<PAGE>
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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
--------------- ----------------
Commission file number 0-28622
INSIGHT HEALTH SERVICES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0702770
----------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4400 MacArthur Blvd., Suite 800, Newport Beach, CA 92660
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 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: 2,825,856 shares of
Common Stock as of November 6, 1998.
The number of pages in this Form 10-Q is 24.
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
----------------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
PAGE NUMBER
------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and June 30, 1998 3
Condensed Consolidated Statements of Income (unaudited)
for the three months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16-22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 29,834 $ 44,740
Trade accounts receivable, net 27,451 25,663
Other current assets 3,402 3,050
--------- ---------
Total current assets 60,687 73,453
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $30,400 and $26,116, respectively 81,895 71,814
INVESTMENT IN PARTNERSHIPS 1,610 1,523
OTHER ASSETS 6,841 6,639
INTANGIBLE ASSETS, net 74,303 74,831
--------- ---------
$ 225,336 $ 228,260
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment, capital leases and other notes $ 10,822 $ 10,140
Accounts payable and other accrued expenses 21,732 26,410
--------- ---------
Total current liabilities 32,554 36,550
--------- ---------
LONG-TERM LIABILITIES:
Equipment, capital leases and other notes, less current portion 151,781 152,120
Other long-term liabilities 963 984
--------- ---------
Total long-term liabilities 152,744 153,104
--------- ---------
MINORITY INTEREST 518 748
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 per value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
September 30, 1998 and June 30, 1998, respectively, with a liquidation
preference of $25,000 23,923 23,923
Convertible Series C preferred stock, 27,953 shares outstanding at
September 30, 1998 and June 30, 1998, respectively, with a liquidation
preference of $27,953 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares authorized,
2,825,856 and 2,824,090 shares outstanding at September 30, 1998
and June 30, 1998, respectively 3 3
Additional paid-in capital 23,415 23,415
Accumulated deficit (20,994) (22,656)
--------- ---------
Total stockholders' equity 39,520 37,858
--------- ---------
$ 225,336 $ 228,260
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1998 1997
--------- ---------
REVENUES:
<S> <C> <C>
Contract services $ 20,220 $ 13,412
Patient services 17,199 13,630
Other 514 612
--------- ---------
Total revenues 37,933 27,654
--------- ---------
COSTS OF OPERATIONS:
Costs of services 19,948 14,060
Provision for doubtful accounts 623 498
Equipment leases 4,337 4,512
Depreciation and amortization 5,894 3,173
--------- ---------
Total costs of operations 30,802 22,243
--------- ---------
Gross profit 7,131 5,411
CORPORATE OPERATING EXPENSES 2,124 2,358
--------- ---------
Income from company operations 5,007 3,053
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 174 170
--------- ---------
Operating income 5,181 3,223
INTEREST EXPENSE, Net 3,459 1,688
--------- ---------
Income before income taxes 1,722 1,535
PROVISION FOR INCOME TAXES 60 431
--------- ---------
Net income $ 1,662 $ 1,104
--------- ---------
--------- ---------
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.18 $ 0.21
--------- ---------
--------- ---------
Diluted $ 0.18 $ 0.20
--------- ---------
--------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,142,077 5,216,485
--------- ---------
--------- ---------
Diluted 9,410,127 5,460,581
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1998 1997
-------- ---------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,662 $ 1,104
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization 5,967 3,209
Amortization of deferred gain on debt restructure (25) (213)
Cash provided by (used in) changes in operating working capital:
Trade accounts receivable, net (1,788) (2,492)
Other current assets (352) (1,474)
Accounts payable and other current liabilities (4,674) 2,906
--------- --------
Net cash provided by operating activities 790 3,040
--------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (14,936) (7,339)
Other (873) (106)
--------- --------
Net cash used in investing activities (15,809) (7,445)
--------- --------
FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (2,654) (3,334)
Proceeds from issuance of debt 2,997 9,045
Other (230) 86
--------- --------
Net cash provided by financing activities 113 5,797
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,906) 1,392
CASH AND CASH EQUIVALENTS:
Beginning of period 44,740 6,884
--------- --------
End of period $ 29,834 $ 8,276
--------- --------
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,029 $ 1,854
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. NATURE OF BUSINESS
InSight Health Services Corp. (the Company) provides diagnostic imaging,
treatment and related management services in 30 states throughout the United
States. The Company's services are provided through a network of 60 mobile
magnetic resonance imaging (MRI) facilities (Mobile Facilities), 35
fixed-site MRI facilities (Fixed Facilities), 16 multi-modality imaging
centers (Centers), 4 mobile lithotripsy facilities, one Leksell Stereotactic
Gamma Knife treatment center, and one radiation oncology center. An
additional radiation oncology center is operated by the Company as part of
one of its Centers. The Company's operations are located throughout the
United States, with a substantial presence in California, Texas, New England,
the Carolinas and the Midwest (Illinois, Indiana and Ohio).
At its Centers, the Company offers other services in addition to MRI,
including open MRI, computed tomography (CT), diagnostic and fluoroscopic
x-ray, mammography, diagnostic ultrasound, lithotripsy, nuclear medicine,
nuclear cardiology, and cardiovascular services. The Company offers
additional services through a variety of arrangements including equipment
rental, technologist services and training/applications, marketing, radiology
management services, patient scheduling, utilization review and billing and
collection services.
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, 1998 filed with the Securities and
Exchange Commission on September 28, 1998. 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 three months ended September 30, 1998, are not necessarily
indicative of the results to be achieved for the full fiscal year.
Certain reclassifications have been made to conform prior year amounts to the
current year presentation.
3. RECAPITALIZATION AND FINANCING
On October 14, 1997, the Company consummated a recapitalization
(Recapitalization) pursuant to which (a) certain investors affiliated with TC
Group, LLC and its affiliates (collectively, Carlyle), a private merchant
bank headquartered in Washington, D.C., made a cash investment of $25 million
in the Company and received therefor (i) 25,000 shares of newly issued
convertible preferred stock, Series B of the Company, par value $0.001 per
share (Series B Preferred Stock), initially convertible, at the option of the
holders thereof, in the aggregate into 2,985,075 shares of common stock, and
(ii) warrants (Carlyle Warrants) to purchase up to 250,000 shares of common
stock at an exercise price of $10.00 per share; (b) General Electric Company
(GE) (i) surrendered its rights under the amended equipment service agreement
to receive supplemental service fee payments equal to 14% of pretax income in
exchange for the issuance of 7,000 shares of newly issued convertible
preferred stock, Series C of the Company, par value $0.001 per share (Series
C Preferred Stock), initially convertible, at the option of GE, in the
aggregate into 835,821 shares of common stock, for which the Company recorded
a non-recurring expense of approximately $6.3 million during the second
quarter of fiscal 1998, (ii) received warrants (GE Warrants) to purchase up
to 250,000 shares of common stock at an exercise price of $10.00 per share
and (iii) exchanged all of its Series A Preferred Stock, for an additional
20,953 shares of Series C Preferred Stock, initially convertible, at the
option of GE, in the aggregate into 2,501,760 shares of common stock; and (c)
the Company executed a Credit Agreement with NationsBank, N.A. pursuant to
which NationsBank, as agent and lender, provided a total of $125 million in
senior secured credit financing (Bank Financing), including (i) a $50 million
term loan facility consisting of a $20
6
<PAGE>
million tranche with increasing amortization over a five-year period and a
$30 million tranche with increasing amortization over a seven-year period,
principally repayable in years six and seven, (ii) a $25 million revolving
working capital facility with a five-year maturity, and (iii) a $50 million
acquisition facility. Initial funding under the Bank Financing occurred on
October 22, 1997 and, on December 19, 1997, the Bank Financing was increased
to a total of $150 million by converting $10 million of outstanding debt
under the acquisition facility to the seven-year tranche (which was thereby
increased to $40 million) and increasing the acquisition facility to $65
million.
The terms of the Series B Preferred Stock and the Series C Preferred Stock
(collectively, Preferred Stock) are substantially the same. The Preferred
Stock has a liquidation preference of $1,000 per share. It will participate
in any dividends paid with respect to the common stock. There is no
mandatory or optional redemption provision for the Preferred Stock. The
Preferred Stock is convertible into an aggregate of 6,322,656 shares of
common stock.
For so long as Carlyle and its affiliates own at least 33% of the Series B
Preferred Stock or GE and its affiliates own at least 33% of the Series C
Preferred Stock, respectively, the approval of at least 67% of the holders of
such series of Preferred Stock is required before the Company may take
certain actions including, but not limited to, amending its certificate of
incorporation or bylaws, changing the number of directors or the manner in
which directors are selected, incurring indebtedness in excess of $15 million
in any fiscal year, issuing certain equity securities below the then current
market price or the then applicable conversion price, acquiring equity
interests or assets of entities for consideration equal to or greater than
$15 million, and engaging in mergers for consideration equal to or greater
than $15 million. The Preferred Stock will vote with the common stock on an
as-if-converted basis on all matters except the election of directors,
subject to an aggregate maximum Preferred Stock percentage of 37% of all
votes entitled to be cast on such matters. Assuming the conversion of all of
the Series B Preferred Stock into common stock and the exercise of all of the
Carlyle Warrants, Carlyle would own approximately 32% of the common stock of
the Company, on a fully diluted basis. Assuming the conversion of all of the
Series C Preferred Stock and the exercise of the GE Warrants, GE would own
approximately 36% of the common stock of the Company, on a fully diluted
basis.
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Company's Board of Directors (the Board) is currently fixed at
nine. Six directors (Common Stock Directors) are to be elected by the common
stockholders, one of whom (Joint Director) is to be proposed by Carlyle and
GE and approved by a majority of the Board in its sole discretion. Of the
three remaining directors (Preferred Stock Directors), two are to be elected
by the holders of the Series B Preferred Stock and one is to be elected by
the holders of the Series C Preferred Stock, in each case acting by written
consent and without a meeting of the common stockholders. As long as Carlyle
and certain affiliates thereof own an aggregate of at least 50% of the Series
B Preferred Stock, originally purchased thereby, the holders of the Series B
Preferred Stock will have the right to elect two Preferred Stock Directors
and as long as Carlyle and certain affiliates thereof own an aggregate of at
least 25% of such stock, such holders will have the right to elect one
Preferred Stock Director. As long as GE and its affiliates own an aggregate
of at least 25% of the Series C Preferred Stock, originally purchased
thereby, GE will have the right to elect one Preferred Stock Director. If
any such ownership percentage falls below the applicable threshold, the
Preferred Stock Director(s) formerly entitled to be elected by Carlyle or GE,
as the case may be, will thereafter be elected by the common stockholders.
The Board currently consists of eight directors, five of whom are Common
Stock Directors and three of whom are Preferred Stock Directors. The vacancy
created for the Joint Director has not yet been filled.
At any time after October 22, 1998, all of the Series B Preferred Stock and
the Series C Preferred Stock may be converted into a newly created
Convertible Preferred Stock, Series D, par value $0.001 per share (Series D
Preferred Stock). The Series D Preferred Stock allows the number of
directors to be automatically increased to a number which would permit each
of Carlyle and GE, by filling the newly created vacancies, to achieve
representation on the Board proportionate to their respective common stock
ownership percentages on an as-if-converted basis but would limit such
representation to less than two thirds of the Board of Directors for a
certain period of time. The Series D Preferred Stock has a liquidation
preference of $0.001 per share but no mandatory or optional redemption
provision. It will participate in any dividends paid with respect to the
common stock and is convertible into 6,322,660 shares of common stock.
7
<PAGE>
Holders of the Preferred Stock also have a right of first offer with respect
to future sales of common stock in certain transactions or proposed
transactions not involving a public offering by the Company of its common
stock or securities convertible into common stock. Holders of the Preferred
Stock are also entitled to certain demand and "piggyback" registration rights.
On June 12, 1998, the Company completed a refinancing of substantially all of
the Company's long-term debt through the issuance of $100 million of 9 5/8%
senior subordinated notes due 2008 (Notes). Concurrent with the issuance of
the Notes, the Company entered into an amendment to and restatement of the
Bank Financing, pursuant to which the Company refinanced and consolidated its
prior $20 million tranche and $40 million tranche into a $50 million term
loan facility with a six-year amortization, (ii) a $25 million revolving
working capital facility with a five-year maturity and (iii) a $75 million
acquisition facility with a six-year maturity.
4. INVESTMENTS IN PARTNERSHIPS
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The Company's investment interests in
partnerships or limited liability companies (Partnerships) are accounted for
under the equity method of accounting for ownership of 50% or less when the
Company does not exercise significant control over the operations of the
Partnership and does not have primary responsibility for the Partnership's
long-term debt. The Company's investment interests in Partnerships are
consolidated for ownership of 50% or greater owned entities when the Company
exercises significant control over the operations and is primarily
responsible for the associated long-term debt.
Set forth below is the summarized combined financial data of the Company's
two 50% owned and controlled entities which are consolidated (amounts in
thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
(unaudited)
<S> <C> <C>
Condensed Combined
Balance Sheet Data:
Current assets $2,040 $1,825
Total assets 2,134 1,896
Current liabilities 866 644
Minority interest equity 651 642
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Condensed Combined Statement of Income Data:
Net revenues $1,439 $1,646
Expenses 993 1,100
Provision for center profit distribution 223 273
------ ------
Net income $ 223 $ 273
------ ------
------ ------
</TABLE>
The provision for center profit distribution shown above represents the
minority interest in the income of these combined entities.
8
<PAGE>
5. INCOME PER COMMON SHARE
The Company has adopted SFAS No. 128, which replaces primary EPS and fully
diluted EPS with basic EPS and diluted EPS. The number of shares used in
computing EPS is equal to the weighted average number of common and converted
preferred shares outstanding during the respective period. Since the
Preferred Stock has no stated dividend rate and participates in any dividends
paid with respect to the common stock, the as-if-converted amounts are
included in the computation of basic EPS. There were no adjustments to net
income (the numerator) for purposes of computing EPS.
A reconciliation of basic and diluted share computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Average common stock outstanding 2,819,421 2,714,725
Effect of preferred stock 6,322,656 2,501,760
--------- ---------
Denominator for basic EPS 9,142,077 5,216,485
Dilutive effect of stock options and warrants 268,050 244,096
--------- ---------
9,410,127 5,460,581
--------- ---------
</TABLE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Company's payment obligations under the Notes are guaranteed by certain
of the Company's wholly owned subsidiaries (the Guarantor Subsidiaries).
Such guarantees are full, unconditional and joint and several. Separate
financial statements of the Guarantor Subsidiaries are not presented because
the Company's management has determined that they would not be material to
investors. The following supplemental financial information sets forth, on
an unconsolidated basis, balance sheets, statements of income, and statements
of cash flows information for the Company (Parent Company Only), for the
Guarantor Subsidiaries and for the Company's other subsidiaries (the
Non-Guarantor Subsidiaries). The supplemental financial information reflects
the investments of the Company and the Guarantor Subsidiaries in the
Guarantor and Non-Guarantor Subsidiaries using the equity method of
accounting.
9
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ - $ 27,646 $ 2,188 $ - $ 29,834
Trade accounts receivable, net 24,055 3,396 - 27,451
Other current assets - 3,160 242 - 3,402
Intercompany accounts receivable 210,965 11,171 - (222,136) -
-------- --------- --------- --------- --------
Total current assets 210,965 66,032 5,826 (222,136) 60,687
Property and equipment, net - 73,128 8,767 - 81,895
Investments in partnerships - 1,610 - - 1,610
Investments in consolidated subsidiaries (23,320) 2,327 - 20,993 -
Other assets - 6,841 - - 6,841
Intangible assets, net - 74,098 205 - 74,303
-------- --------- --------- --------- --------
$187,645 $ 224,036 $ 14,798 $(201,143) $225,336
-------- --------- --------- --------- --------
-------- --------- --------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases
and other notes $ 7,500 $ 3,198 $ 124 $ - $ 10,822
Accounts payable and other accrued expenses - 21,200 532 - 21,732
Intercompany accounts payable - 210,965 11,171 (222,136) -
-------- --------- --------- --------- --------
Total current liabilities 7,500 235,363 11,827 (222,136) 32,554
Equipment, capital leases and other notes,
less current portion 140,625 11,030 126 - 151,781
Other long-term liabilities - 963 - - 963
Minority interest - - 518 - 518
Stockholders' equity (deficit) 39,520 (23,320) 2,327 20,993 39,520
-------- --------- --------- --------- --------
$187,645 $ 224,036 $ 14,798 $(201,143) $225,336
-------- --------- --------- --------- --------
-------- --------- --------- --------- --------
</TABLE>
10
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ - $ 43,250 $ 1,490 $ - $ 44,740
Trade accounts receivable, net - 22,909 2,754 - 25,663
Other current assets - 2,751 299 - 3,050
Intercompany accounts receivable 211,995 4,903 - (216,898) -
-------- --------- --------- --------- --------
Total current assets 211,995 73,813 4,543 (216,898) 73,453
Property and equipment, net - 68,363 3,451 - 71,814
Investments in partnerships - 1,523 - - 1,523
Investments in consolidated subsidiaries (24,137) 1,482 - 22,655 -
Other assets - 6,639 - - 6,639
Intangible assets, net - 74,711 120 - 74,831
-------- --------- --------- --------- --------
$187,858 $226,531 $8,114 $(194,243) $228,260
-------- --------- --------- --------- --------
-------- --------- --------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases
and other notes $ 7,500 $ 2,497 $ 143 $ - $ 10,140
Accounts payable and other accrued expenses - 25,741 669 - 26,410
Intercompany accounts payable - 211,995 4,903 (216,898) -
-------- --------- --------- --------- --------
Total current liabilities 7,500 240,233 5,715 (216,898) 36,550
Equipment, capital leases and other notes,
less current portion 142,500 9,451 169 - 152,120
Other long-term liabilities - 984 - - 984
Minority interest - - 748 - 748
Stockholders' equity (deficit) 37,858 (24,137) 1,482 22,655 37,858
-------- --------- --------- --------- --------
$187,858 $226,531 $8,114 $(194,243) $228,260
-------- --------- --------- --------- --------
-------- --------- --------- --------- --------
</TABLE>
11
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ - $33,373 $4,560 $ - $37,933
Costs of operations - 26,900 3,902 - 30,802
------ ------ ------ ------- -------
Gross profit - 6,473 658 - 7,131
Corporate operating expenses - 2,124 - - 2,124
------ ------ ------ ------- -------
Income from company operations - 4,349 658 - 5,007
Equity in earnings of unconsolidated partnerships - 174 - - 174
------ ------ ------ ------- -------
Operating income - 4,523 658 - 5,181
Interest expense, net - 3,203 256 - 3,459
------ ------ ------ ------- -------
Income before income taxes - 1,320 402 - 1,722
Provision for income taxes - 60 - - 60
------ ------ ------ ------- -------
Income before equity in income of
consolidated subsidiaries - 1,260 402 - 1,662
------ ------ ------ ------- -------
Equity in income of consolidated subsidiaries 1,662 402 - (2,064) -
------ ------ ------ ------- -------
Net income $1,662 $1,662 $ 402 $(2,064) $ 1,662
------ ------ ------ ------- -------
------ ------ ------ ------- -------
</TABLE>
12
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ - $23,882 $3,772 $ - $27,654
Costs of operations - 19,218 3,025 - 22,243
------ ------ ------ ------- -------
Gross profit - 4,664 747 - 5,411
Corporate operating expenses - 2,358 - - 2,358
------ ------ ------ ------- -------
Income from company operations - 2,306 747 - 3,053
Equity in earnings of unconsolidated partnerships - 170 - - 170
------ ------ ------ ------- -------
Operating income - 2,476 747 - 3,223
Interest expense, net - 1,605 83 - 1,688
------ ------ ------ ------- -------
Income before income taxes - 871 664 - 1,535
Provision for income taxes - 431 - - 431
------ ------ ------ ------- -------
Income before equity in income of
consolidated subsidiaries - 440 664 - 1,104
Equity in income of consolidated subsidiaries 1,104 664 - (1,768) -
------ ------ ------ ------- -------
Net income $1,104 $1,104 $ 664 $(1,768) $ 1,104
------ ------ ------ ------- -------
------ ------ ------ ------- -------
</TABLE>
13
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $1,662 $ 1,662 $ 402 $(2,064) $1,662
Adjustments to reconcile net income to net
cash provided by operating activities:
Total depreciation and amortization - 5,232 735 - 5,967
Amortization of deferred gain on debt
restructure - (25) - - (25)
Equity in income of consolidated
subsidiaries (1,662) (402) - 2,064 -
Cash provided by (used in) changes in
operating assets and liabilities:
Trade accounts receivable, net - (1,146) (642) - (1,788)
Intercompany receivables, net 1,875 (8,586) 6,711 - -
Other current assets - (409) 57 - (352)
Accounts payable and other current
liabilities - (4,537) (137) - (4,674)
------- -------- ------- ------- -------
Net cash provided by (used in) operating
activities 1,875 (8,211) 7,126 - 790
------- -------- ------- ------- -------
INVESTING ACTIVITIES:
Additions to property and equipment - (8,949) (5,987) - (14,936)
Other - (724) (149) - (873)
------- -------- ------- ------- -------
Net cash used in investing activities - (9,673) (6,136) - (15,809)
------- -------- ------- ------- -------
FINANCING ACTIVITIES:
Payments of debt and capital lease
obligations (1,875) (717) (62) - (2,654)
Proceeds from issuance of debt - 2,997 - - 2,997
Other - - (230) - (230)
------- -------- ------- ------- -------
Net cash provided by (used in) financing
activities (1,875) 2,280 (292) - 113
------- -------- ------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS - (15,604) 698 - (14,906)
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 43,250 1,490 - 44,740
------- -------- ------- ------- -------
Cash, end of period $ - $ 27,646 $ 2,188 $ - $29,834
------- -------- ------- ------- -------
------- -------- ------- ------- -------
</TABLE>
14
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income $ 1,104 $ 1,104 $ 664 $ (1,768) $ 1,104
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization - 2,924 285 - 3,209
Amortization of deferred gain on debt restructure - (213) - - (213)
Equity in income of consolidated subsidiaries (1,104) (664) - 1,768 -
Cash provided by (used in) changes in operating assets
and liabilities:
Trade accounts receivables, net - (2,366) (126) - (2,492)
Intercompany receivables, net - (323) 323 - -
Other current assets - (1,471) (3) - (1,474)
Accounts payable and other current liabilities - 3,033 (127) - 2,906
------- -------- ------- ------ -------
Net cash provided by operating activities - 2,024 1,016 - 3,040
------- -------- ------- ------ -------
INVESTING ACTIVITIES:
Additions to property and equipment - (7,095) (244) - (7,339)
Other - (106) - - (106)
------- -------- ------- ------ -------
Net cash used in investing activities - (7,201) (244) - (7,445)
------- -------- ------- ------ -------
FINANCING ACTIVITIES:
Payments of debt and capital lease obligations - (3,276) (58) - (3,334)
Proceeds from issuance of debt - 9,045 - - 9,045
Other - - 86 - 86
------- -------- ------- ------ -------
Net cash provided by (used in) financing activities - 5,769 28 - 5,797
------- -------- ------- ------ -------
INCREASE IN CASH AND CASH EQUIVALENTS - 592 800 - 1,392
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 5,845 1,039 - 6,884
------- -------- ------- ------ -------
Cash, end of period $ - $ 6,437 $ 1,839 $ - $ 8,276
------- -------- ------- ------ -------
------- -------- ------- ------ -------
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this report that are not purely historical or
which might be considered an opinion or projection concerning the Company or
its business, whether express or implied, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements may include statements regarding the Company's expectations,
intentions, plans or strategies regarding the future, including statements
related to the Year 2000 Issue. All forward-looking statements included in
this report are based upon information available to the Company on the date
hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's
actual results could differ materially from those described or implied in
such forward-looking statements because of certain factors which could affect
the Company. Such forward-looking statements should be evaluated in light of
the following factors: availability of financing; limitations and delays in
reimbursement by third party payors; contract renewals and financial
stability of customers; technology changes; governmental regulation;
conditions within the health care environment; Year 2000 issues; adverse
utilization trends for certain diagnostic imaging procedures; aggressive
competition; general economic factors; InSight's inability to carry out its
business strategy; and the risk factors described in the Company's periodic
filings with the Securities and Exchange Commission (SEC), on Forms 10-K,
10-Q and 8-K (if any) and the factors described under "Risk Factors" in the
Company's Registration Statement on Form S-4, filed with the SEC on August 4,
1998, and any amendments thereto.
ACQUISITIONS
The Company believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through
consolidation. InSight's strategy is to further develop and expand regional
diagnostic imaging networks that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service and
convenience to its customers. The strategy of the Company is focused on the
following components: (i) to further participate in the consolidation
occurring in the diagnostic imaging industry by continuing to build its
market presence in its existing regional diagnostic imaging networks through
geographically disciplined acquisitions; (ii) to develop or acquire
additional regional networks in strategic locations where the Company can
offer a broad range of services to its customers and realize increased
economies of scale; (iii) to continue to market current diagnostic imaging
applications through its existing facilities to optimize and increase overall
procedure volume; (iv) to strengthen the regional diagnostic imaging networks
by focusing on managed care customers; and (v) to implement a variety of new
products and services designed to further leverage its core business
strengths, including: Open MRI systems and the radiology co-source product
which involves the joint ownership and management of the physical and
technical operations of the multi-modality radiology department of a hospital
or multi-specialty physician group. The Company believes that long-term
viability is contingent upon its ability to successfully execute its business
strategy.
In fiscal 1997, the Company completed three acquisitions as follows: a
Fixed Facility in Hayward, California; Mobile Facilities in Maine and New
Hampshire; and a Center in Chattanooga, Tennessee. All three transactions
included the purchase of assets and assumption of certain equipment related
liabilities. The cumulative purchase price for these acquisitions was
approximately $18.6 million.
In fiscal 1998, the Company completed four acquisitions as follows: a Center
in Columbus, Ohio; a Center in Murfreesboro, Tennessee; a Fixed Facility in
Redwood City, California; and a Center in Las Vegas, Nevada. In connection
with the purchase of the Center in Columbus, Ohio, InSight also acquired a
majority ownership interest in a new Center in Dublin, Ohio. All
transactions included the purchase of assets and assumption of certain
equipment related liabilities. The cumulative purchase price for these
acquisitions was approximately $18.4 million.
In fiscal 1998, the Company also acquired all of the capital stock of Signal
Medical Services, Inc. (Signal). The purchase price was approximately $45.7
million. The Signal assets primarily consisted of Mobile Facilities in the
Northeastern and Southeastern United States.
16
<PAGE>
In addition, in fiscal 1998, the Company installed three Open MRI Fixed
Facilities in Atlanta, Georgia; Scarborough, Maine; and Santa Ana,
California; and opened its first radiology co-source outpatient Center in
Oxnard, California, all of which were financed through GE. Effective
December 31, 1997, the Company terminated its agreement to operate a Gamma
Knife Center and entered into an agreement to dissolve a partnership related
to a Fixed Facility in Seattle, Washington.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company operates in a capital intensive, high fixed cost industry that
requires significant amounts of working capital to fund operations,
particularly the initial start-up and development expenses of new operations
and yet is constantly under external pressure to contain costs and reduce
prices. Revenues and cash flows have been adversely affected by an increased
collection cycle, competitive pressures and major restructurings within the
health care industry. This adverse effect on revenues and cash flow is
expected to continue, especially in the mobile diagnostic imaging business.
The Company continues to pursue acquisition opportunities. The Company
believes that the expansion of its business through acquisitions is a key
factor in maintaining profitability. Generally, acquisition opportunities
are aimed at increasing revenues and profits, and maximizing utilization of
existing capacity. Incremental operating profit resulting from future
acquisitions will vary depending on geographic location, whether facilities
are Centers, Mobile Facilities or Fixed Facilities, the range of services
provided and the Company's ability to integrate the acquired businesses into
its existing infrastructure.
On October 14, 1997, the Company consummated the Recapitalization pursuant to
which (a) the Company issued to Carlyle 25,000 shares of Series B Preferred
Stock having a liquidation preference of $1,000 per share and the Carlyle
Warrants, generating net proceeds to the Company (after related transaction
costs of approximately $2.0 million) of approximately $23.0 million; (b) the
Company issued to GE 7,000 shares of Series C Preferred Stock, with a
liquidation preference of $1,000 per share, in consideration of the
termination of GE's right to receive supplemental service fee payments equal
to 14% of InSight's pretax income, the GE Warrants and an additional 20,953
shares of Series C Preferred Stock in exchange for all of GE's shares of
Series A Preferred Stock; and (c) the Company executed the Bank Financing.
Initial funding under the Bank Financing occurred on October 22, 1997 and, on
December 19, 1997, the Bank Financing was increased to a total of $150
million by converting $10 million of outstanding debt under the acquisition
facility to the seven-year tranche (which was thereby increased to $40
million) and increasing the acquisition facility to $65 million. The net
proceeds from the Carlyle investment were used to refinance a portion of the
outstanding GE indebtedness (approximately $20 million). At the initial
funding of the Bank Financing, all of the term loan facility was drawn down
to refinance all of the remaining GE indebtedness (approximately $50 million)
and approximately $8 million of the revolving facility was drawn down for
working capital purposes. The terms of the Series B Preferred Stock and the
Series C Preferred Stock, as well as the Bank Financing, contain certain
restrictions on the Company's ability to act without first obtaining a waiver
or consent from Carlyle, GE and NationsBank.
On June 12, 1998, the Company completed a refinancing of substantially all of
the Company's debt through the issuance of the Notes. The Notes bear
interest at 9.625%, with interest payable semi-annually and mature in June
2008. The Notes are redeemable at the option of the Company, in whole or in
part, on or after June 15, 2003. The Notes are unsecured senior subordinated
obligations of the Company and are subordinated in right of payment to all
existing and future senior indebtedness, as defined in the indenture, of the
Company, including borrowings under the Bank Financing.
Concurrently with the issuance of the Notes, the Company entered into an
amendment to, and restatement of the Bank Financing, pursuant to which, among
other things, the Company refinanced and consolidated its prior $20 million
tranche term loan and $40 million tranche term loan into a $50 million term
loan, with a six-year amortization. Borrowings under the $50 million term
loan bear interest at LIBOR plus 1.75%. The Company utilized a portion of
the net proceeds from the Notes, together with the net proceeds of the
borrowing under the term loan portion of the Bank Financing to repay
outstanding indebtedness under the Bank Financing. The remaining net
17
<PAGE>
proceeds of approximately $28.8 million were added to working capital and are
being used for general corporate purposes.
As part of the amendment to the Bank Financing, the Company has available a
$25 million working capital facility with a five-year maturity and a $75
million acquisition facility with a six-year maturity. Borrowings under both
credit facilities bear interest at LIBOR plus 1.75%. The Company is required
to pay an unused facility fee of between 0.375% and 0.5% on unborrowed
amounts under both facilities. There were no borrowings under either
facility at September 30, 1998.
Net cash provided by operating activities was approximately $0.8 million for
the three months ended September 30, 1998. Cash provided by operating
activities resulted primarily from net income before depreciation and
amortization (approximately $7.6 million), offset by an increase in accounts
receivable (approximately $1.8 million) and a decrease in accounts payable
and other accrued expenses (approximately $4.7 million).
Net cash used in investing activities was approximately $15.8 million for the
three months ended September 30, 1998. Cash used in investing activities
resulted primarily from the Company purchasing new diagnostic imaging
equipment or upgrading its existing diagnostic imaging equipment
(approximately $14.9 million).
The Company generated approximately $0.1 million from financing activities,
primarily from additional long-term debt incurred in purchasing new
diagnostic imaging equipment, offset by amortization of long-term debt.
The Company has committed to purchase or lease, at an aggregate cost of
approximately $10 million, five MRI systems for delivery during the year
ending June 30, 1999. The Company expects to use internal funds to finance
the purchase of such equipment. In addition, the Company has committed to
purchase or lease from GE, at an aggregate cost of approximately $24 million,
including siting costs, 20 Open MRI systems for delivery and installation. As
of September 30, 1998, the Company had installed nine of such Open MRI
systems: two at existing Centers, three in newly opened Fixed Facilities, and
four in Mobile Facilities which operate in existing networks serviced by
conventional Mobile Facilities. The Company may purchase, lease or upgrade
other MRI systems as opportunities arise to place new equipment into service
when new contract services agreements are signed, existing agreements are
renewed, acquisitions are completed, or new imaging centers are developed in
accordance with the Company's business strategy.
The Company believes that, based on proceeds from the issuance of the Notes,
current levels of operations and anticipated growth, its cash from
operations, together with other available sources of liquidity, including
borrowings available under the Bank Financing, will be sufficient through the
fiscal year ending June 30, 2001 to fund anticipated capital expenditures and
make required payments of principal and interest on its debt, including
payments due on the Notes and obligations under the Bank Financing. In
addition, the Company continually evaluates potential acquisitions and
expects to fund such acquisitions from its available sources of liquidity,
including borrowings under the Bank Financing. The Company's acquisition
strategy, however, may require sources of capital in addition to that
currently available to the Company, and no assurance can be given that the
Company will be able to raise any such necessary additional funds on terms
acceptable to the Company or at all.
YEAR 2000 ISSUE
IMPACT OF YEAR 2000: The Year 2000 Issue exists because many computer
systems and applications currently use two-digit date fields to designate a
year. As the century date occurs, computer programs, computers and embedded
microprocessors controlling equipment with date-sensitive systems may
recognize Year 2000 as 1900 or not at all. This inability to recognize or
properly treat Year 2000 may result in computer system failures or
miscalculations of critical financial and operational information as well as
failures of equipment controlling date-sensitive microprocessors. In
addition, there are two other related issues which could also lead to
miscalculations or failures: (i) some older systems' programming assigns
special meaning to certain dates, such as 9/9/99 and (ii) the Year 2000 is a
leap year.
18
<PAGE>
STATE OF READINESS: The Company started to formulate a plan to address the
Year 2000 Issue in late 1995. To date, the Company's primary focus has been
on its own internal information technology systems, including all types of
systems in use by the Company in its operations, marketing, finance and human
resources departments, and to deal with the most critical systems first. The
Company is in the process of developing a Year 2000 Plan to address all of
its Year 2000 Issues. The Company has given its Vice President-Information
Technology specific responsibility for managing its Year 2000 Plan and a Year
2000 Committee has been established to assist in developing and implementing
the Year 2000 Plan. The Year 2000 Plan being developed will involve generally
the following phases: awareness, assessment, renovation, testing and
implementation.
Although the Company's assessment of the Year 2000 Issue is incomplete, the
Company has completed an assessment of approximately 75% of its internal
information technology systems. The Company estimates that it will complete
the assessment of its remaining internal information technology systems by
December 31, 1998 and will establish a timetable for the renovation phase of
the remaining technology systems. The Company has already completed the
renovation of approximately 50% of its information technology systems,
including modifying and upgrading software and developing and purchasing new
software, and continues to renovate the portions of such systems for which
assessment is complete. The Company has not begun or established a timetable
for the testing and implementation phases. The Company's goal is to complete
such phases by June 30, 1999, although complications arising from
unanticipated acquisitions might cause some delay.
The Company has recently begun to assess the potential for Year 2000 problems
with the information systems of its customers and vendors. The Company is
preparing questionnaires that it expects to send to its customers, vendors
and other third parties with which the Company has a material relationship by
December 31, 1998. The Company expects to complete the assessment with
respect to such parties by March 31, 1999 subject to their ability to provide
requested information by February 28, 1999. The Company does not have
sufficient information to provide an estimated timetable for completion of
renovation and testing that such parties with which the Company has a
material relationship may undertake. The Company is unable to estimate the
costs that it may incur to remedy the Year 2000 Issues relating to such
parties.
The Company has received some preliminary information concerning the Year
2000 readiness of some of its customers, vendors and other third parties with
which the Company has a material relationship and expects to engage in
discussions with most of such parties during the balance of 1998 and through
March 31, 1999 in an attempt to determine the extent to which the Company is
vulnerable to those parties' possible failure to become Year 2000 compliant.
All of the Company's diagnostic imaging equipment used to provide imaging
services have computer systems and applications, and in some cases embedded
microprocessors, that could be affected by Year 2000 Issues. The Company has
begun to assess the impact on its diagnostic imaging equipment by contacting
the vendors of such equipment. The vendor with respect to the majority of
the MRI and CT equipment used by the Company has informed the Company (i)
that certain identified MRI and CT equipment is Year 2000 compliant, (ii) it
has developed software for functional workarounds to ensure Year 2000
compliance with respect to the balance of its noncompliant MRI and CT
equipment and (iii) remediation will be made during future regular
maintenance visits. The Company is in the process of contacting the other
vendors of its diagnostic imaging equipment. The Company expects to receive
information from such other vendors by December 31, 1998 with respect to
their assessment of the impact on the equipment that they provided to the
Company and the nature and timetable of the remediation that such vendors may
propose. The Company expects to complete its assessment by March 31, 1999
and that renovation will be completed by June 30, 1999. The Company expects
that its equipment vendors will propose timely remediation and will bear the
cost of modifying or otherwise renovating the Company's diagnostic imaging
equipment.
In September 1998, the Company began an assessment of the potential for Year
2000 problems with the embedded microprocessors in its other equipment,
facilities and corporate and regional offices, including telecommunications
systems, utilities, dictation systems, security systems and HVACS and expects
to complete the assessment by December 31, 1998.
19
<PAGE>
COSTS TO ADDRESS YEAR 2000 ISSUE: The Company estimates on a preliminary
basis that the cost of assessment, renovation, testing and implementation of
its internal information technology systems will range from approximately
$500,000 to $1,500,000, of which $30,000 has been incurred. The major
components of these costs are: consultants, additional personnel costs,
programming, new software and hardware, software upgrades and travel
expenses. The Company expects that such costs will be funded through
operating cash flows. This estimate, based on currently available
information, will be updated as the Company continues its assessment and
proceeds with renovation, testing and implementation and may be adjusted upon
receipt of more information from the Company's vendors, customers and other
third parties and upon the design and implementation of the Company's
contingency plan. In addition, the availability and cost of consultants and
other personnel trained in this area and unanticipated acquisitions might
materially affect the estimated costs.
RISKS TO THE COMPANY: The Company's Year 2000 Issue involves significant
risks. There can be no assurance that the Company will succeed in
implementing the Year 2000 Plan it is developing. The following describes
the Company's most reasonably likely worst-case scenario, given current
uncertainties. If the Company's renovated or replaced internal information
technology systems fail the testing phase, or any software application or
embedded microprocessors central to the Company's operations are overlooked
in the assessment or implementation phases, significant problems including
delays may be incurred in billing the Company's major customers (Medicare,
HMOs or private insurance carriers) for services performed. If its major
customers' systems do not become Year 2000 compliant on a timely basis, the
Company will have problems and incur delays in receiving and processing
correct reimbursement. If the computer systems of third parties with which
the Company's systems exchange data do not become Year 2000 compliant both on
a timely basis and in a manner compatible with continued data exchange with
the Company's information technology systems, significant problems may be
incurred in billing and reimbursement. If the systems on the diagnostic
imaging equipment utilized by the Company are not Year 2000 compliant, the
Company may not be able to provide imaging services to patients. If the
Company's vendors or suppliers of the Company's necessary power,
telecommunications, transportation and financial services, fail to provide
the Company with equipment and services the Company will be unable to provide
services to its customers. If any of these uncertainties were to occur, the
Company's business, financial condition and results of operations would be
adversely affected. The Company is unable to assess the likelihood of such
events occurring or the extent of the effect on the Company.
CONTINGENCY PLAN: The Company has not yet established a contingency plan to
address unavoided or unavoidable Year 2000 risks with internal information
technology systems and with customers, vendors and other third parties, but
it expects to create such a plan by March 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
REVENUES: Revenues increased approximately 36.8% from approximately $27.7
million for the three months ended September 30, 1997, to approximately $37.9
million for the three months ended September 30, 1998. This increase was due
primarily to the acquisitions discussed above (approximately $8.5 million)
and an increase in contract services and patient services (approximately $2.8
million) at existing facilities, partially offset by the termination of a
Fixed Facility and a Gamma Knife Center in 1997 (approximately $1.1 million).
Contract services revenues increased approximately 50.7% from approximately
$13.4 million for the three months ended September 30, 1997, to approximately
$20.2 million for the three months ended September 30, 1998. This increase
was due primarily to the acquisitions discussed above (approximately $5.2
million) and an increase at existing facilities (approximately $1.6 million).
The increase at existing facilities was due to higher utilization
(approximately 17%) offset by a decline in reimbursement from customers,
primarily hospitals (approximately 4%), as a result of increased price
competition.
20
<PAGE>
Contract services revenues, primarily earned by the Company's Mobile
Facilities, represented approximately 53% of total revenues for the three
months ended September 30, 1998. Each year approximately one-quarter to
one-third of the contract services agreements are subject to renewal. It is
expected that some high volume customer accounts will elect not to renew
their agreements and instead will purchase or lease their own diagnostic
imaging equipment and some customers may choose an alternative services
provider. In the past where agreements have not been renewed, the Company
has been able to obtain replacement customer accounts. While some
replacement accounts have initially been smaller than the lost accounts such
replacement accounts revenues have generally increased over the term of the
agreement. The non-renewal of a single customer agreement would not have a
material impact on InSight's contract services revenues; however, non-renewal
of several agreements could have a material impact on contract services
revenues.
In addition, the Company's contract services revenues with regard to its
Mobile Facilities in certain markets depend in part on some customer accounts
with high volume. If the future reimbursement levels of such customers were
to decline or cease or if such customers were to become financially insolvent
and if such agreements were not replaced with new accounts or with the
expansion of services on existing accounts, InSight's contract services
revenues would be adversely affected.
Patient services revenues increased approximately 26.5% from approximately
$13.6 million for the three months ended September 30, 1997, to approximately
$17.2 million for the three months ended September 30, 1998. This increase
was due primarily to the acquisitions discussed above (approximately $3.2
million) and an increase in revenues at existing facilities (approximately
$1.5 million). The increase at existing facilities was due to higher
utilization (approximately 11%), partially offset by declines in
reimbursement from third party payors (approximately 4%) and reduced revenues
from the termination of a Fixed Facility and a Gamma Knife Center in 1997
(approximately $1.1 million).
Management believes that any future increases in revenues at existing
facilities can only be achieved by higher utilization and not by increases in
procedure prices; however, excess capacity of diagnostic imaging equipment,
increased competition, and the expansion of managed care may impact
utilization and make it difficult for the Company to achieve revenue
increases in the future, absent the execution of provider agreements with
managed care companies and other payors, and the execution of the Company's
business strategy, particularly acquisitions. InSight's operations are
principally dependent on its ability (either directly or indirectly through
its hospital customers) to attract referrals from physicians and other health
care providers representing a variety of specialties. The Company's
eligibility to provide service in response to a referral is often dependent
on the existence of a contractual arrangement with the referred patient's
insurance carrier (primarily if the insurance is provided by a managed care
organization). Managed care contracting has become very competitive and
reimbursement schedules are at or below Medicare reimbursement levels, and a
significant decline in referrals could have a material impact on the
Company's revenues.
COSTS OF OPERATIONS: Costs of operations increased approximately 38.7% from
approximately $22.2 million for the three months ended September 30, 1997, to
approximately $30.8 million for the three months ended September 30, 1998.
This increase was due primarily to an increase in costs due to the
acquisitions discussed above (approximately $6.9 million) and an increase in
costs at existing facilities (approximately $2.5 million), offset by the
elimination of costs at the two terminated facilities discussed above
(approximately $0.8 million).
Costs of operations, as a percent of total revenues, increased from
approximately 80.4% for the three months ended September 30, 1997, to
approximately 81.2% for the three months ended September 30, 1998. The
increase in percent is due primarily to higher salaries and benefits,
occupancy and higher amortization costs associated with the Company's
acquisition activities, offset by reduced costs in equipment maintenance,
equipment lease and depreciation costs.
CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased
approximately 12.5%, from approximately $2.4 million for the three months
ended September 30, 1997, to approximately $2.1 million for the three months
ended September 30, 1998. This decrease was due primarily to reduced
consulting, legal and travel costs associated with the Company's acquisition
activities. As noted above, the Company anticipates incurring
21
<PAGE>
approximately $500,000 to $1,500,000 in connection with its Year 2000 Issue,
approximately $30,000 of which was incurred through September 30, 1998.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 105.9%
from approximately $1.7 million for the three months ended September 30,
1997, to approximately $3.5 million for the three months ended September 30,
1998. This increase was due primarily to additional debt related to (i) the
acquisitions discussed above, (ii) additional debt related to the issuance of
Notes discussed above, and (iii) additional debt related to the Company
upgrading its existing diagnostic imaging equipment, offset by reduced
interest as a result of amortization of long-term debt.
PROVISION FOR INCOME TAXES: Provision for income taxes decreased from
approximately $0.4 million for the three months ended September 30, 1997, to
approximately $0.06 million for the three months ended September 30, 1998.
The decrease in provision is due to anticipated benefits from the utilization
of certain operating loss carryforwards in 1998.
INCOME PER COMMON SHARE: On a diluted basis, net income per common share was
$0.18 for the three months ended September 30, 1998, compared to net income
per common share of $0.20 for the same period in 1997. The decrease in net
income per common share is the result of (i) increased interest expense, and
(ii) the additional shares outstanding as a result of the Recapitalization
discussed above, offset by (i) increased gross profit, (ii) an increase in
earnings from unconsolidated partnerships, and (iii) decreased corporate
operating expenses.
NEW PRONOUNCEMENTS
In fiscal 1999, the Company will be required to adopt Statement of Financial
Accounting Standards Nos. 130 and 131, "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information." The
Company believes that adoption of these standards will not have a material
impact on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
InSight's market risk exposure relates primarily to interest rates, where
InSight will periodically use interest rate swaps to hedge interest rates on
long-term debt under its Bank Financing. InSight does not engage in
activities using complex or highly leveraged instruments.
At September 30, 1998, InSight had outstanding an interest rate swap,
converting the majority of its $50 million term loan floating rate debt to
fixed rate debt. Since the majority of the Company's debt has historically
been fixed-rate debt, the impact of the interest rate swap has not been
material on the Company's weighted average interest rate.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) The following is a list of securities sold by the Company
during the period covered by this report on Form 10-Q which,
pursuant to the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended ("Securities Act"), were
not registered under the Securities Act:
1. On September 8, 1998, the Company issued to Joseph Bean
Associates, ("Purchaser") pursuant to a Restricted Stock
Purchase Agreement dated September 8, 1998 and in
consideration of the termination of a Sublease Agreement
between the Company and Purchaser, 2,385 shares of the
Company's common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
There are none.
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K with the SEC on
July 2, 1998, under Item 5 thereof, reporting the completion
of the issuance of the Notes; an Amendment No. 1 to Current
Report on Form 8-K with the SEC on July 21, 1998, under Item 7
thereof, filing the financial statements for Signal Medical
Services, Inc. for the years ended December 31, 1997 and 1996,
and the three months ended March 31, 1998 and 1997; and an
Amendment No. 2 to Current Report on Form 8-K with the SEC on
August 12, 1998, under Item 7 thereof, filing the financial
statements for Mobile Imaging Consortium for the three months
ended March 31, 1997 and 1996.
23
<PAGE>
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
Senior Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
November 13, 1998
24
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