Medical Scanner InSight Offering Shares for Debt

Lake Forest-based InSight Health Services Holdings Corp., a provider of medical scanning services with yearly sales of $300 million, is offering creditors nearly all of the company in exchange for forgiving a big chunk of its debt.

InSight filed plans with the Securities and Exchange Commission last month to offer 87% of its common stock to bond holders in exchange for $200 million in debt due in 2011.

So far, close to half of InSight’s debt holders are on board with the offer, Chief Executive Bret Jorgensen said.

Jorgensen declined to name the debt holders. Nor were they spelled out in InSight’s filing. Many are Wall Street debt investors, he said.

The company is looking to get 95% of its debt holders on board and complete the offering in the second quarter, Jorgensen said.

The offering is the carrot. The stick: a possible bankruptcy filing if the offer doesn’t pan out, according to InSight’s filing.

“That’s not the path we’re on, but if we chose to, we could use that as a tool to force any holdouts to do the exchange,” Jorgensen said. “We’re parallel-pathing just to make sure the exchange offer remains on track.”

The privately held company runs about 220 diagnostic medical imaging centers, including some mobile units that call upon hospitals and other healthcare facilities. InSight has more than 2,100 workers.

Competitors include Alliance Imaging Inc., an Anaheim company with about $460 million in yearly sales.

For the six months through December, InSight had sales of $145 million, down 5% from the year-ago period. It lost $55.7 million for the six months, largely due to an impairment charge. A year earlier, it lost $12.3 million.

The company paid about $27 million in interest on its debt in the six months through December. As of Dec. 31, InSight had $503 million in debt.

InSight’s exchange offer would allow the company to reduce its debt and interest payments by taking out $200 million in subordinated bonds and swapping “it for a substantial amount of ownership of the company,” Jorgensen said.

Private equity investors J.W. Childs Associates LP of Boston and Halifax Group LLC of Washington, D.C., now own InSight after taking the company private five years ago. J.W. Childs owns 80%, while Halifax owns 20%.

The firms are set to give up most of their stakes to debt holders that swap bonds for stock.

“So it’s basically a transfer of most of the private equity sponsors’ ownership stake to those debt holders,” Jorgensen said.

The firms likely will write off their investment in InSight.

“I’m sure they’ve already substantially written down the investment,” Jorgensen said.

J.W. Childs didn’t return a call for this story.

InSight has been squeezed by reductions in federal funding for its services as well as pressure from insurers for lower prices, according to Jorgensen.

“The industry has undergone quite a bit of stress from both a cost and a reimbursement perspective,” he said.

The Deficit Reduction Act of 2005, which President Bush signed in early 2006, “included some very significant reductions for the diagnostic imaging industry,” Jorgensen said.

“Where we found ourselves as a company is simply with a level of debt that’s not sustainable in the future,” he said.

In InSight’s filing, the company illustrates its predicament in a table outlining cash from operations and expenses. In the 12 months through June 2005, the company generated $64 million in cash, enough to cover its $45 million in interest payments for the period.

For the 12 months through June 2006, InSight’s cash from operations fell to $38 million, while interest payments rose to $51 million.

“There’s not anything pressing us to do this transaction today, other than we’re trying to get ahead of the need to do this and basically try to de-leverage the business,” Jorgensen said.

If the offer’s completed, InSight would be left with about $300 million in debt, a level Jorgensen said would be manageable.

In November, InSight retained New York investment bank Lazard Fr