<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 March 31, 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:
2,864,121 shares of Common Stock as of May 1, 1999.
The number of pages in this Form 10-Q is 29.
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and June 30, 1998 3
Condensed Consolidated Statements of Operations (unaudited) for
the nine months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows (unaudited) for
the nine months ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19-27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,435 $ 44,740
Trade accounts receivable, net 31,914 25,663
Other current assets 4,358 3,050
---------------- ----------------
Total current assets 53,707 73,453
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $38,699 and $26,116, respectively 89,585 71,814
INVESTMENTS IN PARTNERSHIPS 1,636 1,523
OTHER ASSETS 7,107 6,639
INTANGIBLE ASSETS, net 75,065 74,831
---------------- ----------------
$ 227,100 $ 228,260
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment, capital leases and other notes $ 10,296 $ 10,140
Accounts payable and other accrued expenses 19,679 26,410
---------------- ----------------
Total current liabilities 29,975 36,550
---------------- ----------------
LONG-TERM LIABILITIES:
Equipment, capital leases and other notes, less current portion 153,897 152,120
Other long-term liabilities 920 984
---------------- ----------------
Total long-term liabilities 154,817 153,104
---------------- ----------------
MINORITY INTEREST 231 748
---------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
March 31, 1999 and June 30, 1998, respectively, with a liquidation 23,923 23,923
preference of $25,000
Convertible Series C preferred stock, 27,953 shares outstanding at
March 31, 1999 and June 30, 1998, respectively, with a liquidation 13,173 13,173
preference of $27,953
Common stock, $.001 par value, 25,000,000 shares authorized, 2,828,241 and
2,824,090 shares outstanding at March 31, 1999
and June 30, 1998, respectively 3 3
Additional paid-in capital 23,447 23,415
Accumulated deficit (18,469) (22,656)
---------------- ----------------
Total stockholders' equity 42,077 37,858
---------------- ----------------
$ 227,100 $ 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 OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------------
1999 1998
----------------- ---------------
<S> <C> <C>
REVENUES:
Contract services $ 61,901 $ 40,114
Patient services 53,585 43,350
Other 2,139 1,704
----------------- ---------------
Total revenues 117,625 85,168
----------------- ---------------
COSTS OF OPERATIONS:
Costs of services 61,634 44,141
Provision for doubtful accounts 1,868 1,511
Equipment leases 13,600 12,983
Depreciation and amortization 18,053 10,570
----------------- ---------------
Total costs of operations 95,155 69,205
----------------- ---------------
Gross profit 22,470 15,963
CORPORATE OPERATING EXPENSES 7,647 6,510
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION -- 6,309
----------------- ---------------
Income from company operations 14,823 3,144
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 398 510
----------------- ---------------
Operating income 15,221 3,654
INTEREST EXPENSE, net 10,704 4,676
----------------- ---------------
Income (loss) before income taxes 4,517 (1,022)
PROVISION FOR INCOME TAXES 330 431
----------------- ---------------
Net income (loss) $ 4,187 $ (1,453)
----------------- ---------------
----------------- ---------------
INCOME (LOSS) PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.46 $ (0.19)
----------------- ---------------
----------------- ---------------
Diluted $ 0.45 $ (0.19)
----------------- ---------------
----------------- ---------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,148,127 7,589,549
----------------- ---------------
----------------- ---------------
Diluted
9,405,764 7,589,549
----------------- ---------------
----------------- ---------------
</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 OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
REVENUES:
Contract services $ 21,816 $ 12,981
Patient services 18,442 14,862
Other 561 522
----------------- ----------------
Total revenues 40,819 28,365
----------------- ----------------
COSTS OF OPERATIONS:
Costs of services 22,171 14,604
Provision for doubtful accounts 613 473
Equipment leases 4,913 3,981
Depreciation and amortization 6,116 3,871
----------------- ----------------
Total costs of operations 33,813 22,929
----------------- ----------------
Gross profit 7,006 5,436
CORPORATE OPERATING EXPENSES 2,892 2,254
----------------- ----------------
Income from company operations 4,114 3,182
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 140 174
----------------- ----------------
Operating income 4,254 3,356
INTEREST EXPENSE, net 3,671 1,426
----------------- ----------------
Income before income taxes 583 1,930
PROVISION FOR INCOME TAXES 58 --
----------------- ----------------
Net income $ 525 $ 1,930
----------------- ----------------
----------------- ----------------
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.06 $ 0.21
----------------- ----------------
----------------- ----------------
Diluted $ 0.06 $ 0.20
----------------- ----------------
----------------- ----------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,150,897 9,075,693
----------------- ----------------
----------------- ----------------
Diluted 9,388,690 9,493,304
----------------- ----------------
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,187 $ (1,453)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Total depreciation and amortization 18,335 10,686
Amortization of deferred gain on debt restructure (62) (1,355)
Provision for supplemental service fee termination -- 6,309
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivable, net (6,251) (4,752)
Other current assets (1,241) (741)
Accounts payable and other accrued expenses (6,733) 1,012
---------------- ---------------
Net cash provided by operating activities 8,235 9,706
---------------- ---------------
INVESTING ACTIVITIES:
Additions to property and equipment (24,247) (15,172)
Acquisitions of imaging centers (11,745) (12,890)
Other (996) (1,016)
---------------- ---------------
Net cash used in investing activities (36,988) (29,078)
---------------- ---------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 23,346
Proceeds from issuance of common stock 21 --
Proceeds from stock options and warrants exercised 11 266
Payment of loan financing costs -- (2,210)
Principal payments of equipment, capital leases and other notes (11,132) (82,985)
Proceeds from issuance of equipment, capital leases and other notes 13,065 83,277
Other (517) (183)
---------------- ---------------
Net cash provided by financing activities 1,448 21,511
---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,305) 2,139
CASH AND CASH EQUIVALENTS:
Beginning of period 44,740 6,884
---------------- ---------------
End of period $ 17,435 $ 9,023
---------------- ---------------
---------------- ---------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 8,007 $ 4,476
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<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 29 states throughout the United
States. The Company's services are provided through a network of 68 mobile
magnetic resonance imaging (MRI) facilities (Mobile Facilities), 36
fixed-site MRI facilities (Fixed Facilities), 19 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 Open MRI, computed tomography (CT), diagnostic and fluoroscopic
x-ray, mammography, diagnostic ultrasound, 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 (SEC) 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 nine months ended March 31, 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. 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
7
<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 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 35% 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.
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.
8
<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, a $25 million revolving working
capital facility with a five-year maturity and 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 condensed combined financial data of the Company's two
50% owned and controlled entities which are consolidated (amounts in
thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---------------- ----------------
(unaudited)
<S> <C> <C>
Condensed Combined
Balance Sheet Data:
Current assets $ 1,460 $ 1,825
Total assets 1,587 1,896
Current liabilities 636 644
Minority interest equity 492 642
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Condensed Combined Statement
of Operations Data:
Net revenues $ 4,194 $ 4,483 $ 1,319 $ 1,147
Expenses 3,002 3,191 1,011 895
Provision for center profit distribution 596 646 154 126
-------------- -------------- -------------- --------------
Net income $ 596 $ 646 $ 154 $ 126
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The provision for center profit distribution shown above represents the
minority interest in the income of these combined entities.
9
<PAGE>
5. INCOME PER COMMON AND PREFERRED SHARE
The Company has adopted Statement of Financial Accounting Standards 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. Common
stock equivalents relating to options, warrants and convertible Preferred
Stock are not included for the nine months ended March 31, 1998 due to their
antidilutive effect. 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>
Nine Months Ended Three Months Ended
March 31, March 31,
-------------------------------- -------------------------------
1999 1998 1999 1998
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Average common stock outstanding 2,825,471 2,731,105 2,828,241 2,753,037
Effect of preferred stock 6,322,656 4,858,444 6,322,656 6,322,656
--------------- -------------- -------------- -------------
Denominator for basic EPS 9,148,127 7,589,549 9,150,897 9,075,693
Dilutive effect of stock options and warrants 257,637 -- 237,793 417,611
--------------- -------------- -------------- -------------
9,405,764 7,589,549 9,388,690 9,493,304
--------------- -------------- -------------- -------------
--------------- -------------- -------------- -------------
</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 (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 operations and statements
of cash flows information for the Company (Parent Company Only), for the
Guarantor Subsidiaries and for the Company's other subsidiaries
(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.
10
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1999
(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 $ -- $ 16,244 $ 1,191 $ -- $ 17,435
Trade accounts receivable, net -- 28,070 3,844 -- 31,914
Other current assets -- 4,088 270 -- 4,358
Intercompany accounts receivable 214,998 11,049 -- (226,047) --
----------- --------------- ----------------- --------------- --------------
Total current assets 214,998 59,451 5,305 (226,047) 53,707
Property and equipment, net -- 81,102 8,483 -- 89,585
Investments in partnerships -- 1,636 -- -- 1,636
Investments in consolidated subsidiaries (20,345) 1,877 -- 18,468 --
Other assets -- 7,107 -- -- 7,107
Intangible assets, net -- 74,989 76 -- 75,065
----------- --------------- ----------------- --------------- --------------
$ 194,653 $ 226,162 $ 13,864 $ (207,579) $ 227,100
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases
and other notes $ 7,500 $ 2,672 $ 124 $ -- $ 10,296
Accounts payable and other accrued expenses -- 19,126 553 -- 19,679
Intercompany accounts payable -- 214,998 11,049 (226,047) --
----------- --------------- ----------------- --------------- --------------
Total current liabilities 7,500 236,796 11,726 (226,047) 29,975
Equipment, capital leases and other notes, less
current portion 145,076 8,791 30 -- 153,897
Other long-term liabilities -- 920 -- -- 920
Minority interest -- -- 231 -- 231
Stockholders' equity (deficit) 42,077 (20,345) 1,877 18,468 42,077
----------- --------------- ----------------- --------------- --------------
$ 194,653 $ 226,162 $ 13,864 $ (207,579) $ 227,100
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
</TABLE>
11
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY 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>
12
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ -- $ 103,669 $ 13,956 $ -- $ 117,625
Costs of operations -- 83,221 11,934 -- 95,155
----------- --------------- ----------------- --------------- --------------
Gross profit -- 20,448 2,022 -- 22,470
Corporate operating expenses -- 7,647 -- -- 7,647
----------- --------------- ----------------- --------------- --------------
Income from company operations -- 12,801 2,022 -- 14,823
Equity in earnings of unconsolidated partnerships -- 398 -- -- 398
----------- --------------- ----------------- --------------- --------------
Operating income -- 13,199 2,022 -- 15,221
Interest expense, net -- 9,913 791 -- 10,704
----------- --------------- ----------------- --------------- --------------
Income before income taxes -- 3,286 1,231 -- 4,517
Provision for income taxes -- 330 -- -- 330
----------- --------------- ----------------- --------------- --------------
Income before equity in income of
consolidated subsidiaries -- 2,956 1,231 -- 4,187
Equity in income of consolidated subsidiaries 4,187 1,231 -- (5,418) --
----------- --------------- ----------------- --------------- --------------
Net income $ 4,187 $ 4,187 $ 1,231 $ (5,418) $ 4,187
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
</TABLE>
13
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ -- $ 74,511 $ 10,657 $ -- $ 85,168
Costs of operations -- 59,706 9,499 -- 69,205
----------- --------------- ----------------- --------------- --------------
Gross profit -- 14,805 1,158 -- 15,963
Corporate operating expenses -- 6,510 -- -- 6,510
Provision for supplemental service
fee termination -- 6,309 -- -- 6,309
----------- --------------- ----------------- --------------- --------------
Income from company operations -- 1,986 1,158 -- 3,144
Equity in earnings of unconsolidated
partnerships -- 510 -- -- 510
----------- --------------- ----------------- --------------- --------------
Operating income -- 2,496 1,158 -- 3,654
Interest expense, net -- 4,449 227 -- 4,676
----------- --------------- ----------------- --------------- --------------
Income (loss) before income taxes -- (1,953) 931 -- (1,022)
Provision for income taxes -- 431 -- -- 431
----------- --------------- ----------------- --------------- --------------
Income (loss) before equity in income of
consolidated subsidiaries -- (2,384) 931 -- (1,453)
Equity in income (loss) of consolidated
subsidiaries (1,453) 931 -- 522 --
----------- --------------- ----------------- --------------- --------------
Net income (loss) $(1,453) $ (1,453) $ 931 $ 522 $ (1,453)
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
</TABLE>
14
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ -- $ 36,174 $ 4,645 $ -- $ 40,819
Costs of operations -- 29,732 4,081 -- 33,813
----------- --------------- ----------------- --------------- --------------
Gross profit -- 6,442 564 -- 7,006
Corporate operating expenses -- 2,892 -- -- 2,892
----------- --------------- ----------------- --------------- --------------
Income from company operations -- 3,550 564 -- 4,114
Equity in earnings of unconsolidated
partnerships -- 140 -- -- 140
----------- --------------- ----------------- --------------- --------------
Operating income -- 3,690 564 -- 4,254
Interest expense, net -- 3,414 257 -- 3,671
----------- --------------- ----------------- --------------- --------------
Income before income taxes -- 276 307 -- 583
Provision for income taxes -- 58 -- -- 58
----------- --------------- ----------------- --------------- --------------
Income before equity in income of
consolidated subsidiaries -- 218 307 -- 525
Equity in income of consolidated subsidiaries 525 307 -- (832) --
----------- --------------- ----------------- --------------- --------------
Net income $ 525 $ 525 $ 307 $ (832) $ 525
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
</TABLE>
15
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ -- $ 25,171 $ 3,194 $ -- $ 28,365
Costs of operations -- 19,736 3,193 -- 22,929
----------- --------------- ----------------- --------------- --------------
Gross profit -- 5,435 1 -- 5,436
Corporate operating expenses -- 2,254 -- -- 2,254
----------- --------------- ----------------- --------------- --------------
Income from company operations -- 3,181 1 -- 3,182
Equity in earnings of unconsolidated
partnerships -- 174 -- -- 174
----------- --------------- ----------------- --------------- --------------
Operating income -- 3,355 1 -- 3,356
Interest expense, net -- 1,374 52 -- 1,426
----------- --------------- ----------------- --------------- --------------
Income (loss) before income taxes -- 1,981 (51) -- 1,930
Provision for income taxes -- -- -- -- --
----------- --------------- ----------------- --------------- --------------
Income (loss) before equity in income of
consolidated subsidiaries -- 1,981 (51) -- 1,930
Equity in income (loss) of consolidated
subsidiaries 1,930 (51) -- (1,879) --
----------- --------------- ----------------- --------------- --------------
Net income (loss) $ 1,930 $ 1,930 $ (51) $ (1,879) $ 1,930
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
</TABLE>
16
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(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 $ 4,187 $ 4,187 $ 1,231 $ (5,418) $ 4,187
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Total depreciation and amortization -- 16,144 2,191 -- 18,335
Amortization of deferred gain on debt restructure -- (62) -- -- (62)
Equity in income (loss) of consolidated
subsidiaries (4,187) (1,231) -- 5,418 --
Cash provided by (used in) changes in operating
assets and liabilities:
Trade accounts receivable, net -- (5,161) (1,090) -- (6,251)
Intercompany receivables, net (2,608) (2,702) 5,310 -- --
Other current assets -- (1,270) 29 -- (1,241)
Accounts payable and other accrued expenses -- (6,617) (116) -- (6,733)
----------- --------------- ----------------- --------------- --------------
Net cash provided by (used in)
operating activities (2,608) 3,288 7,555 -- 8,235
----------- --------------- ----------------- --------------- --------------
INVESTING ACTIVITIES:
Additions to property and equipment -- (17,217) (7,030) -- (27,472)
Acquisitions of imaging centers -- (11,745) -- -- (11,745)
Other -- (847) (149) -- (996)
----------- --------------- ----------------- --------------- --------------
Net cash used in investing activities -- (29,809) (7,179) -- (40,213)
----------- --------------- ----------------- --------------- --------------
FINANCING ACTIVITIES:
Proceeds from stock options and
warrants exercised 11 -- -- -- 11
Proceeds from issuance of common stock 21 -- -- -- 21
Principal payments of equipment, capital
leases and other notes (5,624) (5,350) (158) -- (11,132)
Proceeds from issuance of equipment,
capital leases and other notes 8,200 4,865 -- -- 13,065
Other -- -- (517) -- (517)
----------- --------------- ----------------- --------------- --------------
Net cash provided by (used in)
financing activities 2,608 (485) (675) -- 1,448
----------- --------------- ----------------- --------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS -- (27,006) (299) -- (30,530)
CASH AND CASH EQUIVALENTS:
Cash, beginning of period -- 43,250 1,490 -- 44,740
----------- --------------- ----------------- --------------- --------------
Cash, end of period $ -- $ 16,244 $ 1,191 $ -- $ 14,210
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
</TABLE>
17
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 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 (loss) $ (1,453) $ (1,453) $ 931 $ 522 $ (1,453)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Total depreciation and amortization -- 10,437 249 -- 10,686
Amortization of deferred gain on debt
restructure -- (1,355) -- -- (1,355)
Provision for supplemental service fee
termination -- 6,309 -- -- 6,309
Equity in income (loss) of consolidated
subsidiaries 1,453 (931) -- (522) --
Cash provided by (used in) changes in operating
assets and liabilities:
Trade accounts receivable, net -- (4,874) 122 -- (4,752)
Intercompany receivables, net (93,812) 91,149 2,663 -- --
Other current assets -- (745) 4 -- (741)
Accounts payable and other accrued expenses -- 1,035 (23) -- 1,012
----------- --------------- ----------------- --------------- --------------
Net cash provided by (used in) operating
activities (93,812) 99,572 3,946 -- 9,706
----------- --------------- ----------------- --------------- --------------
INVESTING ACTIVITIES:
Additions to property and equipment -- (13,421) (1,751) -- (15,172)
Acquisitions of imaging centers -- (12,890) -- -- (12,890)
Other -- (890) (126) -- (1,016)
----------- --------------- ----------------- --------------- --------------
Net cash used in investing activities -- (27,201) (1,877) -- (29,078)
----------- --------------- ----------------- --------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 23,346 -- -- -- 23,346
Proceeds from stock options and warrants
exercised 266 -- -- -- 266
Payment of loan financing costs -- (2,210) -- -- (2,210)
Principal payments of equipment, capital leases
and other notes (2,700) (79,337) (948) -- (82,985)
Proceeds from issuance of equipment, capital
leases and other notes 72,900 10,241 136 -- 83,277
Other -- -- (183) -- (183)
----------- --------------- ----------------- --------------- --------------
Net cash provided by (used in) financing
activities 93,812 (71,306) (995) -- 21,511
----------- --------------- ----------------- --------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS -- 1,065 1,074 -- 2,139
CASH AND CASH EQUIVALENTS:
Cash, beginning of period -- 5,845 1,039 -- 6,884
----------- --------------- ----------------- --------------- --------------
Cash, end of period $ -- $ 6,910 $ 2,113 $ -- $ 9,023
----------- --------------- ----------------- --------------- --------------
----------- --------------- ----------------- --------------- --------------
</TABLE>
18
<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 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 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.
In addition, in fiscal 1998, the Company installed 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
19
<PAGE>
operate a Gamma Knife Center and entered into an agreement to dissolve a
partnership related to a Fixed Facility in Seattle, Washington.
On March 1, 1999, the Company completed the acquisition of a majority
interest in five Centers in the Buffalo, New York area. The transaction
included the purchase of assets and assumption of certain equipment related
liabilities. The purchase price for this transaction was approximately $5.0
million.
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, declines in reimbursement and major
restructurings within the healthcare industry. This adverse effect on
revenues and cash flow is expected to continue, especially in the mobile
diagnostic imaging business.
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 of its business development
team. 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. The terms of the notes contain
certain restrictions on the Company's ability to act without first obtaining
consent of the noteholders.
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
20
<PAGE>
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
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 annual unused facility fee of between 0.375% and 0.5% on unborrowed
amounts under both facilities, of which the Company has paid approximately
$0.3 million through March 31, 1999. At March 31, 1999, there was
approximately $8.2 million in borrowings under the acquisition facility and
no borrowings under the working capital facility.
Net cash provided by operating activities was approximately $8.2 million for
the nine months ended March 31, 1999. Cash provided by operating activities
resulted primarily from net income before depreciation and amortization
(approximately $22.5 million), offset by an increase in accounts receivable
(approximately $6.3 million) primarily due to the Company's acquisitions and
new Fixed Facilities and Centers discussed above (approximately $3.8 million),
and a decrease in accounts payable and other accrued expenses (approximately
$6.7 million).
Net cash used in investing activities was approximately $37.0 million for the
nine months ended March 31, 1999. Cash used in investing activities resulted
primarily from the purchase of new diagnostic imaging equipment or upgrading
its existing diagnostic imaging equipment (approximately $24.2 million),
offset by the sale of a building in which a Center is located in Las Vegas,
Nevada (approximately $3.6 million) and cash used in the Company's
acquisitions as discussed above (approximately $11.7 million), which included
the purchase of two buildings in which a Center is located in Chattanooga,
Tennessee (approximately $3.2 million).
Net cash provided by financing activities was approximately $1.4 million for
the nine months ended March 31, 1999, resulting primarily from borrowings of
debt and capital lease obligations (approximately $13.1 million), offset by
principal payments of debt and capital lease obligations (approximately $11.1
million).
The Company has committed to purchase or lease, at an aggregate cost of
approximately $36.0 million, 21 MRI systems for delivery through December 31,
1999. As of May 1, 1999, none have been delivered. 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 $29.0 million, including siting costs, 24 Open MRI systems for
delivery and installation. As of May 1, 1999, the Company had installed 16 of
such Open MRI systems: six at existing Centers, four in newly opened Fixed
Facilities and six 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.
21
<PAGE>
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.
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 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 involves 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 90% of its internal
information technology systems. As a result of delays in obtaining
information, the Company now estimates that it will complete the assessment
of its remaining internal information technology systems by June 30, 1999 and
will then establish a timetable for the renovation phase of the remaining
technology systems. The Company has already completed the renovation of
approximately 60% 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 is assessing the potential for Year 2000 problems with the
information systems of its customers and vendors. The Company has determined
that direct contact with its vendors, customers, business partners, landlords
and other third parties with which the Company has a material relationship
will yield better results than submitting questionnaires, which historically
have not been responded to adequately, if at all. The Company intends to send
to its vendors, customers, business partners, landlords and other third
parties, follow-up questionnaires and letters to confirm verbal assurances
received. The Company has extended the date to complete such assessment to
June 30, 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 finalize its
discussions with most of such parties by June 30, 1999 in an attempt to
determine the extent to which the Company is vulnerable to those parties'
possible failure to become 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
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 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. The
Company is in the process of contacting the other vendors of its diagnostic
imaging equipment. While progress has been slow, the Company has received
some information from such other vendors with respect to their
22
<PAGE>
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. In addition, the Company is utilizing other resources at its
disposal, e.g. equipment vendor web sites, to assist in its assessment. As a
result of these delays, the Company now expects to complete its assessment by
July 31, 1999, subject to equipment vendor response, and that renovation will
be completed by September 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. The
Company has experienced delays in responses, which have caused the Company to
extend the completion of the assessment to June 30, 1999. The Company intends
to engage consultants to independently evaluate the Company's progress with
its Year 2000 Plan, to assist in the testing (i.e. the verification and
validation) of the Company's internal information technology systems, the
information systems of its vendors, customers, business partners, landlords
and other third parties and its diagnostic imaging equipment.
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 and diagnostic imaging equipment
will range from approximately $500,000 to $1,500,000, of which approximately
$50,000 has been incurred. The major components of these costs are:
consultants, additional personnel costs, programming, new software and
hardware, software upgrades, travel expenses and diagnostic imaging equipment
replacement. 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 is in the process of developing a contingency
plan to address unavoided or unavoidable Year 2000 risks with internal
information technology systems and with customers, vendors and other third
parties, which will be submitted to the Company's senior management for
review by June 30, 1999.
23
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
REVENUES: Revenues increased approximately 38.0% from approximately $85.2
million for the nine months ended March 31, 1998, to approximately $117.6
million for the nine months ended March 31, 1999. This increase was due
primarily to the acquisitions discussed above (approximately $25.2 million),
an increase in contract services and patient services revenues (approximately
$9.2 million) at existing facilities and an increase in other revenues
(approximately $0.2 million) which included a one-time settlement payment in
connection with an earn-out from the sale of the Company's lithotripsy
partnerships in 1995 (approximately $0.4 million), partially offset by the
termination of a Fixed Facility and a Gamma Knife Center in 1998
(approximately $2.2 million). Contract services and patient services revenues
were negatively impacted in January and early February 1999 due to unusually
severe weather conditions in the Midwest and New England, where the Company
has a significant number of Mobile Facilities, Fixed Facilities and Centers.
Contract services revenues increased approximately 54.4% from approximately
$40.1 million for the nine months ended March 31, 1998, to approximately
$61.9 million for the nine months ended March 31, 1999. This increase was due
primarily to the acquisitions discussed above (approximately $17.4 million)
and an increase at existing facilities (approximately $4.4 million). The
increase at existing facilities was due to higher utilization (approximately
13%), offset by a decline in reimbursement from customers, primarily
hospitals (approximately 4%), as a result of increased price competition.
Contract services revenues, primarily earned by the Company's Mobile
Facilities, represented approximately 53% of total revenues for the nine
months ended March 31, 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 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 23.5% from approximately
$43.4 million for the nine months ended March 31, 1998, to approximately
$53.6 million for the nine months ended March 31, 1999. This increase was due
primarily to the acquisitions discussed above (approximately $7.6 million)
and an increase in revenues at existing facilities (approximately $4.8
million). The increase at existing facilities was due to higher utilization
(approximately 9%), partially offset by declines in reimbursement from third
party payors (approximately 1%) and reduced revenues from the termination of
a Fixed Facility and a Gamma Knife Center in 1998 (approximately $2.2
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, 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.
InSight's operations are principally dependent on its ability (either
directly or indirectly through its hospital customers) to attract referrals
from physicians and other healthcare providers representing a variety of
specialties. In addition, unusually severe weather conditions during the
winter in the Midwest and New England, where the Company has a significant
number of Mobile Facilities (as a result of the acquisitions of Mobile
Imaging Consortium and Signal), Fixed Facilities and Centers, could have a
negative impact on the Company's contract services and patient services
revenues.
24
<PAGE>
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 37.6% from
approximately $69.2 million for the nine months ended March 31, 1998, to
approximately $95.2 million for the nine months ended March 31, 1999. This
increase was due primarily to an increase in costs due to the acquisitions
discussed above (approximately $20.1 million) and an increase in costs at
existing facilities (approximately $6.8 million), offset by the elimination
of costs at the two terminated facilities discussed above (approximately $0.9
million).
Costs of operations, as a percent of total revenues, decreased from
approximately 81.3% for the nine months ended March 31, 1998, to
approximately 80.9% for the nine months ended March 31, 1999. The decrease
was due primarily to reduced costs in diagnostic imaging equipment
maintenance, equipment lease and medical supply costs, offset by (i) higher
amortization costs associated with the Company's acquisition activities and
(ii) higher salaries and benefits, occupancy and depreciation costs.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 16.9% from approximately $6.5 million for the nine months
ended March 31, 1998, to approximately $7.6 million for the nine months ended
March 31, 1999. This increase was due primarily to (i) increased salaries,
benefits and travel costs associated with the Company's acquisition
activities, (ii) increased occupancy and communication costs, and (iii)
additional information systems costs, offset by reduced legal costs.
Corporate operating expenses, as a percent of total revenues, decreased from
approximately 7.6% for the nine months ended March 31, 1998, to approximately
6.5% for the nine months ended March 31, 1999.
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: In October 1997, as part
of the Recapitalization and Bank Financing discussed above, the Company
issued to GE 7,000 shares of Series C Preferred Stock to terminate GE's right
to receive supplemental service fee payments equal to 14% of the Company's
pre-tax income. The Series C Preferred Stock was valued at $7.0 million, and,
during the nine months ended March 31, 1998, the Company recorded a one-time
provision of approximately $6.3 million, net of amounts previously accrued,
for the Preferred Stock issuance.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 127.7%
from approximately $4.7 million for the nine months ended March 31, 1998, to
approximately $10.7 million for the nine months ended March 31, 1999. This
increase was due primarily to additional debt related to (i) the issuance of
Notes discussed above, which increased the Company's effective interest rate,
(ii) the acquisitions discussed above, and (iii) 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 nine months ended March 31, 1998, to
approximately $0.3 million for the nine months ended March 31, 1999. The
decrease in provision is due to anticipated benefits from the utilization of
certain operating loss carryforwards in 1999.
INCOME (LOSS) PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis,
net loss per common and converted preferred share was ($0.19) for the nine
months ended March 31, 1998, compared to net income per common and converted
preferred share of $0.45 for the same period in 1999. Excluding the one-time
provision for supplemental service fee termination, net income for the nine
months ended March 31, 1998 would have been approximately $4.8 million,
compared to approximately $4.2 million for the nine months ended March 31,
1999 and net income per common and converted preferred share on a diluted
basis for the nine months ended March 31, 1998 would have been $0.64. The
decrease in net income per common and converted preferred share was the
result of (i) the additional shares outstanding as a result of the
Recapitalization discussed above, (ii) increased interest expense, (iii)
increased corporate operating expenses, and (iv) a decrease in earnings from
25
<PAGE>
unconsolidated partnerships as a result of the installation of new diagnostic
imaging equipment, offset by increased gross profit.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
REVENUES: Revenues increased approximately 43.7% from approximately $28.4
million for the three months ended March 31, 1998, to approximately $40.8
million for the three months ended March 31, 1999. This increase was due
primarily to the acquisitions discussed above (approximately $8.1 million)
and an increase in contract services, patient services and other revenues
(approximately $4.3 million) at existing facilities. Contract services and
patient services revenues were negatively impacted in the first half of the
three months ended March 31, 1999 due to unusually severe weather conditions
in the Midwest and New England, where the Company has a significant number of
Mobile Facilities, Fixed Facilities and Centers.
Contract services revenues increased approximately 67.7% from approximately
$13.0 million for the three months ended March 31, 1998, to approximately
$21.8 million for the three months ended March 31, 1999. This increase was
due primarily to the acquisitions discussed above (approximately $6.4
million) and an increase at existing facilities (approximately $2.4 million).
The increase at existing facilities was due to higher utilization
(approximately 15%), offset by a decline in reimbursement from customers,
primarily hospitals (approximately 5%), as a result of increased price
competition.
Patient services revenues increased approximately 23.5% from approximately
$14.9 million for the three months ended March 31, 1998, to approximately
$18.4 million for the three months ended March 31, 1999. This increase was
due primarily to the acquisitions discussed above (approximately $1.8
million) and an increase in revenues at existing facilities (approximately
$1.7 million). The increase at existing facilities was due to higher
utilization (approximately 12%).
COSTS OF OPERATIONS: Costs of operations increased approximately 47.6% from
approximately $22.9 million for the three months ended March 31, 1998, to
approximately $33.8 million for the three months ended March 31, 1999. This
increase was due primarily to an increase in costs due to the acquisitions
discussed above (approximately $6.6 million), (ii) an increase in costs at
existing facilities (approximately $3.6 million) and (iii) the elimination of
a gain recognized in 1998 due to the termination of the Gamma Knife Center
discussed above (approximately $0.7 million).
Costs of operations, as a percent of total revenues, increased from
approximately 80.8% for the three months ended March 31, 1998, to
approximately 82.8% for the three months ended March 31, 1999. The increase
was due to (i) higher amortization costs associated with the Company's
acquisition activities and (ii) higher salaries and benefits, occupancy and
depreciation costs, offset by reduced diagnostic equipment maintenance and
equipment lease costs.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 26.1% from approximately $2.3 million for the three months
ended March 31, 1998, to approximately $2.9 million for the three months
ended March 31, 1999. This increase was due primarily to (i) increased
salaries, benefits and travel costs associated with the Company's acquisition
activities, (ii) higher occupancy and communications costs, and (iii)
additional information systems costs. Corporate operating costs, as a percent
of total revenues, decreased from approximately 7.9% for the three months
ended March 31, 1998, to approximately 7.1% for the three months ended March
31, 1999.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 164.3%
from approximately $1.4 million for the three months ended March 31, 1998, to
approximately $3.7 million for the three months ended March 31, 1999. This
increase was due primarily to additional debt related to (i) the issuance of
Notes discussed above, which increased the Company's effective interest rate,
(ii) the acquisitions discussed above, and (iii) 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: During the three months ended March 31, 1999, the
Company recorded a provision for income taxes of approximately $0.1 million,
compared to no provision recorded in the same period in 1998. The increase in
provision in 1999 is due to anticipated tax rates for a full fiscal year,
partially offset by anticipated benefits from the utilization of certain
operating loss carryforwards.
26
<PAGE>
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net
income per common and converted preferred share was $0.20 for the three
months ended March 31, 1998, compared to net income per common and converted
preferred share of $0.06 for the same period in 1999. The decrease in net
income per common and converted preferred share is the result of (i)
increased interest expense, (ii) increased corporate operating expenses and
(iii) a decrease in earnings from unconsolidated partnerships as a result of
the installation of new diagnostic imaging equipment, offset by increased
gross profit.
NEW PRONOUNCEMENTS
As of June 30, 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.
In fiscal 2001, the Company will be required to adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives, Instruments and
Hedging Activities" and Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities". The Company believes the 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 March 31, 1999, InSight had outstanding an interest rate swap, converting
the majority of its $46.3 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.
27
<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
No current reports on Form 8-K were filed by the
Company for the quarter ended March 31, 1999.
28
<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
May 17, 1999
29
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<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
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37,096
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