<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, 2000
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: 2,993,531 shares of Common
Stock as of November 3, 2000.
The number of pages in this Form 10-Q is 22.
<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 September 30, 2000
and June 30, 2000 (unaudited) 3
Condensed Consolidated Statements of Income
for the three months ended September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2000 and 1999 (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 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,268 $ 27,133
Trade accounts receivables, net 46,107 40,598
Other current assets 9,398 9,161
--------- ---------
Total current assets 70,773 76,892
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $71,107 and $62,805, respectively 159,515 148,469
INVESTMENTS IN PARTNERSHIPS 1,629 1,782
OTHER ASSETS 7,576 7,799
INTANGIBLE ASSETS, net 92,653 93,930
--------- ---------
$ 332,146 $ 328,872
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment, capital leases and other notes $ 31,146 $ 29,465
Accounts payable and other accrued expenses 26,871 26,613
--------- ---------
Total current liabilities 58,017 56,078
--------- ---------
LONG-TERM LIABILITIES:
Equipment, capital leases and other notes, less current portion 216,978 218,767
Other long-term liabilities 2,826 2,540
--------- ---------
Total long-term liabilities 219,804 221,307
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
September 30, 2000 and June 30, 2000, respectively, with a liquidation
preference of $25,000 as of September 30, 2000 23,923 23,923
Convertible Series C preferred stock, 27,953 shares outstanding at
September 30, 2000 and June 30, 2000, respectively, with a liquidation
preference of $27,953 as of September 30, 2000 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares authorized:
2,993,531 and 2,979,293 shares outstanding at September 30, 2000
and June 30, 2000, respectively 3 3
Additional paid-in capital 23,824 23,743
Accumulated deficit (6,598) (9,355)
--------- ---------
Total stockholders' equity 54,325 51,487
--------- ---------
$ 332,146 $ 328,872
========= =========
</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,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
REVENUES:
Contract services $ 26,279 $ 24,589
Patient services 25,711 20,820
Other 230 757
---------- ----------
Total revenues 52,220 46,166
---------- ----------
COSTS OF OPERATIONS:
Costs of services 27,084 24,697
Provision for doubtful accounts 833 750
Equipment leases 2,292 5,086
Depreciation and amortization 10,340 7,563
---------- ----------
Total costs of operations 40,549 38,096
---------- ----------
Gross profit 11,671 8,070
CORPORATE OPERATING EXPENSES 2,702 2,635
---------- ----------
Income from company operations 8,969 5,435
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 126 178
---------- ----------
Operating income 9,095 5,613
INTEREST EXPENSE, net 6,032 3,963
---------- ----------
Income before income taxes 3,063 1,650
PROVISION FOR INCOME TAXES 306 330
---------- ----------
Net income $ 2,757 $ 1,320
========== ==========
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.30 $ 0.14
========== ==========
Diluted $ 0.29 $ 0.14
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,311,927 9,201,931
========== ==========
Diluted 9,500,709 9,381,936
========== ==========
</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,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,757 $ 1,320
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,340 7,563
Amortization of deferred gain on debt restructure -- (8)
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables (5,509) (3,144)
Other current assets (237) (931)
Accounts payable and other accrued expenses 258 2,559
-------- --------
Net cash provided by operating activities 7,609 7,359
-------- --------
INVESTING ACTIVITIES:
Acquisition of Centers, Fixed and Mobile Facilities -- (1,433)
Additions to property and equipment (12,469) (6,048)
Other 140 (76)
-------- --------
Net cash used in investing activities (12,329) (7,557)
-------- --------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 81 5
Principal payments of debt and capital lease obligations (7,512) (3,191)
Proceeds from issuance of debt -- 5,000
Other 286 (24)
-------- --------
Net cash provided by (used in) financing activities (7,145) 1,790
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,865) 1,592
Cash, beginning of period 27,133 14,294
-------- --------
Cash, end of period $ 15,268 $ 15,886
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,879 $ 1,485
======== ========
Income taxes paid 132 142
======== ========
Equipment additions under capital leases 7,404 --
======== ========
</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. (Company) was incorporated in Delaware in February
1996. The Company's predecessors, InSight Health Corp. (formerly American Health
Services Corp.) (IHC), and Maxum Health Corp. (MHC), became wholly owned
subsidiaries of the Company on June 26, 1996, pursuant to an Agreement and Plan
of Merger among the Company, IHC and MHC.
The Company provides diagnostic imaging, treatment and related management
services in 30 states throughout the United States. The Company's services are
provided through a network of 80 mobile magnetic resonance imaging (MRI)
facilities (Mobile Facilities), 42 fixed-site MRI facilities (Fixed Facilities),
26 multi-modality imaging centers (Centers), four mobile lithotripsy facilities,
one Leksell Stereotactic Gamma Knife treatment center, one positron emission
therapy (PET) Fixed Facility, 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, nuclear medicine, bone densitometry, nuclear cardiology,
and cardiovascular services. The Company offers additional services through a
variety of arrangements including equipment rental, technologist services,
marketing, radiology management services, 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, 2000 filed with the Securities and Exchange Commission
(SEC) on September 7, 2000. 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, 2000 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 50
percent controlled entity which is consolidated (amounts in thousands):
September 30, June 30,
2000 2000
------------- --------
(unaudited)
Condensed Combined Balance Sheet Data:
Current assets $1,504 $1,490
Total assets 1,721 1,706
Current liabilities 610 623
Minority interest equity 454 441
Three Months Ended
September 30,
---------------------
2000 1999
------- ------
(unaudited)
Condensed Combined Statement of Income Data:
Net revenues $1,464 $1,417
Expenses 1,000 859
Provision for center profit distribution 232 279
------ ------
Net income $ 232 $ 279
====== ======
The provision for center profit distribution shown above represents the minority
interest in the income of this entity.
4. INCOME PER COMMON AND CONVERTED PREFERRED SHARE
The number of shares used in computing earnings per share (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:
Three Months Ended
September 30,
------------------
2000 1999
---- ----
(unaudited)
Average common stock outstanding 2,989,271 2,879,275
Effect of preferred stock 6,322,656 6,322,656
--------- ---------
Denominator for basic EPS 9,311,927 9,201,931
Dilutive effect of stock options and warrants 188,782 180,005
--------- ---------
9,500,709 9,381,936
========= =========
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, 2000
(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 $ -- $ 12,674 $ 2,594 $ -- $ 15,268
Trade accounts receivables, net -- 36,140 9,967 -- 46,107
Other current assets -- 9,215 183 -- 9,398
Intercompany accounts receivables 249,802 26,372 -- (276,174) --
--------- --------- --------- --------- --------
Total current assets 249,802 84,401 12,744 (276,174) 70,773
Property and equipment, net -- 138,853 20,662 -- 159,515
Investments in partnerships -- 1,629 -- -- 1,629
Investments in consolidated subsidiaries (11,020) 4,422 -- 6,598 --
Other assets -- 7,576 -- -- 7,576
Intangible assets, net -- 91,293 1,360 -- 92,653
--------- --------- --------- --------- --------
$ 238,782 $ 328,174 $ 34,766 $(269,576) $332,146
========= ========= ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases
and other notes $ 18,997 $ 11,670 $ 479 $ -- $ 31,146
Accounts payable and other accrued expenses -- 25,860 1,011 -- 26,871
Intercompany accounts payable -- 249,802 26,372 (276,174) --
--------- --------- --------- --------- --------
Total current liabilities 18,997 287,332 27,862 (276,174) 58,017
Equipment, capital leases and other notes, less
current portion 165,460 49,279 2,239 -- 216,978
Other long-term liabilities -- 2,583 243 -- 2,826
Stockholders' equity (deficit) 54,325 (11,020) 4,422 6,598 54,325
--------- --------- --------- --------- --------
$ 238,782 $ 328,174 $ 34,766 $(269,576) $332,146
========= ========= ========= ========= ========
</TABLE>
9
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
JUNE 30, 2000
(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 $ -- $ 25,375 $ 1,758 $ -- $ 27,133
Trade accounts receivables, net -- 32,841 7,757 -- 40,598
Other current assets -- 8,954 207 -- 9,161
Intercompany accounts receivables 253,181 24,776 -- (277,957) --
--------- --------- --------- --------- --------
Total current assets 253,181 91,946 9,722 (277,957) 76,892
Property and equipment, net -- 129,499 18,970 -- 148,469
Investments in partnerships -- 1,782 -- -- 1,782
Investments in consolidated subsidiaries (12,639) 3,284 -- 9,355 --
Other assets -- 7,799 -- -- 7,799
Intangible assets, net -- 92,478 1,452 -- 93,930
--------- --------- --------- --------- --------
$ 240,542 $ 326,788 $ 30,144 $(268,602) $328,872
========= ========= ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases
and other notes $ 18,393 $ 10,809 $ 263 $ -- $ 29,465
Accounts payable and other accrued expenses -- 25,712 901 -- 26,613
Intercompany accounts payable -- 253,181 24,776 (277,957) --
--------- --------- --------- --------- --------
Total current liabilities 18,393 289,702 25,940 (277,957) 56,078
Equipment, capital leases and other notes, less
current portion 170,662 47,257 848 -- 218,767
Other long-term liabilities -- 2,468 72 -- 2,540
Stockholders' equity (deficit) 51,487 (12,639) 3,284 9,355 51,487
--------- --------- --------- --------- --------
$ 240,542 $ 326,788 $ 30,144 $(268,602) $328,872
========= ========= ========= ========= ========
</TABLE>
10
<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, 2000
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $42,438 $9,782 $ -- $52,220
Costs of operations -- 33,028 7,521 -- 40,549
------ ------- ------ ------- -------
Gross profit -- 9,410 2,261 -- 11,671
Corporate operating expenses -- 2,702 -- -- 2,702
------ ------- ------ ------- -------
Income from company operations -- 6,708 2,261 -- 8,969
Equity in earnings of unconsolidated partnerships -- 126 -- -- 126
------ ------- ------ ------- -------
Operating income -- 6,834 2,261 -- 9,095
Interest expense, net -- 5,467 565 -- 6,032
------ ------- ------ ------- -------
Income before income taxes -- 1,367 1,696 -- 3,063
Provision for income taxes -- 306 -- -- 306
------ ------- ------ ------- -------
Income before equity in income of
consolidated subsidiaries -- 1,061 1,696 -- 2,757
Equity in income of consolidated subsidiaries 2,757 1,696 -- (4,453) --
------ ------- ------ ------- -------
Net income $2,757 $ 2,757 $1,696 $(4,453) $ 2,757
====== ======= ====== ======= =======
</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, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
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>
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, 2000
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,757 $ 2,757 $ 1,696 $ (4,453) $ 2,757
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization -- 9,100 1,240 -- 10,340
Equity in income of consolidated subsidiaries (2,757) (1,696) -- 4,453 --
Cash provided by (used in) changes in operating
assets and liabilities:
Trade accounts receivables -- (3,299) (2,210) -- (5,509)
Intercompany receivables, net 4,517 (5,555) 1,038 -- --
Other current assets -- (261) 24 -- (237)
Accounts payable and other accrued expenses -- 148 110 -- 258
------- -------- ------- -------- --------
Net cash provided by operating activities 4,517 1,194 1,898 -- 7,609
------- -------- ------- -------- --------
INVESTING ACTIVITIES:
Additions to property and equipment -- (11,359) (1,110) -- (12,469)
Other -- 140 -- -- 140
------- -------- ------- -------- --------
Net cash used in investing activities -- (11,219) (1,110) -- (12,329)
------- -------- ------- -------- --------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 81 -- -- -- 81
Principal payments of debt and capital lease obligations (4,598) (2,791) (123) -- (7,512)
Other -- 115 171 -- 286
------- -------- ------- -------- --------
Net cash provided by (used in) financing activities (4,517) (2,676) 48 -- (7,145)
------- -------- ------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (12,701) 836 -- (11,865)
Cash, beginning of period -- 25,375 1,758 -- 27,133
------- -------- ------- -------- --------
Cash, end of period $ -- $ 12,674 $ 2,594 $ -- $ 15,268
======= ======== ======= ======== ========
</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, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,320 $ 1,320 $ 548 $(1,868) $ 1,320
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization -- 6,849 714 -- 7,563
Amortization of deferred gain on debt restructure -- (8) -- -- (8)
Equity in income of consolidated subsidiaries (1,320) (548) -- 1,868 --
Cash provided by (used in) changes in operating assets
and liabilities:
Trade accounts receivables -- (3,134) (10) -- (3,144)
Intercompany receivables, net (2,521) 2,921 (400) -- --
Other current assets -- (906) (25) -- (931)
Accounts payable and other accrued expenses -- 2,529 30 -- 2,559
------- -------- ------- ------- --------
Net cash provided by (used in) operating activities (2,521) 9,023 857 -- 7,359
------- -------- ------- ------- --------
INVESTING ACTIVITIES:
Acquisitions of Centers, Fixed and Mobile Facilities -- (1,433) -- -- (1,433)
Additions to property and equipment -- (5,765) (283) -- (6,048)
Other -- (76) -- -- (76)
------- -------- ------- ------- --------
Net cash used in investing activities -- (7,274) (283) -- (7,557)
------- -------- ------- ------- --------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 5 -- -- -- 5
Principal payments of debt and capital lease obligations (2,484) (694) (13) -- (3,191)
Proceeds from issuance of debt 5,000 -- -- -- 5,000
Other -- -- (24) -- (24)
------- -------- ------- ------- --------
Net cash provided by (used in) financing activities 2,521 (694) (37) -- 1,790
------- -------- ------- ------- --------
INCREASE IN CASH AND CASH EQUIVALENTS -- 1,055 537 -- 1,592
Cash, beginning of period -- 12,709 1,585 -- 14,294
------- -------- ------- ------- --------
Cash, end of period $ -- $ 13,764 $ 2,122 $ -- $ 15,886
======= ======== ======= ======= ========
</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. 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; adverse utilization trends for certain diagnostic
imaging procedures; aggressive competition; general economic factors; successful
integration of acquisitions; and the risk factors described in the Company's
periodic filings with the Securities and Exchange Commission (SEC) on Forms
10-K, 10-Q and 8-K (if any) and the factors described under "Risk Factors" in
the Company's Registration Statement on Form S-4, filed with the SEC on August
4, 1998, and any amendments thereto.
ACQUISITIONS
The Company believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through
consolidation. 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 a single or multi-modality facility on
a hospital campus. The Company believes that long-term viability is contingent
upon its ability to successfully execute its business strategy.
In fiscal 2000, the Company completed two acquisitions as follows: two Fixed
Facilities in Indianapolis and Clarksville, Indiana, respectively; and a 90%
interest in a partnership which owns a Center in Wilkes-Barre, Pennsylvania. The
aggregate purchase price for these two acquisitions was approximately $24.5
million.
In fiscal 2000, the Company opened the following: its second radiology co-source
outpatient Fixed Facility in Granada Hills, California; its third radiology
co-source outpatient Center in Henderson, Nevada; and an Open MRI Fixed Facility
in Pleasanton, California. These were financed through both capital leases with
General Electric Company (GE) and internally generated funds. In fiscal 2000,
the Company closed an Open MRI Fixed Facility in Atlanta, Georgia.
In fiscal 2001, the Company opened its fourth radiology co-source Fixed Facility
in Marina del Rey, California, which was financed with a capital lease from GE
and a PET Fixed Facility in Louisville, Kentucky, which was financed with
outside financing.
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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
improving profitability. Generally, acquisition opportunities are aimed at
increasing revenues and operating income, and maximizing utilization of existing
capacity. Incremental operating income 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 twelve acquisitions. 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. In addition, the
Company's acquisition facility has expired, and until alternate financing
sources can be arranged, the Company will have to utilize its own internally
generated funds to complete future acquisitions, as discussed below.
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 take certain actions without first
obtaining consent of the noteholders.
The Company also has the following credit facilities with Bank of America, N.A.:
(i) a $50 million term loan which matures in June 2004, (ii) a $25 million
working capital facility which expires in June 2003, and (iii) a $75 million
acquisition facility which matures in June 2004, the availability of which
expired on June 12, 2000 (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 0.375 percent, payable quarterly, on unborrowed amounts
under the working capital facility. At September 30, 2000, there were
approximately $33.1 million and $51.3 million in borrowings under the term loan
and the acquisition facilities, respectively; however, there were no borrowings
under the working capital facility. The Company did not completely utilize the
acquisition facility prior to its expiration and until alternate financing
sources can be arranged, the Company will have to utilize its own internally
generated funds to complete future acquisitions. As of September 30, 2000, the
Company had cash on hand of approximately $15.3 million, which it may utilize to
consummate such acquisitions. As of November 3, 2000, the Company had borrowing
availability of approximately $25 million under the working capital facility.
Net cash provided by operating activities was approximately $7.6 million for the
three months ended September 30, 2000. Cash provided by operating activities
resulted primarily from net income before depreciation and amortization
(approximately $13.1 million) and an increase in accounts payable and other
accrued expenses (approximately $0.3 million), offset by an increase in trade
accounts receivables (approximately $5.5 million). The increase in trade
accounts receivables is due primarily to the Company's acquisitions in fiscal
2000.
Net cash used in investing activities was approximately $12.3 million for the
three months ended September 30, 2000. Cash used in investing activities
resulted primarily from the Company purchasing or upgrading diagnostic imaging
equipment at its existing facilities (approximately $12.5 million).
Net cash used in financing activities was approximately $7.1 million for the
three months ended September 30, 2000, resulting primarily from principal
payments of debt and capital lease obligations (approximately $7.5 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 Centers, Fixed and Mobile Facilities, at an aggregate cost of
approximately $11.9 million, eight diagnostic imaging systems for delivery
through January 31, 2001. The
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Company expects to use either internally generated funds or leases from GE and
others to finance the purchase of such equipment. The Company may purchase,
lease or upgrade other diagnostic imaging 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.
Effective December 1, 1999, the Company purchased 38 pieces of diagnostic
imaging equipment from GE by converting operating leases to capital leases. The
capital leases bear interest at 9% per annum, have 48 to 72 month terms and
contain a $1.00 buyout at the end of each lease. The total purchase price was
approximately $45 million. For the three months ended September 30, 2000,
equipment lease expense was reduced by approximately $3.0 million, and
depreciation and interest combined was increased by approximately the same
amount. The Company believes, on an annualized basis, equipment lease expense
will be reduced by approximately $12 million, and depreciation and interest will
be increased by approximately the same amount. During the three months ended
September 30, 2000, the Company also purchased four pieces of diagnostic imaging
equipment which were financed through capital leases with GE. The total purchase
price was approximately $7.4 million.
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, as discussed above. The
Company's acquisition strategy may require sources of capital in addition to
that currently available to the Company. The Company expects, subject to market
conditions, to obtain additional acquisition financing in the third quarter of
fiscal 2001. 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, 2000 COMPARED TO SEPTEMBER 30, 1999
REVENUES: Revenues increased approximately 13.0% from approximately $46.2
million for the three months ended September 30, 1999, to approximately $52.2
million for the three months ended September 30, 2000. This increase was due
primarily to the acquisitions and opened Fixed Facilities discussed above
(approximately $3.2 million) and an increase in contract services, patient
services and other revenues (approximately $2.8 million) at existing facilities,
as a result of refocused sales efforts and incentive initiatives implemented at
the existing facilities.
Contract services revenues increased approximately 6.9% from approximately $24.6
million for the three months ended September 30, 1999, to approximately $26.3
million for the three months ended September 30, 2000. This increase was due to
the addition of three Mobile Facilities and a combination of higher utilization
and more fixed monthly fee contracts at the Company's existing mobile customer
base.
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 50% of total revenues for the three months ended
September 30, 2000. 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
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with new accounts or with the expansion of services on existing accounts, the
Company's contract services revenues would be adversely affected. As a result of
the implementation of the new Outpatient Prospective Payment System (OPPS) for
outpatient services, the Company's contract services revenues could be adversely
affected.
Effective August 1, 2000, Medicare will pay hospitals for outpatient services
based on ambulatory payment classification (APC) groups rather than on a
hospital's costs. Each APC has been assigned a payment weight by the Health Care
Financing Administration. Under the new OPPS, the payment due a hospital for
performing an outpatient service will be an amount based on the APC weight, a
dollar based conversion factor, a geographic adjustment factor to account for
area labor cost differences and any other adjustments applicable to the hospital
or case. Because the new OPPS may initially have a severe adverse economic
effect on hospitals, Congress enacted additional legislation in the Balanced
Budget Refinement Act of 1999 (BBA) to ease such effect for a specific period of
time (through 2003). Under the BBA, hospitals may receive additional payments
for new technologies, transitional pass-through for innovative medical devices,
drugs and biologics, outlier adjustments and transitional payment corridors.
The Company believes that the impact of the new OPPS on hospital payments for
diagnostic imaging services - especially for MRI and CT services - may cause
hospitals to consider restructuring their outpatient diagnostic imaging
services as freestanding centers which are unaffected by the new OPPS. This
may provide the Company with additional opportunities for its radiology
co-source product which involves the joint ownership and management of single
and multi-modality imaging centers with hospitals. Given the infancy and
complexity of the new OPPS it is difficult to determine whether hospitals
will be receiving less from Medicare (after they take advantage of the
additional payments that may be available under the BBA) and to what extent
they will attempt to renegotiate existing contractual arrangements. However,
a reduction in contractual rates for several customers could have a material
impact on the Company's contract services revenues.
Patient services revenues increased approximately 23.6% from approximately $20.8
million for the three months ended September 30, 1999, to approximately $25.7
million for the three months ended September 30, 2000. This increase was due
primarily to the acquisitions and opened Fixed Facilities discussed above
(approximately $3.2 million) and an increase in revenues at existing facilities
(approximately $1.7 million). The increase at existing facilities was due to
higher utilization (approximately 8%), partially offset by nominal changes in
reimbursement from third party payors (less than 1%).
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 6.3% from
approximately $38.1 million for the three months ended September 30, 1999, to
approximately $40.5 million for the three months ended September 30, 2000. This
increase was due primarily to an increase in costs due to the acquisitions and
opened Fixed Facilities discussed above (approximately $2.0 million) and an
increase in costs at existing facilities (approximately $0.4 million).
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Costs of operations, as a percentage of total revenues, decreased from
approximately 82.5% for the three months ended September 30, 1999, to
approximately 77.7% for the three months ended September 30, 2000. The
percentage decrease is due primarily to reduced costs in equipment leases,
equipment maintenance, occupancy and travel costs, offset by higher depreciation
and amortization, salary and benefits and supply costs. The Company is
continuing its effort to improve operating efficiencies through cost reduction
initiatives, which are focused primarily on costs for occupancy, marketing,
supplies, salary and benefits and diagnostic imaging equipment costs, including
lease, depreciation and maintenance.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 3.8%, from approximately $2.6 million for the three months ended
September 30, 1999, to approximately $2.7 million for the three months ended
September 30, 2000. This increase was due primarily to additional information
systems costs, offset by a decrease in salaries and benefits associated with the
Company's acquisition and development activities and reduced travel and
occupancy costs. Corporate operating expenses, as a percentage of total
revenues, decreased from approximately 5.7% for the three months ended September
30, 1999, to approximately 5.2% for the three months ended September 30, 2000.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 50.0% from
approximately $4.0 million for the three months ended September 30, 1999, to
approximately $6.0 million for the three months ended September 30, 2000. This
increase was due primarily to additional debt related to (i) the acquisitions
discussed above, (ii) the buy-out of operating leases discussed above, (iii) the
Company upgrading its existing diagnostic imaging equipment, and (iv) higher
interest rates on the Company's floating rate debt, offset by reduced interest
as a result of amortization of long-term debt.
PROVISION FOR INCOME TAXES: For the three months ended Septemer 30, 2000, the
effective tax rate decreased to approximately 10% from approximately 20% for
the three months ended September 30, 1999, primarily as a result of the
effects of benefits from the Company's net operating loss carryforwards. At
the beginning of each fiscal year, the Company estimates its effective tax
rate for the fiscal year. In addition, the Company periodically reviews the
effective tax rate in light of certain factors, including actual operating
income, acquisitions completed and new business development and the effects
of benefits from the Company's net operating loss carryforwards. This review
may result in an increase or decrease in the effective tax rate during the
fiscal year.
EBITDA: Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased approximately 47.0% from approximately $13.2 million for the three
months ended September 30, 1999, to approximately $19.4 million for the three
months ended September 30, 2000. This increase was primarily due to higher
revenues at existing facilities as a result of the revenue enhancing efforts
described above, lower costs of services as a result of the cost reduction
initiatives described above, and decreased equipment lease expense as a result
of the buy-out of capital leases discussed above.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income
per common and converted preferred share was $0.29 for the three months ended
September 30, 2000, compared to net income per common and converted preferred
share of $0.14 for the same period in 1999. The increase in net income per
common and converted preferred share is the result of increased income from
company operations and a decrease in provision for income taxes, offset by a
decrease in earnings of unconsolidated partnerships, as a result of start-up
losses at two of the Company's new partnerships, and increased interest
expense.
NEW PRONOUNCEMENTS
In the first quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No.
138, (collectively SFAS 133). SFAS 133 requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Under SFAS 133 an
entity may designate a derivative as a hedge of exposure to either changes
in: (a) fair value of a recognized asset or liability or firm commitment, (b)
cash flows of a recognized or forecasted transaction, or (c) foreign
currencies of a net investment in
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foreign operations, firm commitments, available-for-sale securities or a
forecasted transaction. Depending upon the effectiveness of the hedge and/or the
transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the fair
value of all derivative instruments not recognized as hedge accounting are
recognized in current year earnings. The adoption of SFAS 133 did not have a
material impact on the Company's financial condition or results of operations.
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, 2000, the Company had long-term debt of approximately $84.4
million, which has floating rate terms. The Company also had outstanding an
interest rate swap, converting $37.3 million of its floating rate debt to fixed
rate debt. The impact of the interest rate swap is not material to the Company's
results of operations.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
There are none.
(b) REPORTS ON FORM 8-K
On August 14, 2000, the Company filed with the SEC an
Amendment No. 1 to Current Report on Form 8-K/A under
Item 7. thereof, filing the financial statements for
Wilkes-Barre Imaging for the years ended December 31,
1999 and 1998 and the three months ended March 31,
2000 and 1999.
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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/ Steven T. Plochocki
-----------------------------------------
Steven T. Plochocki, President and
Chief Executive Officer
/s/ Thomas V. Croal
-----------------------------------------
Thomas V. Croal, Executive Vice
President and Chief Financial Officer
November 13, 2000
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