<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, 1999
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: 2,935,751 shares of Common
Stock as of November 10, 1999.
The number of pages in this Form 10-Q is 23.
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1999
and June 30, 1999 (unaudited) 3
Condensed Consolidated Statements of Income
for the three months ended September 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,886 $ 14,294
Trade accounts receivables, net 39,131 35,987
Other current assets 8,233 7,302
------------- -------------
Total current assets 63,250 57,583
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $48,627 and $43,611, respectively 91,885 90,671
INVESTMENTS IN PARTNERSHIPS 1,396 1,415
OTHER ASSETS 8,103 8,308
INTANGIBLE ASSETS, net 79,331 80,327
------------- -------------
$ 243,965 $ 238,304
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment, capital leases and other notes $ 12,312 $ 12,443
Accounts payable and other accrued expenses 23,048 20,489
------------- -------------
Total current liabilities 35,360 32,932
------------- -------------
LONG-TERM LIABILITIES:
Equipment, capital leases and other notes, less current portion 162,127 160,187
Other long-term liabilities 921 929
------------- -------------
Total long-term liabilities 163,048 161,116
------------- -------------
MINORITY INTEREST 126 150
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
September 30, 1999 and June 30, 1999, respectively, with a liquidation
preference of $25,000 as of September 30, 1999 23,923 23,923
Convertible Series C preferred stock, 27,953 shares outstanding at
September 30, 1999 and June 30, 1999, respectively, with a liquidation
preference of $27,953 as of September 30, 1999 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares authorized:
2,880,321 and 2,879,071 shares outstanding at September 30, 1999
and June 30, 1999, respectively 3 3
Additional paid-in capital 23,556 23,551
Accumulated deficit (15,224) (16,544)
------------- -------------
Total stockholders' equity 45,431 44,106
------------- -------------
$ 243,965 $ 238,304
============= =============
</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,
----------------------------
1999 1998
-------- -------
<S> <C> <C>
REVENUES:
Contract services $ 24,589 $ 20,220
Patient services 20,820 17,199
Other 757 514
---------- ----------
Total revenues 46,166 37,933
---------- ----------
COSTS OF OPERATIONS:
Costs of services 24,697 19,800
Provision for doubtful accounts 750 623
Equipment leases 5,086 4,337
Depreciation and amortization 7,563 5,967
---------- ----------
Total costs of operations 38,096 30,727
---------- ----------
Gross profit 8,070 7,206
CORPORATE OPERATING EXPENSES 2,635 2,199
---------- ----------
Income from company operations 5,435 5,007
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 178 174
---------- ----------
Operating income 5,613 5,181
INTEREST EXPENSE, net 3,963 3,459
---------- ----------
Income before income taxes 1,650 1,722
PROVISION FOR INCOME TAXES 330 60
---------- ----------
Net income $ 1,320 $ 1,662
========== ==========
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.14 $ 0.18
---------- ----------
---------- ----------
Diluted $ 0.14 $ 0.18
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,201,931 9,142,077
========== ==========
Diluted 9,381,936 9,410,127
========== ==========
</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,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,320 $ 1,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,563 5,967
Amortization of deferred gain on debt restructure (8) (25)
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables (3,144) (1,788)
Other current assets (931) (352)
Accounts payable and other accrued expenses 2,559 (4,674)
---------- ----------
Net cash provided by operating activities 7,359 790
---------- ----------
INVESTING ACTIVITIES:
Acquisition of Centers and Mobile Facilities (1,433) -
Additions to property and equipment (6,048) (14,936)
Other (76) (873)
---------- ----------
Net cash used in investing activities (7,557) (15,809)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 5 -
Principal payments of debt and capital lease obligations (3,191) (2,654)
Proceeds from issuance of debt 5,000 2,997
Other (24) (230)
---------- ----------
Net cash provided by financing activities 1,790 113
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,592 (14,906)
CASH AND CASH EQUIVALENTS:
Beginning of period 14,294 44,740
---------- ----------
End of period $ 15,886 $ 29,834
========== ==========
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,485 $ 1,029
========== ==========
Income taxes paid $ 142 $ -
========== ==========
</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 31 states throughout the United
States. InSight's services are provided through a network of 75 mobile
magnetic resonance imaging (MRI) facilities (Mobile Facilities), 35
fixed-site MRI facilities (Fixed Facilities), 23 multi-modality imaging
centers (Centers), 5 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 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, 1999 filed with the Securities and Exchange
Commission (SEC) on September 28, 1999. 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, 1999 are not necessarily
indicative of the results to be achieved for the full fiscal year.
Certain reclassifications have been made to conform prior year amounts to the
current year presentation.
3. INVESTMENTS IN AND TRANSACTIONS WITH 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
Partnerships and does not have primary responsibility for the Partnerships'
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.
6
<PAGE>
Set forth below is the summarized combined financial data of the Company's
two 50% controlled entities, which are consolidated (amounts in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- ------------
(unaudited)
<S> <C> <C>
Condensed Combined Balance Sheet Data:
Current assets $1,404 $1,494
Total assets 1,547 1,637
Current liabilities 343 640
Minority interest equity 619 515
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
Condensed Combined Statement of Income Data:
Net revenues $1,417 $1,439
Expenses 859 993
Provision for center profit distribution 279 223
------------- ------------
Net income $279 $223
============= ============
</TABLE>
The provision for center profit distribution shown above represents the
minority interest in the income of these combined entities.
4. INCOME PER COMMON AND CONVERTED PREFERRED SHARE
The Company reports basic and diluted earnings per share (EPS) for common and
converted preferred stock. 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,
------------------------------
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
Average common stock outstanding 2,879,275 2,819,421
Effect of preferred stock 6,322,656 6,322,656
------------- ------------
Denominator for basic EPS 9,201,931 9,142,077
Dilutive effect of stock options and warrants 180,005 268,050
------------- ------------
9,381,936 9,410,127
============= ============
</TABLE>
7
<PAGE>
5. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Company's payment obligations under the 9 5/8% senior subordinated 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.
8
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 13,764 $ 2,122 $ - $ 15,886
Trade accounts receivables, net - 35,298 3,833 - 39,131
Other current assets - 8,094 139 - 8,233
Intercompany accounts receivable 227,673 11,162 - (238,835) -
-------- ------------ ------------- ------------ ------------
Total current assets 227,673 68,318 6,094 (238,835) 63,250
Property and equipment, net - 84,125 7,760 - 91,885
Investments in partnerships - 1,396 - - 1,396
Investments in consolidated subsidiaries (17,926) 2,704 - 15,222 -
Other assets - 8,103 - - 8,103
Intangible assets, net - 78,674 657 - 79,331
-------- ------------ ------------- ------------ ------------
$209,747 $ 243,320 $ 14,511 $ (223,613) $ 243,965
======== =========== ============= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other
notes $ 10,047 $ 2,140 $ 125 $ - $ 12,312
Accounts payable and other accrued expenses - 22,657 391 - 23,048
Intercompany accounts payable - 227,673 11,162 (238,835) -
-------- ------------ ------------- ------------ ------------
Total current liabilities 10,047 252,470 11,678 (238,835) 35,360
Equipment, capital leases and other notes, less current
portion 154,269 7,855 3 - 162,127
Other long-term liabilities - 921 - - 921
Minority interest - - 126 - 126
Stockholders' equity (deficit) 45,431 (17,926) 2,704 15,222 45,431
-------- ------------ ------------- ------------ ------------
$209,747 $ 243,320 $ 14,511 $ (223,613) $ 243,965
======== =========== ============= ============ ============
</TABLE>
9
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
JUNE 30, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 12,709 $ 1,585 $ - $ 14,294
Trade accounts receivables, net - 32,164 3,823 - 35,987
Other current assets - 7,188 114 - 7,302
Intercompany accounts receivable 225,140 11,027 - (236,167) -
-------- ------------ ------------- ------------ ------------
Total current assets 225,140 63,088 5,522 (236,167) 57,583
Property and equipment, net - 82,544 8,127 - 90,671
Investments in partnerships - 1,415 - - 1,415
Investments in consolidated subsidiaries (19,234) 2,691 - 16,543 -
Other assets - 8,308 - - 8,308
Intangible assets, net - 79,606 721 - 80,327
-------- ------------ ------------- ------------ ------------
$205,906 $237,652 $ 14,370 $ (219,624) $ 238,304
======== ============ ============= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other
notes $ 9,945 $ 2,374 $ 124 $ - $ 12,443
Accounts payable and other accrued expenses - 20,128 361 - 20,489
Intercompany accounts payable - 225,140 11,027 (236,167) -
-------- ------------ ------------- ------------ ------------
Total current liabilities 9,945 247,642 11,512 (236,167) 32,932
Equipment, capital leases and other notes, less current
portion 151,855 8,315 17 - 160,187
Other long-term liabilities - 929 - - 929
Minority interest - - 150 - 150
Stockholders' equity (deficit) 44,106 (19,234) 2,691 16,543 44,106
-------- ------------ ------------- ------------ ------------
$205,906 $237,652 $ 14,370 $ (219,624) $ 238,304
======== ============ ============= ============ ============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $41,309 $4,857 $ - $ 46,166
Costs of operations - 34,061 4,035 - 38,096
-------- ------------ ------------- ----------- ------------
Gross profit - 7,248 822 - 8,070
Corporate operating expenses - 2,635 - - 2,635
-------- ------------ ------------- ----------- ------------
Income from company operations - 4,613 822 - 5,435
Equity in earnings of unconsolidated partnerships - 178 - - 178
-------- ------------ ------------- ----------- ------------
Operating income - 4,791 822 - 5,613
Interest expense, net - 3,689 274 - 3,963
-------- ------------ ------------- ----------- ------------
Income before income taxes - 1,102 548 - 1,650
Provision for income taxes - 330 - - 330
-------- ------------ ------------- ----------- ------------
Income before equity in income of
consolidated subsidiaries - 772 548 - 1,320
Equity in income of consolidated subsidiaries 1,320 548 - (1,868) -
-------- ------------ ------------- ----------- ------------
Net income $1,320 $ 1,320 $ 548 $(1,868) $ 1,320
======== ============ ============= =========== ============
</TABLE>
11
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 33,373 $ 4,560 $ - $ 37,933
Costs of operations - 26,825 3,902 - 30,727
-------- -------- ------- -------- --------
Gross profit - 6,548 658 - 7,206
Corporate operating expenses - 2,199 - - 2,199
-------- -------- ------- -------- --------
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, new - 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,320 $ 1,320 $ 548
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - 6,849 714
Amortization of deferred gain on debt restructure - (8) -
Equity in income of consolidated subsidiaries (1,320) (548) -
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables - (3,134) (10)
Intercompany receivables, net (2,521) 2,921 (400)
Other current assets - (906) (25)
Accounts payable and other accrued expenses - 2,529 30
------ ------- ------
Net cash provided by (used in) operating activities (2,521) 9,023 857
------ ------- ------
INVESTING ACTIVITIES:
Acquisitions of Centers and Mobile Facilities - (1,433) -
Additions to property and equipment - (5,765) (283)
Other - (76) -
------ ------- ------
Net cash used in investing activities - (7,274) (283)
------ ------- ------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 5 - -
Principal payments of debt and capital lease obligations (2,484) (694) (13)
Proceeds from issuance of debt 5,000 - -
Other - - (24)
------ ------- ------
Net cash provided by (used in) financing activities 2,521 (694) (37)
------ ------- ------
INCREASE IN CASH AND CASH EQUIVALENTS - 1,055 537
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 12,709 1,585
------ ------- ------
Cash, end of period $ - $13,764 $2,122
======= ======= ======
<CAPTION>
ELIMINATION CONSOLIDATED
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $(1,868) $1,320
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - 7,563
Amortization of deferred gain on debt restructure - (8)
Equity in income of consolidated subsidiaries 1,868 -
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables - (3,144)
Intercompany receivables, net - -
Other current assets - (931)
Accounts payable and other accrued expenses - 2,559
------- ------
Net cash provided by (used in) operating activities - 7,359
------- ------
INVESTING ACTIVITIES:
Acquisitions of Centers and Mobile Facilities - (1,433)
Additions to property and equipment - (6,048)
Other - (76)
------- ------
Net cash used in investing activities - (7,557)
------- ------
FINANCING ACTIVITIES:
Proceeds from stock options exercised - 5
Principal payments of debt and capital lease obligations - (3,191)
Proceeds from issuance of debt - 5,000
Other - (24)
------- ------
Net cash provided by (used in) financing activities - 1,790
------- ------
INCREASE IN CASH AND CASH EQUIVALENTS - 1,592
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 14,294
------- ------
Cash, end of period $ - $15,886
======= =======
</TABLE>
13
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,662 $ 1,662 $ 402
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - 5,232 735
Amortization of deferred gain on debt restructure - (25) -
Equity in income of consolidated subsidiaries (1,662) (402) -
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables - (1,146) (642)
Intercompany receivables, net 1,875 (8,586) 6,711
Other current assets - (409) 57
Accounts payable and other accrued expenses - (4,537) (137)
------- ------- -------
Net cash provided by (used in) operating activities 1,875 (8,211) 7,126
------- ------- -------
INVESTING ACTIVITIES:
Additions to property and equipment - (8,949) (5,987)
Other - (724) (149)
------- ------- -------
Net cash used in investing activities - (9,673) (6,136)
------- ------- -------
FINANCING ACTIVITIES:
Principal payments of debt and capital lease obligations (1,875) (717) (62)
Proceeds from issuance of debt - 2,997 -
Other - - (230)
------- ------- -------
Net cash provided by (used in) financing activities (1,875) 2,280 (292)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (15,604) 698
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 43,250 1,490
------- ------- -------
Cash, end of period $ - $ 27,646 $ 2,188
======= ======== =======
<CAPTION>
ELIMINATION CONSOLIDATED
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $(2,064) $ 1,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - 5,967
Amortization of deferred gain on debt restructure - (25)
Equity in income of consolidated subsidiaries 2,064 -
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables - (1,788)
Intercompany receivables, net - -
Other current assets - (352)
Accounts payable and other accrued expenses - (4,674)
------- --------
Net cash provided by (used in) operating activities - 790
------- --------
INVESTING ACTIVITIES:
Additions to property and equipment - (14,936)
Other - (873)
------- --------
Net cash used in investing activities - (15,809)
------- --------
FINANCING ACTIVITIES:
Principal payments of debt and capital lease obligations - (2,654)
Proceeds from issuance of debt - 2,997
Other - (230)
------- --------
Net cash provided by (used in) financing activities - 113
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (14,906)
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 44,740
------- --------
Cash, end of period $ - $ 29,834
======= ========
</TABLE>
14
<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 regulations;
conditions within the health care environment; Year 2000 issues; adverse
utilization trends for certain diagnostic imaging procedures; aggressive
competition; general economic factors; the Company's inability to carry out
its business strategy due to rising purchase prices of imaging centers and
companies; successful integration of acquisitions; and the risk factors
described in the Company's periodic filings with the 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. The Company'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 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, the Company 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) through the merger of Signal into a wholly
owned subsidiary of the Company. The purchase price was approximately $45.7
million. The Signal assets primarily consisted of Mobile Facilities in the
Northeastern and Southeastern United States.
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
15
<PAGE>
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.
In fiscal 1999, the Company completed two acquisitions as follows: a 70%
interest in a partnership which owns four Centers and two Fixed Facilities in
Buffalo, New York; and a 100% interest in three Centers and two Fixed
Facilities in Phoenix, Arizona. The cumulative purchase price for these two
acquisitions was approximately $16.9 million.
In the first quarter of fiscal 2000, the Company opened its second radiology
co-source outpatient Fixed Facility in Granada Hills, California, which was
financed with internally generated funds.
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.
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; however, the Company has incurred and will continue to
incur costs for the salaries, benefits and travel expenses of its business
development team. Incremental operating profit resulting from future
acquisitions will vary depending on geographic location, whether facilities
are Mobile or Fixed, the range of services provided and the Company's ability
to integrate the acquired businesses into its existing infrastructure. Since
1996, the Company has completed ten acquisitions as discussed above. No
assurance can be given, however, that the Company will be able to identify
suitable acquisition candidates and thereafter complete such acquisitions on
terms acceptable to the Company.
The Company has outstanding $100 million of 9 5/8% senior subordinated notes
(Notes). The Notes mature in June 2008, with interest payable semi-annually
and 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 indebtedness, as defined in the indenture, of the Company, including
borrowings under the bank financing described below. The terms of the Notes
contain certain restrictions on the Company's ability to act without first
obtaining consent of the noteholders.
The Company also has outstanding with Bank of America, N.A. (BofA) (i) a $50
million term loan which expires in June 2004, (ii) a $25 million working
capital facility which expires in June 2003, and (iii) a $75 million
acquisition facility which expires in June 2004 (Bank Financing). Borrowings
under the Bank Financing bear interest at LIBOR plus 1.75%. The Company is
required to pay an annual unused facility fee of between 0.375% and 0.5%,
payable quarterly, on unborrowed amounts under the working capital and
acquisition facilities, of which the Company paid approximately $0.1 million
during the three months ended September 30, 1999. At September 30, 1999,
there was (i) approximately $40.1 million in borrowings under the term loan,
(ii) approximately $8.0 million in borrowings under the working capital
facility, and (iii) approximately $15.7 million in borrowings under the
acquisition facility.
Net cash provided by operating activities was approximately $7.4 million for
the three months ended September 30, 1999. Cash provided by operating
activities resulted primarily from net income before depreciation and
amortization (approximately $8.9 million) and an increase in accounts payable
and other accrued expenses (approximately $2.6 million). The increase in
accounts payable and other accrued expenses is due primarily to the timing of
accrued interest expense relating to the semi-annual interest payments on the
Notes described above. The increase in cash provided by operating activities
was offset by an increase in trade accounts receivables (approximately $3.1
million). The increase in trade accounts receivables is due primarily to the
Company's acquisition and development activities.
16
<PAGE>
Net cash used in investing activities was approximately $7.6 million for the
three months ended September 30, 1999. Cash used in investing activities
resulted primarily from the Company purchasing or upgrading diagnostic
imaging equipment at its existing facilities (approximately $6.0 million) and
at the facilities acquired in fiscal 1999 described above (approximately $1.4
million).
Net cash provided by financing activities was approximately $1.8 million for
the three months ended September 30, 1999, resulting primarily from
borrowings under the working capital facility described above (approximately
$5.0 million), offset by principal payments of debt and capital lease
obligations (approximately $3.2 million).
The Company has committed to purchase or lease in connection with the
development of new Mobile Facilities and replacement of diagnostic imaging
equipment at Fixed and Mobile Facilities, at an aggregate cost of
approximately $7 million, five MRI systems for delivery during the year
ending June 30, 2000. The Company expects to use internally generated funds
or operating leases from GE to finance the purchase of such equipment. In
addition, the Company previously committed to purchase or lease from GE, at
an aggregate cost of approximately $29 million, including siting costs, 24
Open MRI systems for delivery and installation. As of October 31, 1999, the
Company had installed 17 of such Open MRI systems: four at existing Centers,
three in newly opened Fixed Facilities, and nine in Mobile Facilities which
operate in existing networks serviced by conventional Mobile Facilities. In
fiscal 2000, the Company sold one Open MRI system, which it intended to
install in a Fixed Facility at a hospital in Houston, Texas, to the hospital.
As of October 31, 1999, the Company had a remaining commitment to purchase or
lease seven of such Open MRI systems, at an aggregate cost of approximately
$9 million. 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's lease expense for diagnostic imaging equipment and other
miscellaneous equipment for the three months ended September 30, 1999 was
approximately $5.1 million. The operating leases generally provide the
Company with the ability to purchase the equipment at fair market value at
the end of the lease or at a negotiated amount during the term of the lease.
As of September 30, 1999, the Company believes the leased equipment could be
purchased for approximately $85 million. The purchase of the leased equipment
would require the Company to obtain satisfactory financing and the consent of
its lenders.
The Company believes that, based on current levels of operations and
anticipated growth, its cash from operations, together with other available
sources of liquidity, including borrowings available under the Bank
Financing, will be sufficient through 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
REVENUES: Revenues increased approximately 21.9% from approximately $37.9
million for the three months ended September 30, 1998, to approximately $46.2
million for the three months ended September 30, 1999. This increase was due
primarily to the acquisitions discussed above (approximately $2.8 million)
and an increase in contract services, patient services and other revenues
(approximately $5.5 million) at existing facilities.
Contract services revenues increased approximately 21.8% from approximately
$20.2 million for the three months ended September 30, 1998, to approximately
$24.6 million for the three months ended September 30, 1999. This increase
was due primarily to the acquisitions discussed above (approximately $1.0
million) and an increase in the Company's existing business (approximately
$3.4 million). The increase in existing business was due to (i) the addition
of six Mobile Facilities under fixed monthly fee contracts and (ii) higher
utilization (approximately 15%)
17
<PAGE>
at the Company's existing mobile customer base offset by a decline in
reimbursement from customers, primarily hospitals (approximately 2%).
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 53% of total revenues for the three months ended
September 30, 1999. 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 the Company'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, the Company's contract services
revenues would be adversely affected.
Patient services revenues increased approximately 20.9% from approximately
$17.2 million for the three months ended September 30, 1998, to approximately
$20.8 million for the three months ended September 30, 1999. This increase
was due primarily to the acquisitions and opened centers discussed above
(approximately $1.8 million) and an increase in revenues at existing
facilities (approximately $1.8 million). The increase at existing facilities
was due to higher utilization (approximately 11%), partially offset by
declines in reimbursement from third party payors (approximately 5%).
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, slower start-ups of new operations, 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. The
Company'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 24.1% from
approximately $30.7 million for the three months ended September 30, 1998, to
approximately $38.1 million for the three months ended September 30, 1999.
This increase was due primarily to an increase in costs due to the
acquisitions and opened centers discussed above (approximately $2.8 million)
and an increase in costs at existing facilities (approximately $4.6 million).
Costs of operations, as a percentage of total revenues, increased from
approximately 81.0% for the three months ended September 30, 1998, to
approximately 82.5% for the three months ended September 30, 1999. The
percentage increase is due primarily to higher salaries and benefits and
equipment lease and depreciation costs, partially offset by reduced supply
and equipment maintenance costs as a result of the Company negotiating
favorable supply contracts.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 18.2%, from approximately $2.2 million for the three months
ended September 30, 1998, to approximately $2.6 million for the three months
ended September 30, 1999. This increase was due primarily to (i) increased
salaries, benefits, travel
18
<PAGE>
and legal costs associated with the Company's acquisition and development
activities and (ii) additional information systems costs. Corporate operating
expenses, as a percentage of total revenues, decreased from approximately
5.8% for the three months ended September 30, 1998, to approximately 5.7% for
the three months ended September 30, 1999.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 14.3%
from approximately $3.5 million for the three months ended September 30,
1998, to approximately $4.0 million for the three months ended September 30,
1999. This increase was due primarily to additional debt related to (i) the
acquisitions discussed above and (ii) 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 increased from
approximately $0.06 million for the three months ended September 30, 1998, to
approximately $0.3 million for the three months ended September 30, 1999. The
effective tax rate increased to approximately 20% in 1999 from approximately
3% in 1998 primarily as a result of the effects of benefits from the
Company's net operating loss carryforwards.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net
income per common and converted preferred share was $0.14 for the three
months ended September 30, 1999, compared to net income per common and
converted preferred share of $0.18 for the same period in 1998. The decrease
in net income per common and converted preferred share is the result of (i)
increased interest expense and (ii) an increase in provision for income
taxes, offset by (i) increased income from company operations and (ii) an
increase in earnings from unconsolidated partnerships.
NEW PRONOUNCEMENTS
In fiscal 2001, the Company will be required to adopt Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivatives, Instruments
and Hedging Activities", as deferred and amended by SFAS No. 137. The Company
believes the adoption of this standard will not have a material impact on the
Company's financial condition or results of operations.
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, miscalculations or failures could be caused by the fact that the
Year 2000 is a leap year.
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 has developed a Year 2000 Plan to address all of its Year 2000
Issues. The Company has given its Executive Vice President and Chief
Information Officer 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 involves generally the
following phases: awareness, assessment, renovation, testing and
implementation.
The Company has completed assessment, renovation, testing and implementation
of 95% of its internal information technology systems and now estimates that
it will complete the process for its remaining internal information
technology systems by November 19, 1999.
The Company is assessing the potential for Year 2000 problems with the
information systems of its customers and vendors. The Company has sent to the
majority of its vendors, customers, business partners, landlords and other
19
<PAGE>
third parties, questionnaires and letters to confirm their Y2K readiness. The
Company has received information concerning the Year 2000 readiness of all of
its customers, vendors and other third parties with which the Company has a
material relationship. The Company is taking appropriate precautions as part
of its contingency plans to be prepared should material customers, vendors or
other third parties fail to be Year 2000 ready.
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
completed its assessment of 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 ready,
(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 prior to December 31, 1999. The Company has contacted the
other vendors of its diagnostic imaging equipment and received information
from such other vendors with respect to their assessment of the impact on the
equipment that they provided to the Company. In addition, the Company is
utilizing other resources at its disposal, e.g. equipment vendor web sites,
to assist in its assessment. The Company has completed its assessment and
renovation of over 90% of its diagnostic imaging equipment. The Company
expects that its remaining diagnostic imaging equipment will be remediated
within the next 30 days by either repair or replacement.
The Company has completed its 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.
COSTS TO ADDRESS YEAR 2000 ISSUE: The Company estimates that the cost of
assessment, renovation, testing and implementation of its internal
information technology systems and diagnostic imaging equipment will range
from approximately $500,000 to $800,000, primarily relating to capital
expenditures for the replacement of diagnostic imaging equipment, if
required. To date, the Company has incurred costs of approximately $110,000
relating to consultants, additional personnel, programming, new software and
hardware, software upgrades, and travel expenses. The Company expects that
such costs will be funded through internally generated funds.
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. 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 is in the process of finalizing its contingency
plan to address unavoided or unavoidable Year 2000 risks with internal
information technology systems and with customers, vendors and other third
parties.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure relates primarily to interest rates, where
the Company will periodically use interest rate swaps to hedge interest rates
on long-term debt under its Bank Financing. The Company does not engage in
activities using complex or highly leveraged instruments.
At September 30, 1999, the Company had outstanding an interest rate swap,
converting $38.3 million of its 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.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
There are none.
(b) REPORTS ON FORM 8-K.
The Company did not file any Current Report on Form
8-K with the SEC for the quarter ended September 30,
1999.
22
<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/ FRANK E. EGGER
------------------------------------
Frank E. Egger, Acting President and
Chief Executive Officer
/s/ THOMAS V. CROAL
-------------------------------------
Thomas V. Croal
Executive Vice President and
Chief Financial Officer
November 15, 1999
23
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,886
<SECURITIES> 0
<RECEIVABLES> 39,131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,250
<PP&E> 140,512
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<CURRENT-LIABILITIES> 35,360
<BONDS> 162,127
0
37,096
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<TOTAL-LIABILITY-AND-EQUITY> 243,965
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