<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 December 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: 2,965,791 shares of
Common Stock as of February 5, 2000.
The number of pages in this Form 10-Q is 26.
<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 December 31, 1999
and June 30, 1999 (unaudited) 3
Condensed Consolidated Statements of Income
for the six months ended December 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Income
for the three months ended December 31, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18-24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,685 $ 14,294
Trade accounts receivables, net 40,279 35,987
Other current assets 8,108 7,302
-------- ---------
Total current assets 58,072 57,583
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $50,500 and $43,611, respectively 142,388 90,671
INVESTMENTS IN PARTNERSHIPS 1,314 1,415
OTHER ASSETS 8,052 8,308
INTANGIBLE ASSETS, net 78,219 80,327
---------- ---------
$ 288,045 $ 238,304
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment, capital leases and other notes $ 20,111 $ 12,443
Accounts payable and other accrued expenses 18,026 20,489
---------- ---------
Total current liabilities 38,137 32,932
LONG-TERM LIABILITIES:
Equipment, capital leases and other notes, less current portion 202,166 160,187
Other long-term liabilities 906 1,079
---------- ---------
Total long-term liabilities 203,072 161,266
---------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
December 31, 1999 and June 30, 1999, respectively, with a liquidation
preference of $25,000 as of December 31, 1999 23,923 23,923
Convertible Series C preferred stock, 27,953 shares outstanding at
December 31, 1999 and June 30, 1999, respectively, with a liquidation
preference of $27,953 as of December 31, 1999 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares authorized:
2,935,791 and 2,879,071 shares outstanding at December 31, 1999
and June 30, 1999, respectively 3 3
Additional paid-in capital 23,639 23,551
Accumulated deficit (13,902) (16,544)
--------- --------
Total stockholders' equity 46,836 44,106
---------- ---------
$ 288,045 $ 238,304
========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
REVENUES:
Contract services $ 49,384 $ 40,085
Patient services 41,898 35,144
Other 1,005 1,577
--------- -------
Total revenues 92,287 76,806
--------- -------
COSTS OF OPERATIONS:
Costs of services 49,751 39,383
Provision for doubtful accounts 1,412 1,255
Equipment leases 9,232 8,687
Depreciation and amortization 15,195 12,115
--------- --------
Total costs of operations 75,590 61,440
--------- --------
Gross profit 16,697 15,366
CORPORATE OPERATING EXPENSES 5,439 4,657
--------- -------
Income from company operations 11,258 10,709
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 403 258
--------- --------
Operating income 11,661 10,967
INTEREST EXPENSE, net 8,359 7,033
--------- --------
Income before income taxes 3,302 3,934
PROVISION FOR INCOME TAXES 660 272
--------- --------
Net income $ 2,642 $ 3,662
========= =======
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.29 $ 0.40
========= =======
Diluted $ 0.28 $ 0.39
========= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,227,438 9,146,773
========= =========
Diluted 9,380,227 9,405,288
========= =========
</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 INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
REVENUES:
Contract services $ 24,795 $ 19,865
Patient services 21,078 17,945
Other 248 1,063
--------- --------
Total revenues 46,121 38,873
--------- --------
COSTS OF OPERATIONS:
Costs of services 25,054 19,583
Provision for doubtful accounts 662 632
Equipment leases 4,146 4,350
Depreciation and amortization 7,632 6,148
--------- --------
Total costs of operations 37,494 30,713
--------- --------
Gross profit 8,627 8,160
CORPORATE OPERATING EXPENSES 2,804 2,458
--------- --------
Income from company operations 5,823 5,702
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 225 84
--------- --------
Operating income 6,048 5,786
INTEREST EXPENSE, net 4,396 3,574
--------- --------
Income before income taxes 1,652 2,212
PROVISION FOR INCOME TAXES 330 212
--------- --------
Net income $ 1,322 $ 2,000
========= =======
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.14 $ 0.22
========= =======
Diluted $ 0.14 $ 0.21
========= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,252,946 9,150,897
========== ==========
Diluted 9,401,721 9,378,578
========== ==========
</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>
Six Months Ended
December 31,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,642 $ 3,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,195 12,115
Amortization of deferred gain on debt restructure (14) (45)
Cash used in changes in operating assets and liabilities:
Trade accounts receivables (4,292) (4,477)
Other current assets (806) (1,132)
Accounts payable and other accrued expenses (2,463) (8,393)
--------- --------
Net cash provided by operating activities 10,262 1,730
--------- --------
INVESTING ACTIVITIES:
Acquisition of Centers (1,433) -
Additions to property and equipment (10,707) (26,865)
Other (147) (1,283)
--------- -------
Net cash used in investing activities (12,287) (28,148)
--------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and warrants exercised 88 11
Proceeds from issuance of common stock - 21
Principal payments of debt and capital lease obligations (7,513) (8,594)
Proceeds from issuance of debt 5,000 4,506
Other (159) (266)
--------- --------
Net cash used in financing activities (2,584) (4,322)
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (4,609) (30,740)
CASH AND CASH EQUIVALENTS:
Beginning of period 14,294 44,740
--------- --------
End of period $ 9,685 $ 14,000
========= ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 7,843 $ 6,979
Income taxes paid 252 39
Equipment additions under capital leases 52,160 -
</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 32 states throughout the United
States. The Company's services are provided through a network of 77 mobile
magnetic resonance imaging (MRI) facilities (Mobile Facilities), 32
fixed-site MRI facilities (Fixed Facilities), 25 multi-modality imaging
centers (Centers), 5 mobile lithotripsy facilities, one Leksell Stereotactic
Gamma Knife treatment center, and one radiation oncology center. An
additional radiation oncology center is operated by the Company as part of
one of its Centers. The Company's operations are located throughout the
United States, with a substantial presence in California, Texas, New England,
the Carolinas and the Midwest (Illinois, Indiana and Ohio).
At its Centers, the Company offers other services in addition to MRI
including computed tomography (CT), diagnostic and fluoroscopic x-ray,
mammography, diagnostic ultrasound, bone densitometry, nuclear medicine,
nuclear cardiology, and cardiovascular services. The Company offers
additional services through a variety of arrangements including equipment
rental, technologist services, marketing, radiology management services,
patient scheduling, utilization review and billing and collection services.
2. INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Company
included herein have been prepared in accordance with generally accepted
accounting principles for interim financial statements and do not include all of
the information and disclosures required by generally accepted accounting
principles for annual financial statements. These financial statements should be
read in conjunction with the consolidated financial statements and related
footnotes included as part of the Company's Annual Report on Form 10-K for the
period ended June 30, 1999 filed with the Securities and Exchange Commission
(SEC) on September 28, 1999. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for fair presentation of
results for the period have been included. The results of operations for the six
months ended December 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. 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.
7
<PAGE>
Set forth below is the summarized combined financial data of the Company's two
50% controlled entities, which are consolidated (amounts in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Condensed Combined Balance Sheet Data:
Current assets $ 1,835 $ 1,494
Total assets 1,964 1,637
Current liabilities 849 640
Minority interest equity 457 515
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
---------------------------------------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Condensed Combined Statement of Income Data:
Net revenues $ 2,772 $ 2,875 $ 1,355 $ 1,436
Expenses 1,752 1,991 893 998
Provision for center profit distribution 510 442 231 219
--------- -------- -------- -------
Net income $ 510 $ 442 $ 231 $ 219
========= ======== ======== =======
</TABLE>
The provision for center profit distribution shown above represents the minority
interest in the income of these combined entities.
4. INCOME PER COMMON AND CONVERTED PREFERRED SHARE
The Company reports basic and diluted earnings per share (EPS) for common and
converted preferred stock. The number of shares used in computing EPS is equal
to the weighted average number of common and converted preferred shares
outstanding during the respective period. Since the preferred stock has no
stated dividend rate and participates in any dividends paid with respect to the
common stock, the as-if-converted amounts are included in the computation of
basic EPS. There were no adjustments to net income (the numerator) for purposes
of computing EPS.
A reconciliation of basic and diluted share computations is as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
------------------------------------ ------------------------------------
1999 1998 1999 1998
----------------- ----------------------------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Average common stock outstanding 2,904,782 2,824,117 2,930,290 2,828,241
Effect of preferred stock 6,322,656 6,322,656 6,322,656 6,322,656
---------- ---------- ---------- ---------
Denominator for basic EPS 9,227,438 9,146,773 9,252,946 9,150,897
Dilutive effect of stock options and warrants 152,789 258,515 148,775 227,681
---------- ---------- ---------- ---------
9,380,227 9,405,288 9,401,721 9,378,578
========== ========== ========== =========
</TABLE>
8
<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.
9
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
-------------- ------------------ -------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 7,160 $ 2,525
Trade accounts receivables, net - 36,535 3,744
Other current assets - 8,071 37
Intercompany accounts receivable 225,163 11,242 -
----------- --------- ---------
Total current assets 225,163 63,008 6,306
Property and equipment, net - 134,424 7,964
Investments in partnerships - 1,314 -
Investments in consolidated subsidiaries (16,498) 2,598 -
Other assets - 8,052 -
Intangible assets, net - 77,627 592
----------- --------- ---------
$ 208,665 $ 287,023 $ 14,862
=========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other notes $ 10,150 $ 9,797 $ 164
Accounts payable and other accrued expenses - 17,619 407
Intercompany accounts payable - 225,163 11,242
----------- --------- ---------
Total current liabilities 10,150 252,579 11,813
Equipment, capital leases and other notes, less current portion 151,679 50,027 460
Other long-term liabilities - 915 (9)
Stockholders' equity (deficit) 46,836 (16,498) 2,598
----------- --------- ---------
$ 208,665 $ 287,023 $ 14,862
=========== ========= =========
<CAPTION>
ELIMINATIONS CONSOLIDATED
--------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ - $ 9,685
Trade accounts receivables, net - 40,279
Other current assets - 8,108
Intercompany accounts receivable (236,405) -
---------- ---------
Total current assets (236,405) 58,072
Property and equipment, net - 142,388
Investments in partnerships - 1,314
Investments in consolidated subsidiaries 13,900 -
Other assets - 8,052
Intangible assets, net - 78,219
------------ ----------
$ (222,505) $ 288,045
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other notes $ - $ 20,111
Accounts payable and other accrued expenses - 18,026
Intercompany accounts payable (236,405) -
--------- -----------
Total current liabilities (236,405) 38,137
Equipment, capital leases and other notes, less current portion - 202,166
Other long-term liabilities - 906
Stockholders' equity (deficit) 13,900 46,836
------------- ----------
$ (222,505) $ 288,045
============= ==========
</TABLE>
10
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
JUNE 30, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
-------------- ------------------ -------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 12,709 $ 1,585
Trade accounts receivables, net - 32,164 3,823
Other current assets - 7,188 114
Intercompany accounts receivable 225,140 11,027 -
---------- -------- ---------
Total current assets 225,140 63,088 5,522
Property and equipment, net - 82,544 8,127
Investments in partnerships - 1,415 -
Investments in consolidated subsidiaries (19,234) 2,691 -
Other assets - 8,308 -
Intangible assets, net - 79,606 721
---------- -------- ---------
$ 205,906 $ 237,652 $ 14,370
========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other notes $ 9,945 $ 2,374 $ 124
Accounts payable and other accrued expenses - 20,128 361
Intercompany accounts payable - 225,140 11,027
---------- -------- ---------
Total current liabilities 9,945 247,642 11,512
Equipment, capital leases and other notes, less current portion 151,855 8,315 17
Other long-term liabilities - 929 150
Stockholders' equity (deficit) 44,106 (19,234) 2,691
---------- -------- ---------
$ 205,906 $ 237,652 $ 14,370
========== ========== =========
<CAPTION>
ELIMINATIONS CONSOLIDATED
--- ------------------ -------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 14,294
Trade accounts receivables, net - 35,987
Other current assets - 7,302
Intercompany accounts receivable (236,167) -
----------- ---------
Total current assets (236,167) 57,583
Property and equipment, net - 90,671
Investments in partnerships - 1,415
Investments in consolidated subsidiaries 16,543 -
Other assets - 8,308
Intangible assets, net - 80,327
----------- ----------
$ (219,624) $ 238,304
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other notes $ - $ 12,443
Accounts payable and other accrued expenses - 20,489
Intercompany accounts payable (236,167) -
----------- ----------
Total current liabilities (236,167) 32,932
Equipment, capital leases and other notes, less current portion - 160,187
Other long-term liabilities - 1,079
Stockholders' equity (deficit) 16,543 44,106
----------- ---------
$ (219,624) $ 238,304
=========== =========
</TABLE>
11
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
------------ ---------------- ------------------
<S> <C> <C> <C>
Revenues $ - $ 82,700 $ 9,587
Costs of operations - 67,525 8,065
---------- ------------ -------------
Gross profit - 15,175 1,522
Corporate operating expenses - 5,439 -
---------- ------------ -------------
Income from company operations - 9,736 1,522
Equity in earnings of unconsolidated partnerships - 403 -
---------- ------------ -------------
Operating income - 10,139 1,522
Interest expense, net - 7,810 549
---------- ------------ -------------
Income before income taxes - 2,329 973
Provision for income taxes - 660 -
---------- ------------ -------------
Income before equity in income of
consolidated subsidiaries - 1,669 973
Equity in income of consolidated subsidiaries 2,642 973 -
---------- ------------ -------------
Net income $ 2,642 $ 2,642 $ 973
========== ============ ============
<CAPTION>
ELIMINATIONS CONSOLIDATED
------------------- ------------------
<S> <C> <C>
Revenues $ - $ 92,287
Costs of operations - 75,590
-------------- ---------
Gross profit - 16,697
Corporate operating expenses - 5,439
-------------- ---------
Income from company operations - 11,258
Equity in earnings of unconsolidated partnerships - 403
-------------- ----------
Operating income - 11,661
Interest expense, net - 8,359
-------------- ----------
Income before income taxes - 3,302
Provision for income taxes - 660
-------------- ----------
Income before equity in income of
consolidated subsidiaries - 2,642
Equity in income of consolidated subsidiaries (3,615) -
-------------- ----------
Net income $ (3,615) $ 2,642
============== ==========
</TABLE>
12
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 67,495 $ 9,311 $ - $ 76,806
Costs of operations - 53,587 7,853 - 61,440
---------- ------------ -------------- ----------- ----------
Gross profit - 13,908 1,458 - 15,366
Corporate operating expenses - 4,657 - - 4,657
---------- ------------ -------------- ----------- ----------
Income from company operations - 9,251 1,458 - 10,709
Equity in earnings of unconsolidated partnerships - 258 - - 258
---------- ------------ -------------- ----------- ----------
Operating income - 9,509 1,458 - 10,967
Interest expense, net - 6,499 534 - 7,033
---------- ------------ -------------- ----------- ----------
Income before income taxes - 3,010 924 - 3,934
Provision for income taxes - 272 - - 272
---------- ------------ -------------- ----------- ----------
Income before equity in income of
consolidated subsidiaries - 2,738 924 - 3,662
Equity in income of consolidated subsidiaries 3,662 924 - (4,586) -
---------- ------------ -------------- ----------- ----------
Net income $ 3,662 $ 3,662 $ 924 $ (4,586) $ 3,662
========== ============ ============== =========== ==========
</TABLE>
13
<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 DECEMBER 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 41,391 $ 4,730 $ - $ 46,121
Costs of operations - 33,464 4,030 - 37,494
---------- ------------ -------------- ----------- ------------
Gross profit - 7,927 700 - 8,627
Corporate operating expenses - 2,804 - - 2,804
---------- ------------ -------------- ----------- ------------
Income from company operations - 5,123 700 - 5,823
Equity in earnings of unconsolidated partnerships - 225 - - 225
---------- ------------ -------------- ----------- ------------
Operating income - 5,348 700 - 6,048
Interest expense, net - 4,121 275 - 4,396
---------- ------------ -------------- ----------- ------------
Income before income taxes - 1,227 425 - 1,652
Provision for income taxes - 330 - - 330
---------- ------------ -------------- ----------- ------------
Income before equity in income of
consolidated subsidiaries - 897 425 - 1,322
Equity in income of consolidated subsidiaries 1,322 425 - (1,747) -
---------- ------------ -------------- ----------- ------------
Net income $ 1,322 $ 1,322 $ 425 $ (1,747) $ 1,322
========== ============ ============== =========== ============
</TABLE>
14
<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 DECEMBER 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ -------------------------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $34,122 $ 4,751 $ - $38,873
Costs of operations - 26,762 3,951 - 30,713
------- ------- ------- ------- -------
Gross profit - 7,360 800 - 8,160
Corporate operating expenses - 2,458 - - 2,458
------- ------- ------- ------- -------
Income from company operations - 4,902 800 - 5,702
Equity in earnings of unconsolidated partnerships - 84 - - 84
------- ------- ------- ------- -------
Operating income - 4,986 800 - 5,786
Interest expense, net - 3,296 278 - 3,574
------- ------- ------- ------- -------
Income before income taxes - 1,690 522 - 2,212
Provision for income taxes - 212 - - 212
------- ------- ------- ------- -------
Income before equity in income of
consolidated subsidiaries - 1,478 522 - 2,000
Equity in income of consolidated subsidiaries 2,000 522 - (2,522) -
------- ------- ------- ------- -------
Net income $ 2,000 $ 2,000 $ 522 $(2,522) $ 2,000
======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES
------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,642 $ 2,642
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization - 13,807
Amortization of deferred gain on debt restructure - (14)
Equity in income of consolidated subsidiaries (2,642) (973)
Cash provided by (used in) changes in operating assets
and liabilities:
Trade accounts receivables - (4,371)
Intercompany receivables, net (117) 968
Other current assets - (883)
Accounts payable and other accrued expenses - (2,509)
-------- --------
Net cash provided by (used in) operating activities (117) 8,667
-------- --------
INVESTING ACTIVITIES:
Acquisitions of Centers - (1,433)
Additions to property and equipment - (10,206)
Other - (147)
-------- --------
Net cash used in investing activities - (11,786)
-------- --------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 88 -
Principal payments of debt and capital lease
obligations (4,971) (2,430)
Proceeds from issuance of debt 5,000 -
Other - -
-------- --------
Net cash provided by (used in) financing activities 117 (2,430)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (5,549)
CASH AND CASH EQUIVALENTS:
Beginning of period - 12,709
-------- --------
End of period $ - $ 7,160
======== ========
<CAPTION>
NON-GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 973 $ (3,615) $ 2,642
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,388 - 15,195
Amortization of deferred gain on debt restructure - - (14)
Equity in income of consolidated subsidiaries - 3,615 -
Cash provided by (used in) changes in operating assets
and liabilities:
Trade accounts receivables 79 - (4,292)
Intercompany receivables, net (851) - -
Other current assets 77 - (806)
Accounts payable and other accrued expenses 46 - (2,463)
-------- -------- --------
Net cash provided by (used in) operating activities 1,712 - 10,262
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions of Centers - - (1,433)
Additions to property and equipment (501) - (10,707)
Other - - (147)
-------- -------- --------
Net cash used in investing activities (501) - (12,287)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from stock options exercised - - 88
Principal payments of debt and capital lease
obligations (112) - (7,513)
Proceeds from issuance of debt - - 5,000
Other (159) - (159)
-------- -------- --------
Net cash provided by (used in) financing activities (271) - (2,584)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 940 - (4,609)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,585 - 14,294
-------- -------- --------
End of period $ 2,525 $ - $ 9,685
======== ======== ========
</TABLE>
16
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES
----------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,662 $ 3,662
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization - 10,643
Amortization of deferred gain on debt restructure - (45)
Equity in income of consolidated subsidiaries (3,662) (924)
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables - (3,685)
Intercompany receivables, net 3,718 (10,262)
Other current assets - (1,241)
Accounts payable and other accrued expenses - (8,288)
-------- --------
Net cash provided by (used in) operating activities 3,718 (10,140)
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment - (20,543)
Other - (1,135)
-------- --------
Net cash used in investing activities - (21,678)
-------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and warrants exercised 21 -
Proceeds from issuance of common stock 11 -
Principal payments of debt and capital lease obligations (3,750) (4,701)
Proceeds from issuance of debt - 4,506
Other - -
-------- --------
Net cash used in financing activities (3,718) (195)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (32,013)
CASH AND CASH EQUIVALENTS:
Beginning of period - 43,250
-------- --------
End of period $ - $ 11,237
======== ========
<CAPTION>
NON-GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------ ---------------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 924 $ (4,586) $ 3,662
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,472 - 12,115
Amortization of deferred gain on debt restructure - - (45)
Equity in income of consolidated subsidiaries - 4,586 -
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables (792) - (4,477)
Intercompany receivables, net 6,544 - -
Other current assets 109 - (1,132)
Accounts payable and other accrued expenses (105) - (8,393)
-------- -------- --------
Net cash provided by (used in) operating activities 8,152 - 1,730
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (6,322) - (26,865)
Other (148) - (1,283)
-------- -------- --------
Net cash used in investing activities (6,470) - (28,148)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and warrants exercised - - 21
Proceeds from issuance of common stock - - 11
Principal payments of debt and capital lease obligations (143) - (8,594)
Proceeds from issuance of debt - - 4,506
Other (266) - (266)
-------- -------- --------
Net cash used in financing activities (409) - (4,322)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,273 - (30,740)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,490 - 44,740
-------- -------- --------
End of period $ 2,763 $ - $ 14,000
======== ======== ========
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report that are not purely historical or which
might be considered an opinion or projection concerning the Company or its
business, whether express or implied, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include statements regarding the Company's expectations,
intentions, plans or strategies regarding the future, including statements
related to the Year 2000 Issue. All forward-looking statements included in this
report are based upon information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those described or implied in such forward-looking
statements because of certain factors which could affect the Company. Such
forward-looking statements should be evaluated in light of the following
factors: availability of financing; limitations and delays in reimbursement by
third party payors; contract renewals and financial stability of customers;
technology changes; governmental regulations; conditions within the health care
environment; Year 2000 issues; adverse utilization trends for certain diagnostic
imaging procedures; aggressive competition; general economic factors; successful
integration of acquisitions; and the risk factors described in the Company's
periodic filings with the SEC on Forms 10-K, 10-Q and 8-K (if any) and the
factors described under "Risk Factors" in the Company's Registration Statement
on Form S-4, filed with the SEC on August 4, 1998, and any amendments thereto.
ACQUISITIONS
The Company believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through
consolidation. The Company's strategy is to further develop and expand
regional diagnostic imaging networks that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service and
convenience to its customers. The strategy of the Company is focused on the
following components: (i) to further participate in the consolidation
occurring in the diagnostic imaging industry by continuing to build its
market presence in its existing regional diagnostic imaging networks through
geographically disciplined acquisitions; (ii) to develop or acquire
additional regional networks in strategic locations where the Company can
offer a broad range of services to its customers and realize increased
economies of scale; (iii) to continue to market current diagnostic imaging
applications through its existing facilities to optimize and increase overall
procedure volume; (iv) to strengthen the regional diagnostic imaging networks
by focusing on managed care customers; and (v) to implement a variety of new
products and services designed to further leverage its core business
strengths, including: Open MRI systems and the radiology co-source product
which involves the joint ownership and management of the physical and
technical operations of 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 1999, the Company completed two acquisitions as follows: a 70%
interest in a partnership which owns four Centers and two Fixed Facilities in
Buffalo, New York; and a 100% interest in three Centers and two Fixed Facilities
in Phoenix, Arizona. The cumulative purchase price for these two acquisitions
was approximately $16.9 million.
In fiscal 2000, the Company opened its second radiology co-source outpatient
Fixed Facility in Granada Hills, California, which was financed with internally
generated funds and opened an Open MRI Fixed Facility in Pleasanton, California.
Effective December 31, 1999, the Company closed an Open MRI Fixed Facility in
Atlanta, Georgia.
In the third quarter of fiscal 2000, the Company completed the acquisition of
two Fixed Facilities located in Indianapolis and Clarksville, Indiana,
respectively. The purchase price for these acquisitions was approximately $6.9
million.
18
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company operates in a capital intensive, high fixed cost industry that
requires significant amounts of working capital to fund operations, particularly
the initial start-up and development expenses of new operations and yet is
constantly under external pressure to contain costs and reduce prices. Revenues
and cash flows have been adversely affected by an increased collection cycle,
competitive pressures and major restructurings within the health care industry.
This adverse effect on revenues and cash flow is expected to continue.
The Company continues to pursue acquisition opportunities. The Company believes
that the expansion of its business through acquisitions is a key factor in
maintaining profitability. Generally, acquisition opportunities are aimed at
increasing revenues and operating income, and maximizing utilization of existing
capacity; however, the Company has incurred and will continue to incur certain
associated costs, including the salaries, benefits and travel expenses of its
business development team. 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 eleven 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.
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 expires in June 2004, (ii) a $25 million
working capital facility which expires in June 2003, and (iii) a $75 million
acquisition facility which expires in June 2004 (Bank Financing). Borrowings
under the Bank Financing bear interest at LIBOR plus 1.75%. The Company is
required to pay an annual unused facility fee of between 0.375% and 0.5%,
payable quarterly, on unborrowed amounts under the working capital and
acquisition facilities, of which the Company paid approximately $0.2 million
during the six months ended December 31, 1999. At December 31, 1999, there was
(i) approximately $38.8 million in borrowings under the term loan, (ii)
approximately $8.0 million in borrowings under the working capital facility, and
(iii) approximately $15.1 million in borrowings under the acquisition facility.
Additionally, the Company borrowed approximately $8.0 million in January 2000 to
complete the acquisition of the two Fixed Facilities discussed above. As of
January 31, 2000, the Company had borrowing availability of approximately $17
million and $50 million under the working capital facility and the acquisition
facility, respectively.
Net cash provided by operating activities was approximately $10.3 million for
the six months ended December 31, 1999. Cash provided by operating activities
resulted primarily from net income before depreciation and amortization
(approximately $17.8 million), offset by an increase in trade accounts
receivables (approximately $4.3 million) and a decrease in accounts payable and
other accrued expenses (approximately $2.5 million). The increase in trade
accounts receivables is due primarily to the Company's acquisition and
development activities.
Net cash used in investing activities was approximately $12.3 million for the
six months ended December 31, 1999. Cash used in investing activities resulted
primarily from the Company purchasing or upgrading diagnostic imaging equipment
at its existing facilities (approximately $10.7 million) and at the facilities
acquired in fiscal 1999 described above (approximately $1.4 million).
Net cash used in financing activities was approximately $2.6 million for the six
months ended December 31, 1999, resulting primarily from borrowings under the
working capital facility described above (approximately $5.0 million), offset by
principal payments of debt and capital lease obligations (approximately $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 Fixed and Mobile Facilities, at an aggregate cost of approximately
19
<PAGE>
$6 million, six MRI systems for delivery during the year ending June 30,
2000. The Company expects to use internally generated funds or leases from
General Electric Company (GE) to finance the purchase of such equipment. In
addition, the Company previously committed to purchase or lease from GE, 24
Open MRI systems for delivery and installation. As of December 31, 1999, the
Company had taken delivery of 18 of such Open MRI systems and had cancelled
orders for three of such systems without further obligation to GE. The
remaining three systems are included in the commitments discussed above. 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.
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. The effect of this transaction is immaterial for the
month of December 1999, creating an increase in depreciation and interest while
reducing equipment lease expense. The Company believes, on an annualized basis,
equipment lease expense will be reduced by approximately $12 million, and
depreciation and interest combined will be increased by approximately the same
amount. In addition, in December 1999, the Company purchased four pieces of
diagnostic imaging equipment which were also financed through capital leases
with GE. The total purchase price was approximately $7 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, including borrowings under
the Bank Financing. The Company's acquisition strategy, however, may require
sources of capital in addition to that currently available to the Company, and
no assurance can be given that the Company will be able to raise any such
necessary additional funds on terms acceptable to the Company or at all.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
REVENUES: Revenues increased approximately 20.2% from approximately $76.8
million for the six months ended December 31, 1998, to approximately $92.3
million for the six months ended December 31, 1999. This increase was due
primarily to the acquisitions and opened centers discussed above (approximately
$7.1 million) and an increase in contract services and patient services revenues
(approximately $9.0 million) at existing facilities, offset by a decrease in
other revenues (approximately $0.6 million), primarily due to a one-time
settlement payment in connection with an earn-out from the sale of the Company's
lithotripsy partnerships which was recorded in 1998 (approximately $0.4
million).
Contract services revenues increased approximately 23.2% from approximately
$40.1 million for the six months ended December 31, 1998, to approximately $49.4
million for the six months ended December 31, 1999. This increase was due
primarily to the acquisitions and opened centers discussed above (approximately
$2.3 million) and an increase in the Company's existing business (approximately
$7.0 million). The increase in existing business was due to (i) the addition of
eight Mobile Facilities under fixed monthly fee contracts and (ii) higher
utilization (approximately 15%) at the Company's existing mobile customer base
offset by a decline in reimbursement from customers, primarily hospitals
(approximately 2%).
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 54% of total revenues for the six months ended
December 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,
20
<PAGE>
the Company has been able to obtain replacement customer accounts. While some
replacement accounts have initially been smaller than the lost accounts, such
replacement accounts revenues have generally increased over the term of the
agreement. The non-renewal of a single customer agreement would not have a
material impact on the Company's contract services revenues; however,
non-renewal of several agreements could have a material impact on contract
services revenues.
In addition, the Company's contract services revenues with regard to its Mobile
Facilities in certain markets depend in part on some customer accounts with high
volume. If the future reimbursement levels of such customers were to decline or
cease or if such customers were to become financially insolvent and if such
agreements were not replaced with new accounts or with the expansion of services
on existing accounts, the Company's contract services revenues would be
adversely affected.
Patient services revenues increased approximately 19.4% from approximately $35.1
million for the six months ended December 31, 1998, to approximately $41.9
million for the six months ended December 31, 1999. This increase was due
primarily to the acquisitions and opened centers discussed above (approximately
$4.8 million) and an increase in revenues at existing facilities (approximately
$2.0 million). The increase at existing facilities was due to higher utilization
(approximately 9%), partially offset by a decline in reimbursement from third
party payors (approximately 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 23.1% from
approximately $61.4 million for the six months ended December 31, 1998, to
approximately $75.6 million for the six months ended December 31, 1999. This
increase was due primarily to additional costs related to the acquisitions and
opened centers discussed above (approximately $7.0 million) and at existing
facilities (approximately $7.2 million).
Costs of operations, as a percentage of total revenues, increased from
approximately 80.0% for the six months ended December 31, 1998, to approximately
81.9% for the six months ended December 31, 1999. The percentage increase is due
primarily to higher salaries and benefits at existing facilities and the
acquisitions and opened centers discussed above.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 14.9%, from approximately $4.7 million for the six months ended
December 31, 1998, to approximately $5.4 million for the six months ended
December 31, 1999. This increase was due primarily to (i) increased salaries,
benefits and travel and costs associated with the Company's acquisition and
development activities, and (ii) additional information systems costs, offset by
a decrease in other travel and consulting costs. Corporate operating expenses,
as a percentage of total revenues, decreased from approximately 6.1% for the six
months ended December 31, 1998, to approximately 5.9% for the six months ended
December 31, 1999.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 20.0% from
approximately $7.0 million for the six months ended December 31, 1998, to
approximately $8.4 million for the six months ended December 31, 1999. This
increase was due primarily to additional debt related to (i) the acquisitions
discussed above, (ii) the buy-out of operating leases 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.
21
<PAGE>
PROVISION FOR INCOME TAXES: Provision for income taxes increased from
approximately $0.3 million for the six months ended December 31, 1998, to
approximately $0.7 million for the six months ended December 31, 1999. The
effective tax rate increased to approximately 20% in 1999 from approximately 7%
in 1998 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 centers
opened, and the effects of benefits from the Company's net operating loss
carryfowards. This review may result in an increase or decrease in the effective
tax rate during the fiscal year.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income
per common and converted preferred share was $0.28 for the six months ended
December 31, 1999, compared to net income per common and converted preferred
share of $0.39 for the same period in 1998. The decrease in net income per
common and converted preferred share is the result of (i) increased interest
expense and (ii) an increase in provision for income taxes, offset by (i)
increased income from company operations and (ii) an increase in earnings from
unconsolidated partnerships.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
REVENUES: Revenues increased approximately 18.5% from approximately $38.9
million for the three months ended December 31, 1998, to approximately $46.1
million for the three months ended December 31, 1999. This increase was due
primarily to the acquisitions and opened centers discussed above (approximately
$4.0 million) and an increase in contract services and patient services revenues
(approximately $4.0 million) at existing facilities, offset by a decrease in
other revenues (approximately $0.8 million), primarily due to a one-time
settlement payment in connection with an earn-out from the sale of the Company's
lithotripsy partnerships which was recorded in 1998 (approximately $0.4
million).
Contract services revenues increased approximately 24.6% from approximately
$19.9 million for the three months ended December 31, 1998, to approximately
$24.8 million for the three months ended December 31, 1999. This increase was
due primarily to the acquisitions and opened centers discussed above
(approximately $1.3 million) and to an increase in the Company's existing
business (approximately $3.6 million). The increase in existing business was due
to (i) the addition of eight Mobile Facilities under fixed monthly fee contracts
and (ii) higher utilization (approximately 18%) at the Company's existing mobile
customer base offset by a decline in reimbursement from customers, primarily
hospitals (approximately 2%).
Patient services revenues increased approximately 17.9% from approximately $17.9
million for the three months ended December 31, 1998, to approximately $21.1
million for the three months ended December 31, 1999. This increase was due
primarily to the acquisitions and opened centers discussed above (approximately
$2.7 million) and an increase in revenues at existing facilities (approximately
$0.5 million). The increase at existing facilities was due to higher utilization
(approximately 8%), partially offset by a decline in reimbursement from third
party payors (approximately 1%).
COSTS OF OPERATIONS: Costs of operations increased approximately 22.2% from
approximately $30.7 million for the three months ended December 31, 1998, to
approximately $37.5 million for the three months ended December 31, 1999. This
increase was due primarily to additional costs related to the acquisitions and
opened centers discussed above (approximately $3.6 million) and at existing
facilities (approximately $3.2 million).
Costs of operations, as a percentage of total revenues, increased from
approximately 79.0% for the three months ended December 31, 1998, to
approximately 81.3% for the three months ended December 31, 1999. The percentage
increase is due primarily to higher salaries and benefits at existing facilities
and the acquisitions and opened centers discussed above.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 12.0%, from approximately $2.5 million for the three months ended
December 31, 1998, to approximately $2.8 million for the three months ended
December 31, 1999. This increase was due primarily to (i) increased salaries,
benefits and
22
<PAGE>
travel costs associated with the Company's acquisition and development
activities, and (ii) additional information systems costs, offset by a decrease
in other travel and consulting costs. Corporate operating expenses, as a
percentage of total revenues, decreased from approximately 6.3% for the three
months ended December 31, 1998, to approximately 6.1% for the three months ended
December 31, 1999.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 22.2% from
approximately $3.6 million for the three months ended December 31, 1998, to
approximately $4.4 million for the three months ended December 31, 1999. This
increase was due primarily to additional debt related to (i) the acquisitions
discussed above, (ii) the buy-out of operating leases 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 increased from
approximately $0.2 million for the three months ended December 31, 1998, to
approximately $0.3 million for the three months ended December 31, 1999. The
effective tax rate increased to approximately 20% in 1999 from approximately 10%
in 1998 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 centers
opened, and the effects of benefits from the Company's net operating loss
carryfowards. This review may result in an increase or decrease in the effective
tax rate during the fiscal year.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income
per common and converted preferred share was $0.14 for the three months ended
December 31, 1999, compared to net income per common and converted preferred
share of $0.21 for the same period in 1998. The decrease in net income per
common and converted preferred share is the result of (i) increased interest
expense and (ii) an increase in provision for income taxes, offset by (i)
increased income from company operations and (ii) an increase in earnings from
unconsolidated partnerships.
NEW PRONOUNCEMENTS
In fiscal 2001, the Company will be required to adopt Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivatives, Instruments
and Hedging Activities", as deferred and amended by SFAS No. 137. The Company
believes the adoption of this standard will not have a material impact on the
Company's financial condition or results of operations.
YEAR 2000 ISSUE
IMPACT OF YEAR 2000: The Year 2000 Issue exists because many computer systems
and applications currently use two-digit date fields to designate a year. As the
century date occurs, computer programs, computers and embedded microprocessors
controlling equipment with date-sensitive systems may recognize Year 2000 as
1900 or not at all. This inability to recognize or properly treat Year 2000 may
result in computer system failures or miscalculations of critical financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. In addition, miscalculations or failures could
be caused by the fact that the Year 2000 is a leap year.
STATE OF READINESS: The Company started to formulate a plan to address the Year
2000 Issue in late 1995. The Company's primary focus was 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 developed a Year
2000 Plan to address all of its Year 2000 Issues. The Company gave its Executive
Vice President and Chief Information Officer specific responsibility for
managing its Year 2000 Plan and a Year 2000 Committee was established to assist
in developing and implementing the Year 2000 Plan. As of January 31, 2000, the
Company had not experienced and does not expect to experience any material
disruptions to its operations due to Year 2000 Issues; however, no assurance can
be given that the Company has assessed, identified or corrected all Year 2000
Issues that may arise in the coming months.
23
<PAGE>
The Company completed, prior to December 31, 1999, assessment, renovation,
testing and implementation of all of its internal information technology
systems, embedded microprocessors in its other equipment, facilities and
corporate and regional offices, and its diagnostic imaging equipment.
The Company also completed, prior to December 31, 1999, its assessment of the
potential Year 2000 problems with the information systems of its payors,
customers, business partners, landlords and vendors. As part of the Company's
Year 2000 Plan, it requested readiness statements from any third parties whose
non-compliance could materially adversely affect the Company. As of January 31,
2000, the Company had not experienced any Year 2000 Issues with its payors,
customers, business partners, landlords, vendors and third parties.
PRIOR COST ESTIMATES TO ADDRESS YEAR 2000 ISSUES: The Company originally
estimated the cost of assessment, renovation, testing and implementation
would range from approximately $500,000 to $800,000, primarily related to
capital expenditures for the replacement of diagnostic imaging equipment. As
of January 31, 2000, the Company had incurred less than $250,000 in costs
relating to consultants, additional personnel, programming, new software and
hardware, software upgrades and travel expenses and the Company does not
expect to incur significant additional expenses for Year 2000 efforts; except
for the early replacement of a piece of non-compliant diagnostic imaging
equipment at a Fixed Facility, at a cost of approximately $400,000, in the
third quarter of fiscal 2000, which was scheduled for replacement in fiscal
2001. The Company's costs may increase if additional Year 2000 Issues arise
in the future.
RISKS TO THE COMPANY: Although the Company has completed the implementation
of its Year 2000 Plan and has not encountered any material Year 2000 Issues,
there are risks if its efforts did not address all uncertainties or that all
uncertainties have been properly identified. A failure by the Company in
remedying a Year 2000 Issue, or its failure to be, or the failure of its
payors, customers, business partners, landlords, vendors and other third
parties to be, Year 2000 compliant, could, in the worst-case scenario, cause
a business interruption which may materially adversely affect the Company's
business, financial condition and results of operations depending upon the
extent and duration of the business interruption.
CONTINGENCY PLANS: The Company implemented a contingency plan to address
unavoided or unavoidable Year 2000 risks with internal information technology
systems and with customers, vendors and other third parties but no assurance can
be given that such plan will address all risks that may actually arise.
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 December 31, 1999, the Company had outstanding long-term debt of
approximately $61.8 million which has floating rate terms. The Company also had
outstanding an interest rate swap, converting $37.8 million of its 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.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On December 7, 1999, the Company held its annual
meeting of stockholders at which the two matters to
be acted upon was the election of two directors,
Frank E. Egger and Leonard H. Habas as Class III
Directors, to serve for a three year term and the
consideration and approval of the Company's 1999
Stock Option Plan.
(b) Inapplicable.
(c) (i) 2,337,948 shares were voted in favor of
Messrs. Egger and Habas, and 131,099 shares
were withheld.
(ii) 2,740,365 shares were voted for approval of
the 1999 Stock Option Plan, 310,648 shares
were voted against the approval of the 1999
Stock Option Plan and 2,782 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27 Financial Data Schedule
(d) REPORTS ON FORM 8-K.
The Company did not file any Current Report on Form
8-K with the SEC for the quarter ended December 31, 1999.
25
<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/ 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
February 11, 2000
26
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