted FAS 123 would have been immaterial. Options granted, exercised and outstanding under this plan were as follows:
EXERCISE EXERCISE 1997 PRICE 1996 PRICE --------- ----------- --------- ----------- Outstanding at beginning of year........................................ 14,790 -- 13,790 $ 18.00 Granted................................................................. -- -- 1,000 83.00 Exercised............................................................... -- -- -- -- --------- --------- ----------- Outstanding at end of year.............................................. 14,790 14,790 --------- --------- --------- --------- Fair value of options granted during the year........................... $ -- $ 36.65 --------- --------- --------- ---------
The fair value of stock options granted during 1996 were estimated on the date of grant using the minimum value method with the following assumptions: risk-free interest rate of 6.0 percent, expected life of 10 years, and no dividends. 16 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (6) RELATED PARTY TRANSACTION On April 3, 1992, the Company loaned $35,000, at an interest rate of 9%, to an officer and common stockholder of the Company. Interest is due April 1st of each year and 34% of the officer's annual bonus, if any, must be paid toward the outstanding principal balance. The remaining balance of the note at December 31, 1997 and 1996 was $0 and $9,000, respectively, and is included in other receivables. The Company made advances to its employees and joint ventures which totaled approximately $32,000 and $21,000 as of December 31, 1997 and 1996, respectively. These advances are included in other receivables. (7) SHORT-TERM BORROWINGS The Company has a $1,500,000 line of credit from Anthem Blue Cross and Blue Shield of Connecticut, Inc. Borrowings under this line bear interest at the three-month LIBOR rate plus 2% (7.81% at December 31, 1997). The amounts outstanding at December 31, 1997 and 1996 were $0 and $294,000, respectively. The weighted average interest rate on the line of credit during 1997 and 1996 was 8.57%, respectively. 17 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (8) LONG-TERM DEBT The following schedule summarizes long-term debt at December 31, 1997 and 1996:
1997 1996 ------------ ------------ Term notes with banks: $450,000, interest fixed at 7.90%; due in 48 equal monthly principal payments through May 1, 1997......................................................................... $ -- 38,000 $2,500,000, interest fixed at 7.90% through November 1998, variable thereafter; due in 84 equal monthly principal payments through December 1, 2000........................ 1,071,000 1,429,000 $3,000,000, interest fixed at 9.50%; due in 60 equal monthly principal payments through June 1, 1999................................................................ 900,000 1,500,000 $824,444, interest fixed at 9.65% through December 1, 1996, variable thereafter; due in 47 equal monthly principal payments through October 1, 1998...................... 176,000 386,000 $1,950,000, interest fixed at 9.95% through January 1, 1998, variable thereafter; due in 48 equal monthly principal payments through December 1, 1998..................... 487,000 975,000 $750,000, interest fixed at 9.40%; due in 36 equal monthly principal payments through January 10, 1998.................................................................... -- 250,000 $900,000, interest fixed at 9.40%; due in 35 equal monthly principal payments through January 10, 1998.................................................................... -- 308,000 $1,200,000, interest fixed at 8.75%; due in 48 equal monthly principal payments through September 11, 1999.......................................................... 525,000 825,000 $2,100,000, interest fixed at 8.40%; due in 48 equal monthly principal payments through December 14, 1999........................................................... 1,050,000 1,575,000 $475,000, interest fixed at 8.46%; due in 24 equal monthly principal payments through December 31, 1998................................................................... 237,000 475,000 $795,000, interest fixed at 8.95%; due in 60 equal monthly principal payments through February 28, 2002................................................................... 663,000 -- $950,000, interest fixed at 8.90%; due in 60 equal monthly principal payments through August 1, 2002...................................................................... 887,000 -- $975,000, interest fixed at 8.49%; due in 60 equal monthly principal payments through October 31, 2002.................................................................... 943,000 -- ------------ ------------ 6,939,000 7,761,000 Less current maturities............................................................... 3,227,000 3,314,000 ------------ ------------ $ 3,712,000 4,447,000 ------------ ------------ ------------ ------------
18 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (8) LONG-TERM DEBT (CONTINUED) Maturities of long-term debt are as follows: Year ending December 31: 1998........................................................... $3,227,000 1999........................................................... 1,951,000 2000........................................................... 901,000 2001........................................................... 544,000 2002........................................................... 316,000 Thereafter..................................................... -- --------- $6,939,000 --------- ---------
The term notes contain covenants which, among other things, require maintenance of certain ratios of liabilities to tangible net worth, debt service coverage and minimum levels of liquid investments and profitability. The term notes are secured by the medical equipment purchased with the note proceeds, the related service contacts with hospital customers and other assets of the Company. The Company has a $5,000,000 capital expenditure line of credit with a financial institution under which it finances equipment acquisitions on a long-term basis. Interest is at market rates determined at the time of each drawdown under the line. The unused portion of this line at December 31, 1997 was $5,000,000. (9) CONTINGENCIES The Company entered into an agreement in 1993 in which it became the guarantor of a loan between Citrus Memorial Health Foundation, Inc., a customer, and a bank. This loan had an outstanding principal balance of approximately $577,000 at December 31, 1997. In September 1994, the Company entered into a similar loan guarantee with Manchester Memorial Hospital and the same bank. This loan had an outstanding principal balance of approximately $1,027,000 at December 31, 1997. On December 29, 1997, the Company entered in an agreement under which it became a guarantor of a credit facility between Whitney Imaging Center, LLC (WIC) and Shoreline Imaging Center, LLC (SIC) as the borrowers and a bank. Proceeds from the credit facility are being used to finance the development of the two multi-modality imaging centers owned by WIC and SIC and managed by the Company. The credit facility is also guaranteed by the owners of WIC and SIC and is secured by the assets of WIC, SIC and their owners. The Company's guaranty is unsecured. The total amount committed by the bank under the credit facility is $2,450,000. Outstanding borrowings under the facility at December 31, 1997 totaled $1,319,000. In the event that the debtors default under these loans, the Company could become liable for all unpaid interest and principal. As of December 31, 1997, the debtors were current as to interest and principal payments under the loans. 19 SIGNAL MEDICAL SERVICES, INC. BALANCE SHEETS MARCH 31, 1998 AND 1997 (UNAUDITED) ASSETS
1998 1997 ------------- ------------- Current assets: Cash and cash equivalents........................................................ $ 1,642,000 1,013,000 Accounts receivables, net........................................................ 3,397,000 2,571,000 Other receivables................................................................ 239,000 6,000 Prepaid expenses and other assets................................................ 121,000 139,000 ------------- ------------- Total current assets........................................................... 5,399,000 3,729,000 ------------- ------------- Property and equipment: Medical equipment, net........................................................... 12,174,000 10,705,000 Furniture, fixtures and other equipment, net..................................... 112,000 91,000 ------------- ------------- Property and equipment, net.................................................... 12,286,000 10,796,000 ------------- ------------- Other assets, net.................................................................. 660,000 546,000 ------------- ------------- $ 18,345,000 15,071,000 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................. $ 235,000 326,000 Accrued compensation............................................................. 516,000 371,000 Accrued maintenance.............................................................. 258,000 126,000 Other accrued expenses and other liabilities..................................... 1,112,000 778,000 Current portion of long-term debt................................................ 2,993,000 3,304,000 Current portion of capital lease obligation...................................... 309,000 -- ------------- ------------- Total current liabilities...................................................... 5,423,000 4,905,000 ------------- ------------- Long-term debt..................................................................... 3,130,000 4,391,000 Accrued taxes...................................................................... 1,307,000 838,000 Deferred income taxes.............................................................. 912,000 419,000 Other liabilities.................................................................. 139,000 176,000 Long-term portion of capital lease obligation...................................... 1,468,000 -- ------------- ------------- Total liabilities.............................................................. 12,379,000 10,729,000 ------------- ------------- Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares authorized, issued and outstanding, redeemable at $33.34 per share............... 2,000,000 2,000,000 Stockholders' equity: Common stock..................................................................... -- -- Additional paid-in capital....................................................... 156,000 156,000 Retained earnings................................................................ 4,310,000 2,686,000 Less cost of treasury shares....................................................... (500,000) (500,000) ------------- ------------- Total stockholders' equity..................................................... 3,966,000 2,342,000 ------------- ------------- $ 18,345,000 15,071,000 ------------- ------------- ------------- -------------
See accompanying notes to financial statements. 20 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ------------ ------------ Revenues.............................................................................. $ 5,622,000 $ 5,085,000 ------------ ------------ Operating costs and expenses: Operating costs..................................................................... 2,067,000 1,735,000 Selling, general and administrative................................................. 845,000 706,000 Lease expense....................................................................... 686,000 989,000 Depreciation and amortization....................................................... 1,058,000 888,000 Interest expense, net of interest income of $15,000 and $1,000...................... 171,000 178,000 ------------ ------------ Total operating costs and expenses................................................ 4,827,000 4,496,000 ------------ ------------ Income before income taxes........................................................ 795,000 589,000 Income Taxes.......................................................................... 326,000 235,000 ------------ ------------ Net Income........................................................................ $ 469,000 $ 354,000 ------------ ------------ Retained earnings, beginning of period................................................ 3,841,000 2,332,000 ------------ ------------ Retained earnings, end of period...................................................... 4,310,000 2,686,000 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. 21 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ------------ ------------ Cash flows from operating activities: Net income.......................................................................... $ 469,000 354,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................................................... 1,058,000 888,000 Change in assets and liabilities: Increase in accounts receivable................................................. (178,000) (183,000) Decrease (increase) in other receivables........................................ (187,000) 5,000 Increase in prepaid expenses and other current assets........................... (28,000) (49,000) Increase in other assets........................................................ (82,000) (65,000) Increase in accounts payable, accrued expenses and other liabilities............ (257,000) (176,000) ------------ ------------ Net cash provided by operating activities..................................... 795,000 774,000 ------------ ------------ Cash flows used in investing activities: Additions to medical equipment, furniture and fixtures.............................. (107,000) (68,000) ------------ ------------ Net cash used in investing activities......................................... (107,000) (68,000) ------------ ------------ Cash flows used in financing activities: Net decrease in short-term borrowings............................................... -- (294,000) Proceeds from long-term debt........................................................ -- 795,000 Repayment of long-term debt......................................................... (893,000) (861,000) ------------ ------------ Net cash used in financing activities......................................... (893,000) (360,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents.................................. (205,000) 346,000 Cash and cash equivalents, beginning of period........................................ 1,847,000 667,000 ------------ ------------ Cash and cash equivalents, end of period.............................................. $ 1,642,000 1,013,000 ------------ ------------ ------------ ------------ Cash paid for income taxes............................................................ $ 68,000 236,000 ------------ ------------ ------------ ------------ Cash paid for interest................................................................ 159,000 170,000 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. 22 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997 (1) BASIS OF PRESENTATION In the opinion of management, the financial information reflects all adjustments which are necessary to a fair presentation of the financial position, results of operations and cash flows for the interim periods presented and are of a normal recurring nature, unless otherwise disclosed in this report. The statements should be read in conjunction with the notes to the financial statements of Signal Medical Services, Inc. (the Company) as of and for the years ended December 31, 1997 and 1996. (2) ACQUISITION BY INSIGHT HEALTH SERVICES CORP. On May 18, 1998, the stock of the Company was acquired by InSight Health Services Corp., a leading provider of diagnostic imaging and related information services based in Newport Beach, California. The purchase price consisted of $46 million (subject to certain post-closing adjustments), including the assumption of indebtedness. (3) NEW PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." FASB Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company believes that adoption of these standards will not have a material impact on the Company. 23 EX-99.1(B) 4 EXHIBIT 99.1(B) EXHIBIT 99.1 (B) (b) (i) PRO FORMA FINANCIAL INFORMATION INSIGHT HEALTH SERVICES CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET MARCH 31, 1998 (Amounts in thousands)
Signal Pro Historical Historical Acquisition Forma InSight Signal Adjustments Combined ---------- ---------- ----------- -------- ASSETS Cash and cash equivalents $ 9,650 $ 1,642 $ - $ 11,292 Trade accounts receivable, net 21,674 3,397 - 25,071 Other receivables, net 330 239 - 569 Other current assets 2,149 121 - 2,270 --------- --------- --------- --------- Total current assets 33,803 5,399 - 39,202 Property and equipment, net 46,745 12,286 4,309 (2) 63,340 Investment in partnerships 495 - - 495 Other assets net 2,471 660 3,131 Intangible assets, net 43,273 - 26,189 (1) 69,462 --------- --------- --------- --------- $ 126,787 $ 18,345 $ 30,498 $ 175,630 --------- --------- --------- --------- --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of equipment and other notes $ 5,706 $ 3,302 $ - $ 9,008 Accounts payable and accrued expenses 14,905 2,121 - 17,026 --------- --------- --------- --------- Total current liabilities 20,611 5,423 - 26,034 Long term portion of equipment and other note 67,781 4,598 32,155 (1) 4,309 (2) 108,843 Other 680 2,358 - 3,038 --------- --------- --------- --------- Total liabilities 89,072 12,379 36,464 137,915 --------- --------- --------- --------- Minority interest 1,871 - - 1,871 --------- --------- --------- --------- Redeemable convertible cumulative preferred stock - 2,000 (2,000)(1) - --------- --------- --------- --------- Stockholders' equity Convertible Series B preferred stock 23,923 - - 23,923 Convertible Series C preferred stock 13,173 - - 13,173 Common Stock 3 - - 3 Additional paid-in capital 23,366 156 (156)(1) 23,366 (Accumulated deficit) retained earnings (24,621) 4,310 (4,310)(1) (24,621) Treasury stock - (500) 500 (1) - --------- --------- --------- --------- Total stockholders' equity 35,844 3,966 (3,966) 35,844 --------- --------- --------- --------- $ 126,787 $ 18,345 $ 30,498 $ 175,630 --------- --------- --------- --------- --------- --------- --------- ---------
The pro forma condensed combined balance sheet as of March 31, 1998 reflects the following pro forma adjustments: (1) To record the acquisition of common stock of Signal for $32,155 in borrowed funds and the resulting goodwill of $26,189. (2) To record the acquisition of equipment for debt on equipment that is currently under operating leases. The above reflects the acquisition of Signal by InSight using the purchase method of accounting. Under the principles of purchase accounting, the assets and liabilities of Signal are stated at fair market value (FMV). For purposes of these pro forma financial statements, the book value of Signal's assets and liabilities are assumed to approximate FMV. The excess purchase price is allocated to goodwill. 24 (b) (ii) INSIGHT HEALTH SERVICES CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 (Amounts in thousands)
Signal Historical Historical Acquisition Pro Forma InSight Signal Adjustments Combined ----------- ---------- ----------- --------- Revenues $ 93,063 $ 19,331 $ - $ 112,394 ----------- --------- ---------- --------- Costs of services 52,070 9,390 - 61,460 Equipment leases 18,396 3,651 (1,518)(4) 20,529 Depreciation and amortization 9,871 3,354 1,309 (1) 15,396 --------- 862 (2) ----------- --------- ---------- --------- Costs of operations 80,337 16,395 653 97,385 ----------- --------- ---------- --------- Gross profit 12,726 2,936 (653) 15,009 Corporate operating expenses 7,431 - - 7,431 ----------- --------- ---------- --------- Income (loss) from company operations 5,295 2,936 (653) 7,578 Equity in earnings of unconsolidated partnerships 468 - - 468 ----------- --------- ---------- --------- Operating income (loss) 5,763 2,936 (653) 8,046 Interest expense 4,055 720 2,894 (3) 7,669 ----------- --------- ---------- --------- Income (loss) before provision for taxes 1,708 2,216 (3,547) 377 Provision (benefit) for income taxes 427 887 (1,220)(5) 94 ----------- --------- ---------- --------- Net income (loss) $ 1,281 $ 1,329 $ (2,327) $ 283 ----------- --------- ---------- --------- ----------- --------- ---------- --------- Income (loss) per common and preferred share: Basic $ 0.25 $ 0.05 Diluted $ 0.24 $ 0.05 Weighted average common shares outstanding: Basic 5,215 5,215 Diluted 5,440 5,440
The pro forma combined condensed statement of operations for the year ended June 30, 1997 reflects the following acquisition adjustments: (1) To record amortization of goodwill over 20 years. (2) To record depreciation expense on operating leases purchased. (3) To record interest expense for acquisition financing. (4) To record the reversal of lease expense on operating leases purchased. (5) To record the tax effect on the above entries at estimated effective rates. 25 (b) (iii) INSIGHT HEALTH SERVICES CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (Amounts in thousands)
Signal Historical Historical Acquisition Pro Forma InSight Signal Adjustments Combined ---------- ---------- ----------- --------- Revenues $ 85,673 $ 16,095 $ - $ 101,768 --------- --------- --------- --------- Costs of services 46,038 5,993 - 52,031 Equipment leases 12,983 2,412 (1,138)(4) 14,257 Depreciation and amortization 10,670 2,989 982 (1) 15,287 646 (2) --------- --------- --------- --------- Costs of operations 69,691 11,394 490 81,575 --------- --------- --------- --------- Gross profit 15,982 4,701 (490) 20,193 Provision for supplemental service fee termination 6,309 - 6,309 Corporate operating expenses 6,510 2,165 - 8,675 --------- --------- --------- --------- Income (loss) from company operations 3,163 2,536 (490) 5,209 Equity in earnings of unconsolidated partnerships 480 - - 480 --------- --------- --------- --------- Operating income (loss) 3,643 2,536 (490) 5,689 Interest expense 4,665 492 2,170 (3) 7,327 --------- --------- --------- --------- Income (loss) before provision for taxes (1,022) 2,044 (2,660) (1,638) Provision (benefit) for income taxes 431 829 (997)(5) 263 --------- --------- --------- --------- Net income (loss) $ (1,453) $ 1,215 $ (1,663) $ (1,901) --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per common and preferred share: Basic $ (0.19) $ (0.25) Diluted $ (0.19) $ (0.25) Weighted average common shares outstanding: Basic 7,590 7,590 Diluted 7,590 7,590
The pro forma combined condensed statement of operations for the nine months ended March 31, 1998 reflects the following acquisition adjustments: (1) To record amortization of goodwill over 20 years. (2) To record depreciation expense on operating leases purchased. (3) To record interest expense for acquisition financing. (4) To record the reversal of lease expense on operating leases purchased. (5) To record the tax effect on the above entries at estimated effective rates. 26 -----END PRIVACY-ENHANCED MESSAGE-----