-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FJ4yyYvps7oZwsP3WgGct/J6ZaisgCGYJbMFPLfbuLNUL+RDLJOjsCsbLjEbyy3C WPI45e2/Gx0qBSxE0YQFpw== 0000912057-00-024641.txt : 20000516 0000912057-00-024641.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024641 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT HEALTH SERVICES CORP CENTRAL INDEX KEY: 0001012697 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 330702770 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28622 FILM NUMBER: 633725 BUSINESS ADDRESS: STREET 1: 4400 VON KARMAN AVENUE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 VON KARMAN AVE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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: 2,967,041 shares of Common Stock as of May 5, 2000. The number of pages in this Form 10-Q is 26. INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES INDEX
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of March 31, 2000 and June 30, 1999 (unaudited) 3 Condensed Consolidated Statements of Income for the nine months ended March 31, 2000 and 1999 (unaudited) 4 Condensed Consolidated Statements of Income for the three months ended March 31, 2000 and 1999 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2000 and 1999 (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 6. EXHIBITS AND REPORTS ON FORM 8-K 25 SIGNATURES 26
2 ITEM 1. FINANCIAL STATEMENTS INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AMOUNTS IN THOUSANDS)
March 31, June 30, 2000 1999 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13,968 $ 14,294 Trade accounts receivables, net 44,234 35,987 Other current assets 7,968 7,302 --------- --------- Total current assets 66,170 57,583 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $57,700 and $43,611, respectively 138,494 90,671 INVESTMENTS IN PARTNERSHIPS 1,505 1,415 OTHER ASSETS 7,838 8,308 INTANGIBLE ASSETS, net 83,256 80,327 --------- --------- $ 297,263 $ 238,304 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment, capital leases and other notes $ 21,764 $ 12,443 Accounts payable and other accrued expenses 21,955 20,489 --------- --------- Total current liabilities 43,719 32,932 --------- --------- LONG-TERM LIABILITIES: Equipment, capital leases and other notes, less current portion 203,590 160,187 Other long-term liabilities 1,047 1,079 --------- --------- Total long-term liabilities 204,637 161,266 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 3,500,000 shares authorized: Convertible Series B preferred stock, 25,000 shares outstanding at March 31, 2000 and June 30, 1999, respectively, with a liquidation preference of $25,000 as of March 31, 2000 23,923 23,923 Convertible Series C preferred stock, 27,953 shares outstanding at March 31, 2000 and June 30, 1999, respectively, with a liquidation preference of $27,953 as of March 31, 2000 13,173 13,173 Common stock, $.001 par value, 25,000,000 shares authorized: 2,967,041 and 2,879,071 shares outstanding at March 31, 2000 and June 30, 1999, respectively 3 3 Additional paid-in capital 23,720 23,551 Accumulated deficit (11,912) (16,544) --------- --------- Total stockholders' equity 48,907 44,106 --------- --------- $ 297,263 $ 238,304 ========= =========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Nine Months Ended March 31, ----------------------- 2000 1999 ---------- ---------- REVENUES: Contract services $ 75,140 $ 61,901 Patient services 63,562 53,585 Other 1,275 2,139 ---------- ---------- Total revenues 139,977 117,625 ---------- ---------- COSTS OF OPERATIONS: Costs of services 75,663 61,480 Provision for doubtful accounts 2,109 1,868 Equipment leases 11,297 13,600 Depreciation and amortization 24,256 18,335 ---------- ---------- Total costs of operations 113,325 95,283 ---------- ---------- Gross profit 26,652 22,342 CORPORATE OPERATING EXPENSES 8,215 7,519 ---------- ---------- Income from company operations 18,437 14,823 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 624 398 ---------- ---------- Operating income 19,061 15,221 INTEREST EXPENSE, net 13,548 10,704 ---------- ---------- Income before income taxes 5,513 4,517 PROVISION FOR INCOME TAXES 881 330 ---------- ---------- Net income $ 4,632 $ 4,187 ========== ========== INCOME PER COMMON AND CONVERTED PREFERRED SHARE: Basic $ 0.50 $ 0.46 ========== ========== Diluted $ 0.49 $ 0.45 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON AND CONVERTED PREFERRED SHARES OUTSTANDING: Basic 9,245,492 9,148,127 ========== ========== Diluted 9,382,999 9,405,764 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended March 31, ----------------------- 2000 1999 ---------- ---------- REVENUES: Contract services $ 25,756 $ 21,816 Patient services 21,664 18,441 Other 270 562 ---------- ---------- Total revenues 47,690 40,819 ---------- ---------- COSTS OF OPERATIONS: Costs of services 25,912 22,097 Provision for doubtful accounts 697 613 Equipment leases 2,065 4,913 Depreciation and amortization 9,061 6,220 ---------- ---------- Total costs of operations 37,735 33,843 ---------- ---------- Gross profit 9,955 6,976 CORPORATE OPERATING EXPENSES 2,776 2,862 ---------- ---------- Income from company operations 7,179 4,114 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 221 140 ---------- ---------- Operating income 7,400 4,254 INTEREST EXPENSE, net 5,189 3,671 ---------- ---------- Income before income taxes 2,211 583 PROVISION FOR INCOME TAXES 221 58 ---------- ---------- Net income $ 1,990 $ 525 ========== ========== INCOME PER COMMON AND CONVERTED PREFERRED SHARE: Basic $ 0.21 $ 0.06 ========== ========== Diluted $ 0.21 $ 0.06 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON AND CONVERTED PREFERRED SHARES OUTSTANDING: Basic 9,285,453 9,150,897 ========== ========== Diluted 9,466,817 9,388,690 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
Nine Months Ended March 31, -------------------- 2000 1999 -------- -------- OPERATING ACTIVITIES: Net income $ 4,632 $ 4,187 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,256 18,335 Amortization of deferred gain on debt restructure (14) (62) Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables (8,247) (6,251) Other current assets (666) (1,241) Accounts payable and other accrued expenses 1,480 (6,733) -------- -------- Net cash provided by operating activities 21,441 8,235 -------- -------- INVESTING ACTIVITIES: Acquisitions of Centers (8,321) (11,745) Additions to property and equipment (13,624) (24,247) Other (272) (996) -------- -------- Net cash used in investing activities (22,217) (36,988) -------- -------- FINANCING ACTIVITIES: Proceeds from stock options exercised 169 11 Proceeds from issuance of common stock -- 21 Principal payments of debt and capital lease obligations (12,387) (11,132) Proceeds from issuance of debt 12,700 13,065 Other (32) (517) -------- -------- Net cash provided by operating activities 450 1,448 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (326) (27,305) CASH AND CASH EQUIVALENTS: Beginning of period 14,294 44,740 -------- -------- End of period $ 13,968 $ 17,435 ======== ======== SUPPLEMENTAL INFORMATION: Interest paid $ 10,431 $ 8,007 Income taxes paid 369 57 Equipment additions under capital leases 52,411 --
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 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 79 mobile magnetic resonance imaging (MRI) facilities (Mobile Facilities), 34 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 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 nine months ended March 31, 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. 7 Set forth below is the summarized financial data of the Company's only 50% controlled entity, which is consolidated (amounts in thousands):
March 31, June 30, 2000 1999 --------- -------- (unaudited) Condensed Balance Sheet Data: Current assets $ 1,909 $ 1,494 Total assets 2,085 1,637 Current liabilities 1,112 640 Minority interest equity 386 515
Nine Months Ended Three Months Ended March 31, March 31, -------------------------------------- 2000 1999 2000 1999 ------ ------ ------ ------ (unaudited) (unaudited) Condensed Statement of Income Data: Net revenues $4,084 $4,194 $1,312 $1,319 Expenses 2,738 3,002 986 1,011 Provision for center profit distribution 673 596 163 154 ------ ------ ------ ------ Net income $ 673 $ 596 $ 163 $ 154 ====== ====== ====== ======
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 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:
Nine Months Ended Three Months Ended March 31, March 31, --------------------- --------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (unaudited) (unaudited) Average common stock outstanding 2,922,836 2,825,471 2,962,797 2,828,241 Effect of preferred stock 6,322,656 6,322,656 6,322,656 6,322,656 --------- --------- --------- --------- Denominator for basic EPS 9,245,492 9,148,127 9,285,453 9,150,897 Dilutive effect of stock options and warrants 137,507 257,637 181,364 237,793 --------- --------- --------- --------- 9,382,999 9,405,764 9,466,817 9,388,690 ========= ========= ========= =========
8 5. SUBSEQUENT EVENT On May 2, 2000, the Company entered into a definitive agreement to purchase a 90% interest in a partnership, which owns a Center in Wilkes-Barre, Pennsylvania. The completion of the transaction is subject to customary closing conditions and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The closing is expected to occur on or before June 15, 2000. 6. 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 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) MARCH 31, 2000 (Amounts in thousands)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ -- $ 11,586 $ 2,382 $ -- $ 13,968 Trade accounts receivables, net -- 40,056 4,178 -- 44,234 Other current assets -- 7,939 29 -- 7,968 Intercompany accounts receivable 230,403 10,899 -- (241,302) -- --------- --------- --------- --------- --------- Total current assets 230,403 70,480 6,589 (241,302) 66,170 Property and equipment, net -- 131,001 7,493 -- 138,494 Investments in partnerships -- 1,505 -- -- 1,505 Investments in consolidated subsidiaries (14,455) 2,543 -- 11,912 -- Other assets -- 7,838 -- -- 7,838 Intangible assets, net -- 82,728 528 -- 83,256 --------- --------- --------- --------- --------- $ 215,948 $ 296,095 $ 14,610 $(229,390) $ 297,263 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes $ 11,406 $ 10,203 $ 155 $ -- $ 21,764 Accounts payable and other accrued expenses -- 21,509 446 -- 21,955 Intercompany accounts payable -- 230,403 10,899 (241,302) -- --------- --------- --------- --------- --------- Total current liabilities 11,406 262,115 11,500 (241,302) 43,719 Equipment, capital leases and other notes, less current portion 155,635 47,526 429 -- 203,590 Other long-term liabilities -- 909 138 -- 1,047 Stockholders' equity (deficit) 48,907 (14,455) 2,543 11,912 48,907 --------- --------- --------- --------- --------- $ 215,948 $ 296,095 $ 14,610 $(229,390) $ 297,263 ========= ========= ========= ========= =========
10 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) JUNE 30, 1999 (Amounts in thousands)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ -- $ 12,709 $ 1,585 $ -- $ 14,294 Trade accounts receivables, net -- 32,164 3,823 -- 35,987 Other current assets -- 7,188 114 -- 7,302 Intercompany accounts receivable 225,140 11,027 -- (236,167) -- --------- --------- --------- --------- --------- Total current assets 225,140 63,088 5,522 (236,167) 57,583 Property and equipment, net -- 82,544 8,127 -- 90,671 Investments in partnerships -- 1,415 -- -- 1,415 Investments in consolidated subsidiaries (19,234) 2,691 -- 16,543 -- Other assets -- 8,308 -- -- 8,308 Intangible assets, net -- 79,606 721 -- 80,327 --------- --------- --------- --------- --------- $ 205,906 $ 237,652 $ 14,370 $(219,624) $ 238,304 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes $ 9,945 $ 2,374 $ 124 $ -- $ 12,443 Accounts payable and other accrued expenses -- 20,128 361 -- 20,489 Intercompany accounts payable -- 225,140 11,027 (236,167) -- --------- --------- --------- --------- --------- Total current liabilities 9,945 247,642 11,512 (236,167) 32,932 Equipment, capital leases and other notes, less current portion 151,855 8,315 17 -- 160,187 Other long-term liabilities -- 929 150 -- 1,079 Stockholders' equity (deficit) 44,106 (19,234) 2,691 16,543 44,106 --------- --------- --------- --------- --------- $ 205,906 $ 237,652 $ 14,370 $(219,624) $ 238,304 ========= ========= ========= ========= =========
11 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (Amounts in thousands) Revenues $ -- $125,482 $ 14,495 $ -- $139,977 Costs of operations -- 101,194 12,131 -- 113,325 -------- -------- -------- -------- -------- Gross profit -- 24,288 2,364 -- 26,652 Corporate operating expenses -- 8,215 -- -- 8,215 -------- -------- -------- -------- -------- Income from company operations -- 16,073 2,364 -- 18,437 Equity in earnings of unconsolidated partnerships -- 624 -- -- 624 -------- -------- -------- -------- -------- Operating income -- 16,697 2,364 -- 19,061 Interest expense, net -- 13,009 539 -- 13,548 -------- -------- -------- -------- -------- Income before income taxes -- 3,688 1,825 -- 5,513 Provision for income taxes -- 881 -- -- 881 -------- -------- -------- -------- -------- Income before equity in income of consolidated subsidiaries -- 2,807 1,825 -- 4,632 Equity in income of consolidated subsidiaries 4,632 1,825 -- (6,457) -- -------- -------- -------- -------- -------- Net income $ 4,632 $ 4,632 $ 1,825 $ (6,457) $ 4,632 ======== ======== ======== ======== ========
12 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (Amounts in thousands) Revenues $ -- $103,669 $ 13,956 $ -- $117,625 Costs of operations -- 83,349 11,934 -- 95,283 -------- -------- -------- -------- -------- Gross profit -- 20,320 2,022 -- 22,342 Corporate operating expenses -- 7,519 -- -- 7,519 -------- -------- -------- -------- -------- Income from company operations -- 12,801 2,022 -- 14,823 Equity in earnings of unconsolidated partnerships -- 398 -- -- 398 -------- -------- -------- -------- -------- Operating income -- 13,199 2,022 -- 15,221 Interest expense, net -- 9,913 791 -- 10,704 -------- -------- -------- -------- -------- Income before income taxes -- 3,286 1,231 -- 4,517 Provision for income taxes -- 330 -- -- 330 -------- -------- -------- -------- -------- Income before equity in income of consolidated subsidiaries -- 2,956 1,231 -- 4,187 Equity in income of consolidated subsidiaries 4,187 1,231 -- (5,418) -- -------- -------- -------- -------- -------- Net income $ 4,187 $ 4,187 $ 1,231 $ (5,418) $ 4,187 ======== ======== ======== ======== ========
13 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (Amounts in thousands) Revenues $ -- $42,782 $ 4,908 $ -- $47,690 Costs of operations -- 33,669 4,066 -- 37,735 ------- ------- ------- ------- ------- Gross profit -- 9,113 842 -- 9,955 Corporate operating expenses -- 2,776 -- -- 2,776 ------- ------- ------- ------- ------- Income from company operations -- 6,337 842 -- 7,179 Equity in earnings of unconsolidated partnerships -- 221 -- -- 221 ------- ------- ------- ------- ------- Operating income -- 6,558 842 -- 7,400 Interest expense, net -- 5,199 (10) -- 5,189 ------- ------- ------- ------- ------- Income before income taxes -- 1,359 852 -- 2,211 Provision for income taxes -- 221 -- -- 221 ------- ------- ------- ------- ------- Income before equity in income of consolidated subsidiaries -- 1,138 852 -- 1,990 Equity in income of consolidated subsidiaries 1,990 852 -- (2,842) -- ------- ------- ------- ------- ------- Net income $ 1,990 $ 1,990 $ 852 $(2,842) $ 1,990 ======= ======= ======= ======= =======
14 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (Amounts in thousands) Revenues $ -- $36,174 $ 4,645 $ -- $40,819 Costs of operations -- 29,762 4,081 -- 33,843 ------- ------- ------- ------- ------- Gross profit -- 6,412 564 -- 6,976 Corporate operating expenses -- 2,862 -- -- 2,862 ------- ------- ------- ------- ------- Income from company operations -- 3,550 564 -- 4,114 Equity in earnings of unconsolidated partnerships -- 140 -- -- 140 ------- ------- ------- ------- ------- Operating income -- 3,690 564 -- 4,254 Interest expense, net -- 3,414 257 -- 3,671 ------- ------- ------- ------- ------- Income before income taxes -- 276 307 -- 583 Provision for income taxes -- 58 -- -- 58 ------- ------- ------- ------- ------- Income before equity in income of consolidated subsidiaries -- 218 307 -- 525 Equity in income of consolidated subsidiaries 525 307 -- (832) -- ------- ------- ------- ------- ------- Net income $ 525 $ 525 $ 307 $ (832) $ 525 ======= ======= ======= ======= =======
15 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 4,632 $ 4,632 $ 1,825 $ (6,457) $ 4,632 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization -- 22,246 2,010 -- 24,256 Amortization of deferred gain on debt restructure -- (14) -- -- (14) Equity in income of consolidated subsidiaries (4,632) (1,825) -- 6,457 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables -- (7,892) (355) -- (8,247) Intercompany receivables, net (5,410) 7,511 (2,101) -- -- Other current assets -- (751) 85 -- (666) Accounts payable and other accrued expenses -- 1,395 85 -- 1,480 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (5,410) 25,302 1,549 -- 21,441 -------- -------- -------- -------- -------- INVESTING ACTIVITIES: Acquisitions of Centers -- (8,321) -- -- (8,321) Additions to property and equipment -- (13,036) (588) -- (13,624) Other -- (272) -- -- (272) -------- -------- -------- -------- -------- Net cash used in investing activities -- (21,629) (588) -- (22,217) -------- -------- -------- -------- -------- FINANCING ACTIVITIES: Proceeds from stock options exercised 169 -- -- -- 169 Principal payments of debt and capital lease obligations (7,459) (4,776) (152) -- (12,387) Proceeds from issuance of debt 12,700 -- -- -- 12,700 Other -- (20) (12) -- (32) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 5,410 (4,796) (164) -- 450 -------- -------- -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (1,123) 797 -- (326) CASH AND CASH EQUIVALENTS: Beginning of period -- 12,709 1,585 -- 14,294 -------- -------- -------- -------- -------- End of period $ -- $ 11,586 $ 2,382 $ -- $ 13,968 ======== ======== ======== ======== ========
16 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 4,187 $ 4,187 $ 1,231 $ (5,418) $ 4,187 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization -- 16,144 2,191 -- 18,335 Amortization of deferred gain on debt restructure -- (62) -- -- (62) Equity in income of consolidated subsidiaries (4,187) (1,231) -- 5,418 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables -- (5,161) (1,090) -- (6,251) Intercompany receivables, net (2,608) (2,702) 5,310 -- -- Other current assets -- (1,270) 29 -- (1,241) Accounts payable and other accrued expenses -- (6,617) (116) -- (6,733) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (2,608) 3,288 7,555 -- 8,235 -------- -------- -------- -------- -------- INVESTING ACTIVITIES: Acquisitions of Centers -- (11,745) -- -- (11,745) Additions to property and equipment -- (17,217) (7,030) -- (24,247) Other -- (847) (149) -- (996) -------- -------- -------- -------- -------- Net cash used in investing activities -- (29,809) (7,179) -- (36,988) -------- -------- -------- -------- -------- FINANCING ACTIVITIES: Proceeds from stock options exercised 11 -- -- -- 11 Proceeds from issuance of common stock 21 -- -- -- 21 Principal payments of debt and capital lease obligations (5,624) (5,350) (158) -- (11,132) Proceeds from issuance of debt 8,200 4,865 -- -- 13,065 Other -- -- (517) -- (517) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 2,608 (485) (675) -- 1,448 -------- -------- -------- -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS -- (27,006) (299) -- (27,305) CASH AND CASH EQUIVALENTS: Beginning of period -- 43,250 1,490 -- 44,740 -------- -------- -------- -------- -------- End of period $ -- $ 16,244 $ 1,191 $ -- $ 17,435 ======== ======== ======== ======== ========
17 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 aggregate purchase price for these two acquisitions was approximately $16.9 million. In 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. In fiscal 2000, the Company opened its second radiology co-source outpatient Fixed Facility in Granada Hills, California, and an Open MRI Fixed Facility in Pleasanton, California, which were financed with internally generated funds. Effective December 31, 1999, the Company closed an Open MRI Fixed Facility in Atlanta, Georgia. In the fourth quarter of fiscal 2000, the Company opened its third radiology co-source outpatient Center in Henderson, Nevada, which was financed with internally generated funds. Also, in the fourth quarter of fiscal 2000, the Company entered into a definitive agreement to purchase a 90% interest in a partnership, which owns a Center 18 in Wilkes-Barre, Pennsylvania. The completion of the transaction is subject to customary closing conditions and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The closing is expected to occur on or before June 15, 2000. 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, the availability of which expires 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 between 0.375% and 0.5%, payable quarterly, on unborrowed amounts under the working capital and acquisition facilities, of which the Company paid approximately $0.3 million during the nine months ended March 31, 2000. At March 31, 2000, there was (i) approximately $36.9 million in borrowings under the term loan, (ii) approximately $8.0 million in borrowings under the working capital facility, and (iii) approximately $22.2 million in borrowings under the acquisition facility. As of April 30, 2000, the Company had borrowing availability of approximately $20 million and $51 million under the working capital facility and the acquisition facility, respectively. If the acquisition of the interest in the partnership described above is completed, $31 million will be available under the acquisition facility through June 12, 2000, or such extension date, as discussed below. The Company believed that it would fully utilize the acquisition facility prior to its expiration since it has been and continues to be involved in discussions with several acquisition candidates; however, the Company does not expect to completely utilize the facility prior to its expiration. The Company is currently negotiating an extension to the availability of the acquisition facility through June 12, 2001. While the Company believes an extension will be obtained, no assurance can be given that such extension will be obtained on terms acceptable to the Company, or at all. If the facility is not extended, and the Company is unable to obtain alternate financing sources, the Company would have to utilize its own internally generated funds to complete future acquisitions. Net cash provided by operating activities was approximately $21.4 million for the nine months ended March 31, 2000. Cash provided by operating activities resulted primarily from net income before depreciation and amortization (approximately $28.9 million) and an increase in accounts payable and other accrued expenses (approximately $1.5 million), offset by an increase in trade accounts receivables (approximately $8.2 million). The increase in trade accounts receivables is due primarily to the Company's acquisition and development activities. It is also the result of the conversion of the Company's contract services billing system, which the Company believes will be a short-term increase. Net cash used in investing activities was approximately $22.2 million for the nine months ended March 31, 2000. Cash used in investing activities resulted primarily from the (i) Company purchasing or upgrading diagnostic 19 imaging equipment at its existing facilities (approximately $13.6 million), (ii) the acquisition described above (approximately $6.9 million), and (iii) purchasing or upgrading diagnostic imaging equipment at the facilities acquired in fiscal 1999 described above (approximately $1.4 million). Net cash provided by financing activities was approximately $0.5 million for the nine months ended March 31, 2000, resulting primarily from (i) borrowings under the working capital facility described above (approximately $5.0 million) and (ii) borrowings under the acquisition facility (approximately $7.7 million), offset by principal payments of debt and capital lease obligations (approximately $12.4 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 $16 million, 11 MRI systems for delivery through December 31, 2000. The Company expects to use either 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 March 31, 2000, the Company had taken delivery of 19 of such Open MRI systems and had cancelled orders for three of such systems without further obligation to GE. The remaining two 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. For the quarter ended March 31, 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 also purchased four pieces of diagnostic imaging equipment which were also financed through capital leases with GE. The total purchase price was approximately $7.0 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, provided that the acquisition facility is extended through June 12, 2001, as discussed above. Moreover, the Company's acquisition strategy 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 NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999 REVENUES: Revenues increased approximately 19.0% from approximately $117.6 million for the nine months ended March 31, 1999, to approximately $140.0 million for the nine months ended March 31, 2000. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $11.6 million) and an increase in contract services and patient services revenues (approximately $11.7 million) at existing facilities, offset by a decrease in other revenues (approximately $0.9 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 fiscal 1999 (approximately $0.4 million). Contract services revenues increased approximately 21.3% from approximately $61.9 million for the nine months ended March 31, 1999, to approximately $75.1 million for the nine months ended March 31, 2000. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $3.4 million) and an increase in the Company's existing business (approximately $9.8 million). The increase in existing business was 20 due to (i) the addition of four Mobile Facilities and (ii) higher utilization (approximately 14%) 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 nine months ended March 31, 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 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 18.7% from approximately $53.6 million for the nine months ended March 31, 1999, to approximately $63.6 million for the nine months ended March 31, 2000. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $8.2 million) and an increase in revenues at existing facilities (approximately $1.9 million), offset by reduced revenues from the closure of the Open MRI Fixed Facility discussed above (approximately $0.1 million). The increase at existing facilities was due to higher utilization (approximately 10%), partially offset by a decline in reimbursement from third party payors (approximately 3%). 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 18.9% from approximately $95.3 million for the nine months ended March 31, 1999, to approximately $113.3 million for the nine months ended March 31, 2000. This increase was due primarily to additional costs related to the acquisitions and opened Fixed Facilities discussed above (approximately $11.1 million) and at existing facilities (approximately $7.2 million), offset by reduced expenses for the closed Open MRI Fixed Facility discussed above (approximately $0.3 million). Costs of operations, as a percentage of total revenues, remained at approximately 81.0% for the nine months ended March 31, 2000 and 1999, respectively. The Company is continuing its effort to improve operating efficiencies through cost reduction initiatives commenced in the quarter ended March 31, 2000. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 9.3%, from approximately $7.5 million for the nine months ended March 31, 1999, to approximately $8.2 million for the nine months ended March 31, 2000. This increase was due primarily to additional information systems costs, offset by a 21 decrease in travel, legal and consulting costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 6.4% for the nine months ended March 31, 1999, to approximately 5.9% for the nine months ended March 31, 2000. INTEREST EXPENSE, NET: Interest expense, net increased approximately 26.2% from approximately $10.7 million for the nine months ended March 31, 1999, to approximately $13.5 million for the nine months ended March 31, 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) higher interest rates on the Company's floating rate debt and (iv) 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 $0.3 million for the nine months ended March 31, 1999, to approximately $0.9 million for the nine months ended March 31, 2000. The effective tax rate increased to approximately 16% in 2000 from approximately 7% in 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 centers opened, 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. INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income per common and converted preferred share was $0.49 for the nine months ended March 31, 2000, compared to net income per common and converted preferred share of $0.45 for the same period in 1999. The increase in net income per common and converted preferred share is the result of (i) increased income from company operations and (ii) an increase in earnings from unconsolidated partnerships, offset by (i) increased interest expense and (ii) an increase in provision for income taxes. THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999 REVENUES: Revenues increased approximately 16.9% from approximately $40.8 million for the three months ended March 31, 1999, to approximately $47.7 million for the three months ended March 31, 2000. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $4.3 million) and an increase in contract services and patient services revenues (approximately $2.9 million) at existing facilities, offset by a decrease in other revenues (approximately $0.3 million). Contract services revenues increased approximately 18.3% from approximately $21.8 million for the three months ended March 31, 1999, to approximately $25.8 million for the three months ended March 31, 2000. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $1.2 million) and to an increase in the Company's existing business (approximately $2.8 million). The increase in existing business was due to (i) the addition of four Mobile Facilities and (ii) higher utilization (approximately 14%) 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 $18.4 million for the three months ended March 31, 1999, to approximately $21.7 million for the three months ended March 31, 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 $0.3 million), offset by reduced revenues from the closure of the Open MRI Fixed Facility discussed above (approximately $0.1 million). The increase at existing facilities was due to higher utilization (approximately 10%), partially offset by a decline in reimbursement from third party payors (approximately 2%). COSTS OF OPERATIONS: Costs of operations increased approximately 11.5% from approximately $33.8 million for the three months ended March 31, 1999, to approximately $37.7 million for the three months ended March 31, 2000. This increase was due primarily to additional costs related to the acquisitions and opened Fixed Facilities 22 discussed above (approximately $4.1 million), offset by reduced expenses at existing facilities (approximately $0.2 million). Costs of operations, as a percentage of total revenues, decreased from approximately 82.9% for the three months ended March 31, 1999, to approximately 79.1% for the three months ended March 31, 2000. The percentage decrease is due primarily to reductions in diagnostic imaging equipment maintenance, medical supplies and travel, offset by higher salaries and benefits at existing facilities and the acquisitions and opened Fixed Facilities discussed above. CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased approximately 3.4%, from approximately $2.9 million for the three months ended March 31, 1999, to approximately $2.8 million for the three months ended March 31, 2000. This decrease was due primarily to a reduction in travel, legal and consulting costs, offset by additional information systems costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 7.0% for the three months ended March 31, 1999, to approximately 5.8% for the three months ended March 31, 2000. INTEREST EXPENSE, NET: Interest expense, net increased approximately 40.5% from approximately $3.7 million for the three months ended March 31, 1999, to approximately $5.2 million for the three months ended March 31, 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) higher interest rates on the Company's floating rate debt and (iv) 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 $0.1 million for the three months ended March 31, 1999, to approximately $0.2 million for the three months ended March 31, 2000. The effective tax rate remained at approximately 10% in 2000 and 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 centers opened, 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. INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income per common and converted preferred share was $0.21 for the three months ended March 31, 2000, compared to net income per common and converted preferred share of $0.06 for the same period in 1999. The increase in net income per common and converted preferred share is the result of (i) increased income from company operations and (ii) an increase in earnings from unconsolidated partnerships, offset by (i) increased interest expense and (ii) an increase in provision for income taxes. 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 occurred, computer programs, computers and embedded microprocessors controlling equipment with date-sensitive systems might have recognized Year 2000 as 1900 or not at all. This inability to recognize or properly treat Year 2000 might have resulted 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 have been caused by the fact that the Year 2000 is a leap year. 23 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 April 30, 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. 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 April 30, 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 April 30, 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. 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 quarter ended March 31, 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 March 31, 2000, the Company had outstanding long-term debt of approximately $67.0 million which has floating rate terms. The Company also had outstanding an interest rate swap, converting $37.5 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 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. There are none. (b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K with the SEC on February 8, 2000, under Item 2 thereof, reporting the Company's acquisition of substantially all of the assets of Southern Regional MRI, LLC and Indiana MRI of Indianapolis, LLC ("Acquisition") and an Amendment No. 1 to Current Report on Form 8-K with the SEC on March 10, 2000, under Item 7 thereof, reporting that the Company would not be filing financial statements and pro-forma financial information with respect to the Acquisition since they were not required by Item 7. 25 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 May 15, 2000 26 EX-27 2 EXHIBIT 27
5 1,000 9-MOS JUN-30-2000 JUL-01-1999 MAR-31-2000 13,968 0 44,234 0 0 66,170 196,194 57,700 297,263 43,719 203,590 0 37,096 3 11,808 297,263 138,702 139,977 0 111,216 8,215 2,109 13,548 5,513 881 4,632 0 0 0 0 0.50 0.49
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