-----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, LRhguAtTZfSdnWlx0OaPH/rkS7RmNvfK1HLLocOHj/ZciVlHhYAwGE5LZkeRAViP seFN9bP8DAChLFSqdf4QFw== 0001047469-99-006205.txt : 19990217 0001047469-99-006205.hdr.sgml : 19990217 ACCESSION NUMBER: 0001047469-99-006205 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 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: 99542309 BUSINESS ADDRESS: STREET 1: 4440 VON KARMAN AVENUE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4440 VON KARMAN AVE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-Q 1 FORM 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 December 31, 1998 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: 2,828,241 shares of Common Stock as of February 12, 1999. The number of pages in this Form 10-Q is 29. INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES INDEX
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of December 31, 1998 (unaudited) and June 30, 1998 3 Condensed Consolidated Statements of Operations (unaudited) for the six months ended December 31, 1998 and 1997 4 Condensed Consolidated Statements of Operations (unaudited) for the three months ended December 31, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 1998 and 1997 6 Notes to Condensed Consolidated Financial Statements 7-18 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19-27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28 SIGNATURES 29
2 ITEM 1. FINANCIAL STATEMENT INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
December 31, June 30, 1998 1998 --------------- ---------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 14,000 $ 44,740 Trade accounts receivable, net 30,140 25,663 Other current assets 4,182 3,050 ------------ ---------- Total current assets 48,322 73,453 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $34,754 and $26,116, respectively 88,860 71,814 INVESTMENT IN PARTNERSHIPS 1,627 1,523 OTHER ASSETS 6,864 6,639 INTANGIBLE ASSETS, net 73,511 74,831 ------------ ---------- $ 219,184 $ 228,260 ------------ ---------- ------------ ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment, capital leases and other notes $ 10,344 $ 10,140 Accounts payable and other accrued expenses 18,037 26,410 ------------ ---------- Total current liabilities 28,381 36,550 ------------ ---------- LONG-TERM LIABILITIES: Equipment, capital leases and other notes, less current portion 147,828 152,120 Other long-term liabilities 941 984 ------------ ---------- Total long-term liabilities 148,769 153,104 ------------ ---------- MINORITY INTEREST 482 748 ------------ ---------- STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 3,500,000 shares authorized: Convertible Series B preferred stock, 25,000 shares outstanding at December 31, 1998 and June 30, 1998, respectively, with a liquidation preference of $25,000 23,923 23,923 Convertible Series C preferred stock, 27,953 shares outstanding at December 31, 1998 and June 30, 1998, respectively, with a liquidation preference of $27,953 13,173 13,173 Common stock, $.001 par value, 25,000,000 shares authorized, 2,828,241 and 2,824,090 shares outstanding at December 31, 1998 and June 30, 1998, respectively 3 3 Additional paid-in capital 23,447 23,415 Accumulated deficit (18,994) (22,656) ------------ ---------- Total stockholders' equity 41,552 37,858 ------------ ---------- $ 219,184 $ 228,260 ------------ ---------- ------------ ----------
The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Six Months Ended December 31, ------------------------------- 1998 1997 ------------ ------------ REVENUES: Contract services $ 40,085 $ 27,133 Patient services 35,144 28,488 Other 1,577 1,182 ------------ ------------ Total revenues 76,806 56,803 ------------ ------------ COSTS OF OPERATIONS: Costs of services 39,463 29,537 Provision for doubtful accounts 1,255 1,038 Equipment leases 8,687 9,002 Depreciation and amortization 11,937 6,699 ------------ ------------ Total costs of operations 61,342 46,276 ------------ ------------ Gross profit 15,464 10,527 CORPORATE OPERATING EXPENSES 4,755 4,256 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION - 6,309 ------------ ------------ Income (loss) from company operations 10,709 (38) EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 258 336 ------------ ------------ Operating income 10,967 298 INTEREST EXPENSE, net 7,033 3,250 ------------ ------------ Income (loss) before income taxes 3,934 (2,952) PROVISION FOR INCOME TAXES 272 431 ------------ ------------ Net income (loss) $ 3,662 $ (3,383) ------------ ------------ ------------ ------------ INCOME (LOSS) PER COMMON AND CONVERTED PREFERRED SHARE: Basic $ 0.40 $ (0.49) ------------ ------------ ------------ ------------ Diluted $ 0.39 $ (0.49) ------------ ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF COMMON AND CONVERTED PREFERRED SHARES OUTSTANDING: Basic 9,146,773 6,862,631 ------------ ------------ ------------ ------------ Diluted 9,405,288 6,862,631 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended December 31, ------------------------------- 1998 1997 ------------ ------------ REVENUES: Contract services $ 19,865 $ 13,489 Patient services 17,945 14,857 Other 1,063 803 ------------ ------------ Total revenues 38,873 29,149 ------------ ------------ COSTS OF OPERATIONS: Costs of services 19,515 15,477 Provision for doubtful accounts 632 540 Equipment leases 4,350 4,490 Depreciation and amortization 6,043 3,526 ------------ ------------ Total costs of operations 30,540 24,033 ------------ ------------ Gross profit 8,333 5,116 CORPORATE OPERATING EXPENSES 2,631 1,898 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION - 6,309 ------------ ------------ Income (loss) from company operations 5,702 (3,091) EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 84 166 ------------ ------------ Operating income (loss) 5,786 (2,925) INTEREST EXPENSE, net 3,574 1,562 ------------ ------------ Income (loss) before income taxes 2,212 (4,487) PROVISION FOR INCOME TAXES 212 - ------------ ------------ Net income (loss) $ 2,000 $ (4,487) ------------ ------------ ------------ ------------ INCOME (LOSS) PER COMMON AND CONVERTED PREFERRED SHARE: Basic $ 0.22 $ (0.53) ------------ ------------ ------------ ------------ Diluted $ 0.21 $ (0.53) ------------ ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF COMMON AND CONVERTED PREFERRED SHARES OUTSTANDING: Basic 9,150,897 8,508,776 ------------ ------------ ------------ ------------ Diluted 9,378,578 8,508,776 ------------ ------------ ------------ ------------
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)
Six Months Ended December 31, ------------------------------ 1998 1997 ------------- ------------ OPERATING ACTIVITIES: Net income (loss) $ 3,662 $ (3,383) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Total depreciation and amortization 12,093 6,773 Amortization of deferred gain on debt restructure (45) (1,319) Provision for supplemental service fee termination - 6,309 Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivable, net (4,477) (3,907) Other current assets (1,132) (1,181) Accounts payable and other accrued expenses (8,371) 2,559 ------------- ------------ Net cash provided by operating activities 1,730 5,851 ------------- ------------ INVESTING ACTIVITIES: Additions to property and equipment (26,865) (13,448) Acquisitions of imaging centers (12,890) Other (1,283) (951) ------------- ------------ Net cash used in investing activities (28,148) (27,289) ------------- ------------ FINANCING ACTIVITIES: Proceeds from issuance of preferred stock - 23,346 Issuance of common stock 21 - Stock options and warrants exercised 11 50 Payment of loan financing costs - (2,210) Principal payments of debt and capital lease obligations (8,594) (78,455) Proceeds from issuance of debt and capital lease obligations 4,506 83,159 Other (266) (7) ------------- ------------ Net cash provided by (used in) financing activities (4,322) 25,883 ------------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (30,740) 4,445 CASH AND CASH EQUIVALENTS: Beginning of period 44,740 6,884 ------------- ------------ End of period $ 14,000 $ 11,329 ------------- ------------ ------------- ------------ SUPPLEMENTAL INFORMATION: Interest paid $ 6,979 $ 3,300 ------------- ------------ ------------- ------------
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 29 states throughout the United States. The Company's services are provided through a network of 66 mobile magnetic resonance imaging (MRI) facilities (Mobile Facilities), 34 fixed-site MRI facilities (Fixed Facilities), 16 multi-modality imaging centers (Centers), 5 mobile lithotripsy facilities, one Leksell Stereotactic Gamma Knife treatment center, and one radiation oncology center. An additional radiation oncology center is operated by the Company as part of one of its Centers. The Company's operations are located throughout the United States, with a substantial presence in California, Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio). At its Centers, the Company offers other services in addition to MRI, including Open MRI, computed tomography (CT), diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound, nuclear medicine, nuclear cardiology, and cardiovascular services. The Company offers additional services through a variety of arrangements including equipment rental, technologist services and training/applications, marketing, radiology management services, patient scheduling, utilization review and billing and collection services. 2. INTERIM FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with generally accepted accounting principles for interim financial statements and do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included as part of the Company's Annual Report on Form 10-K for the period ended June 30, 1998 filed with the Securities and Exchange Commission on September 28, 1998. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for fair presentation of results for the period have been included. The results of operations for the six months ended December 31, 1998, are not necessarily indicative of the results to be achieved for the full fiscal year. Certain reclassifications have been made to conform prior year amounts to the current year presentation. 3. RECAPITALIZATION AND FINANCING On October 14, 1997, the Company consummated a recapitalization (Recapitalization) pursuant to which (a) certain investors affiliated with TC Group, LLC and its affiliates (collectively, Carlyle), a private merchant bank headquartered in Washington, D.C., made a cash investment of $25 million in the Company and received therefor (i) 25,000 shares of newly issued convertible preferred stock, Series B of the Company, par value $0.001 per share (Series B Preferred Stock), initially convertible, at the option of the holders thereof, in the aggregate into 2,985,075 shares of common stock, and (ii) warrants (Carlyle Warrants) to purchase up to 250,000 shares of common stock at an exercise price of $10.00 per share; (b) General Electric Company (GE) (i) surrendered its rights under the amended equipment service agreement to receive supplemental service fee payments equal to 14% of pretax income in exchange for the issuance of 7,000 shares of newly issued convertible preferred stock, Series C of the Company, par value $0.001 per share (Series C Preferred Stock), initially convertible, at the option of GE, in the aggregate into 835,821 shares of common stock, for which the Company recorded a non-recurring expense of approximately $6.3 million during the second quarter of fiscal 1998, (ii) received warrants (GE Warrants) to purchase up to 250,000 shares of common stock at an exercise price of $10.00 per share and (iii) exchanged all of its Series A Preferred Stock, for an additional 20,953 shares of Series C Preferred Stock, initially convertible, at the option of GE, in the aggregate into 2,501,760 shares of common stock; and (c) the Company executed a Credit Agreement with NationsBank, N.A. pursuant to which NationsBank, as agent and lender, provided a total of $125 million in senior secured credit financing (Bank Financing), including (i) a $50 million term loan facility consisting of a $20 7 million tranche with increasing amortization over a five-year period and a $30 million tranche with increasing amortization over a seven-year period, principally repayable in years six and seven, (ii) a $25 million revolving working capital facility with a five-year maturity, and (iii) a $50 million acquisition facility. Initial funding under the Bank Financing occurred on October 22, 1997 and, on December 19, 1997, the Bank Financing was increased to a total of $150 million by converting $10 million of outstanding debt under the acquisition facility to the seven-year tranche (which was thereby increased to $40 million) and increasing the acquisition facility to $65 million. The terms of the Series B Preferred Stock and the Series C Preferred Stock (collectively, Preferred Stock) are substantially the same. The Preferred Stock has a liquidation preference of $1,000 per share. It will participate in any dividends paid with respect to the common stock. There is no mandatory or optional redemption provision for the Preferred Stock. The Preferred Stock is convertible into an aggregate of 6,322,656 shares of common stock. For so long as Carlyle and its affiliates own at least 33% of the Series B Preferred Stock or GE and its affiliates own at least 33% of the Series C Preferred Stock, respectively, the approval of at least 67% of the holders of such series of Preferred Stock is required before the Company may take certain actions including, but not limited to, amending its certificate of incorporation or bylaws, changing the number of directors or the manner in which directors are selected, incurring indebtedness in excess of $15 million in any fiscal year, issuing certain equity securities below the then current market price or the then applicable conversion price, acquiring equity interests or assets of entities for consideration equal to or greater than $15 million, and engaging in mergers for consideration equal to or greater than $15 million. The Preferred Stock vote with the common stock on an as-if-converted basis on all matters except the election of directors, subject to an aggregate maximum Preferred Stock percentage of 37% of all votes entitled to be cast on such matters. Assuming the conversion of all of the Series B Preferred Stock into common stock and the exercise of all of the Carlyle Warrants, Carlyle would own approximately 32% of the common stock of the Company, on a fully diluted basis. Assuming the conversion of all of the Series C Preferred Stock and the exercise of the GE Warrants, GE would own approximately 35% of the common stock of the Company, on a fully diluted basis. Pursuant to the terms of the Recapitalization, the number of directors comprising the Company's Board of Directors (the Board) is currently fixed at nine. Six directors (Common Stock Directors) are to be elected by the common stockholders, one of whom (Joint Director) is to be proposed by Carlyle and GE and approved by a majority of the Board in its sole discretion. Of the three remaining directors (Preferred Stock Directors), two are to be elected by the holders of the Series B Preferred Stock and one is to be elected by the holders of the Series C Preferred Stock, in each case acting by written consent and without a meeting of the common stockholders. As long as Carlyle and certain affiliates thereof own an aggregate of at least 50% of the Series B Preferred Stock, originally purchased thereby, the holders of the Series B Preferred Stock will have the right to elect two Preferred Stock Directors and as long as Carlyle and certain affiliates thereof own an aggregate of at least 25% of such stock, such holders will have the right to elect one Preferred Stock Director. As long as GE and its affiliates own an aggregate of at least 25% of the Series C Preferred Stock, originally purchased thereby, GE will have the right to elect one Preferred Stock Director. If any such ownership percentage falls below the applicable threshold, the Preferred Stock Director(s) formerly entitled to be elected by Carlyle or GE, as the case may be, will thereafter be elected by the common stockholders. The Board currently consists of eight directors, five of whom are Common Stock Directors and three of whom are Preferred Stock Directors. The vacancy created for the Joint Director has not yet been filled. All of the Series B Preferred Stock and the Series C Preferred Stock may be converted into a newly created Convertible Preferred Stock, Series D, par value $0.001 per share (Series D Preferred Stock). The Series D Preferred Stock allows the number of directors to be automatically increased to a number which would permit each of Carlyle and GE, by filling the newly created vacancies, to achieve representation on the Board proportionate to their respective common stock ownership percentages on an as-if-converted basis but would limit such representation to less than two thirds of the Board of Directors for a certain period of time. The Series D Preferred Stock has a liquidation preference of $0.001 per share but no mandatory or optional redemption provision. It will participate in any dividends paid with respect to the common stock and is convertible into 6,322,660 shares of common stock. 8 Holders of the Preferred Stock also have a right of first offer with respect to future sales of common stock in certain transactions or proposed transactions not involving a public offering by the Company of its common stock or securities convertible into common stock. Holders of the Preferred Stock are also entitled to certain demand and "piggyback" registration rights. On June 12, 1998, the Company completed a refinancing of substantially all of the Company's long-term debt through the issuance of $100 million of 9 5/8% senior subordinated notes due 2008 (Notes). Concurrent with the issuance of the Notes, the Company entered into an amendment to and restatement of the Bank Financing, pursuant to which the Company refinanced and consolidated its prior $20 million tranche and $40 million tranche into a $50 million term loan facility with a six-year amortization, (ii) a $25 million revolving working capital facility with a five-year maturity and (iii) a $75 million acquisition facility with a six-year maturity. 4. INVESTMENTS IN PARTNERSHIPS The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company's investment interests in partnerships or limited liability companies (Partnerships) are accounted for under the equity method of accounting for ownership of 50% or less when the Company does not exercise significant control over the operations of the Partnership and does not have primary responsibility for the Partnership's long-term debt. The Company's investment interests in Partnerships are consolidated for ownership of 50% or greater owned entities when the Company exercises significant control over the operations and is primarily responsible for the associated long-term debt. Set forth below is the condensed combined financial data of the Company's two 50% owned and controlled entities which are consolidated (amounts in thousands):
December 31, June 30, 1998 1998 ------------ ----------- (unaudited) Condensed Combined Balance Sheet Data: Current assets $ 2,172 $ 1,825 Total assets 2,258 1,896 Current liabilities 1,010 644 Minority interest equity 641 642
Six Months Ended Three Months Ended December 31, December 31, ---------------------------- ----------------------------- 1998 1997 1998 1997 ----------- ----------- ------------ ----------- (unaudited) (unaudited) Condensed Combined Statement of Operations Data: Net revenues $ 2,875 $ 3,336 $ 1,436 $ 1,690 Expenses 1,991 2,296 998 1,196 Provision for center profit distribution 442 520 219 247 ----------- ----------- ----------- ----------- Net income $ 442 $ 520 $ 219 $ 247 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The provision for center profit distribution shown above represents the minority interest in the income of these combined entities. 9 5. INCOME PER COMMON SHARE The Company has adopted Statement of Financial Accounting Standards No. 128, which replaces primary EPS and fully diluted EPS with basic EPS and diluted EPS. The number of shares used in computing EPS is equal to the weighted average number of common and converted preferred shares outstanding during the respective period. Since the Preferred Stock has no stated dividend rate and participates in any dividends paid with respect to the common stock, the as-if-converted amounts are included in the computation of basic EPS. Common stock equivalents relating to options, warrants and convertible Preferred Stock are not included for the periods ended December 31, 1997 due to their antidilutive effect. There were no adjustments to net income (the numerator) for purposes of computing EPS. A reconciliation of basic and diluted share computations is as follows:
Six Months Ended Three Months Ended December 31, December 31, ------------------------- ------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Average common stock outstanding 2,824,117 2,720,377 2,828,241 2,726,029 Effect of preferred stock 6,322,656 4,142,254 6,322,656 5,782,747 --------- --------- --------- --------- Denominator for basic EPS 9,146,773 6,862,631 9,150,897 8,508,776 Dilutive effect of stock options and warrants 258,515 - 227,681 - --------- --------- --------- --------- 9,405,288 6,862,631 9,378,578 8,508,776 --------- --------- --------- --------- --------- --------- --------- ---------
6. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION The Company's payment obligations under the Notes are guaranteed by certain of the Company's wholly owned subsidiaries (Guarantor Subsidiaries). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantor Subsidiaries are not presented because the Company's management has determined that they would not be material to investors. The following supplemental financial information sets forth, on an unconsolidated basis, balance sheets, statements of operations and statements of cash flows information for the Company (Parent Company Only), for the Guarantor Subsidiaries and for the Company's other subsidiaries (Non-Guarantor Subsidiaries). The supplemental financial information reflects the investments of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. 10 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) ASSETS Current assets: Cash and cash equivalents $ - $ 11,237 $ 2,763 $ - $ 14,000 Trade accounts receivable, net - 26,594 3,546 - 30,140 Other current assets - 3,992 190 - 4,182 Intercompany accounts receivable 208,966 11,683 - (220,649) - --------- --------- -------- --------- --------- Total current assets 208,966 53,506 6,499 (220,649) 48,322 Property and equipment, net - 80,431 8,429 - 88,860 Investments in partnerships - 1,627 - - 1,627 Investments in consolidated subsidiaries (21,164) 2,170 - 18,994 - Other assets - 6,864 - - 6,864 Intangible assets, net - 73,371 140 - 73,511 --------- --------- -------- --------- --------- $ 187,802 $ 217,969 $ 15,068 $(201,655) $ 219,184 --------- --------- -------- --------- --------- --------- --------- -------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes $ 7,500 $ 2,719 $ 125 $ - $ 10,344 Accounts payable and other accrued expenses - 17,473 564 - 18,037 Intercompany accounts payable - 208,966 11,683 (220,649) - --------- --------- -------- --------- --------- Total current liabilities 7,500 229,158 12,372 (220,649) 28,381 Equipment capital leases and other notes, less current portion 138,750 9,034 44 - 147,828 Other long-term liabilities - 941 - - 941 Minority interest - - 482 - 482 Stockholders' equity (deficit) 41,552 (21,164) 2,170 18,994 41,552 --------- --------- -------- --------- --------- $ 187,802 $ 217,969 $ 15,068 $(201,655) $ 219,184 --------- --------- -------- --------- --------- --------- --------- -------- --------- ---------
11 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) ASSETS Current assets: Cash and cash equivalents $ - $ 43,250 $ 1,490 $ - $ 44,740 Trade accounts receivable, net - 22,909 2,754 - 25,663 Other current assets - 2,751 299 - 3,050 Intercompany accounts receivable 211,995 4,903 - (216,898) - --------- --------- -------- --------- --------- Total current assets 211,995 73,813 4,543 (216,898) 73,453 Property and equipment, net - 68,363 3,451 - 71,814 Investments in partnerships - 1,523 - - 1,523 Investments in consolidated subsidiaries (24,137) 1,482 - 22,655 - Other assets - 6,639 - - 6,639 Intangible assets, net - 74,711 120 - 74,831 --------- --------- -------- --------- --------- $ 187,858 $ 226,531 $ 8,114 $(194,243) $ 228,260 --------- --------- -------- --------- --------- --------- --------- -------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes $ 7,500 $ 2,497 $ 143 $ - $ 10,140 Accounts payable and other accrued expenses - 25,741 669 - 26,410 Intercompany accounts payable - 211,995 4,903 (216,898) - --------- --------- -------- --------- --------- Total current liabilities 7,500 240,233 5,715 (216,898) 36,550 Equipment, capital leases and other notes, less current portion 142,500 9,451 169 - 152,120 Other long-term liabilities - 984 - - 984 Minority interest - - 748 - 748 Stockholders' equity (deficit) 37,858 (24,137) 1,482 22,655 37,858 --------- --------- -------- --------- --------- $ 187,858 $ 226,531 $ 8,114 $(194,243) $ 228,260 --------- --------- -------- --------- --------- --------- --------- -------- --------- ---------
12 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) Revenues $ - $ 67,495 $ 9,311 $ - $ 76,806 Costs of operations - 53,489 7,853 - 61,342 --------- --------- -------- --------- --------- Gross profit - 14,006 1,458 - 15,464 Corporate operating expenses - 4,755 - - 4,755 --------- --------- -------- --------- --------- 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 --------- --------- -------- --------- --------- --------- --------- -------- --------- ---------
13 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) Revenues $ - $ 49,340 $ 7,463 $ - $ 56,803 Costs of operations - 39,970 6,306 - 46,276 ---------- ------------ -------------- ------------ ------------ Gross profit - 9,370 1,157 - 10,527 Corporate operating expenses - 4,256 - - 4,256 Provision for supplemental service fee termination - 6,309 - - 6,309 ---------- ------------ -------------- ------------ ------------ Income (loss) from company operations - (1,195) 1,157 - (38) Equity in earnings of unconsolidated partnerships - 336 - - 336 ---------- ------------ -------------- ------------ ------------ Operating income (loss) - (859) 1,157 - 298 Interest expense, net - 3,075 175 - 3,250 ---------- ------------ -------------- ------------ ------------ Income (loss) before income taxes - (3,934) 982 - (2,952) Provision for income taxes - 431 - - 431 ---------- ------------ -------------- ------------ ------------ Income (loss) before equity in income of consolidated subsidiaries - (4,365) 982 - (3,383) Equity in income (loss) of consolidated subsidiaries (3,383) 982 - 2,401 - ---------- ------------ -------------- ------------ ------------ Net income (loss) $ (3,383) $ (3,383) $ 982 $ 2,401 $ (3,383) ---------- ------------ -------------- ------------ ------------ ---------- ------------ -------------- ------------ ------------
14 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) Revenues $ - $ 34,122 $ 4,751 $ - $ 38,873 Costs of operations - 26,589 3,951 - 30,540 ---------- ------------ -------------- ------------ ------------ Gross profit - 7,533 800 - 8,333 Corporate operating expenses - 2,631 - - 2,631 ---------- ------------ -------------- ------------ ------------ 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 ---------- ------------ -------------- ------------ ------------ ---------- ------------ -------------- ------------ ------------
15 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) Revenues $ - 25,458 $ 3,691 $ - $ 29,149 Costs of operations - 20,752 3,281 - 24,033 ---------- ------------ -------------- ------------ ------------ Gross profit - 4,706 410 - 5,116 Corporate operating expenses - 1,898 - - 1,898 Provision for supplemental service fee termination - 6,309 - - 6,309 ---------- ------------ -------------- ------------ ------------ Income (loss) from company operations - (3,501) 410 - (3,091) Equity in earnings of unconsolidated partnerships - 166 - - 166 ---------- ------------ -------------- ------------ ------------ Operating income (loss) - (3,335) 410 - (2,925) Interest expense, net - 1,470 92 - 1,562 ---------- ------------ -------------- ------------ ------------ Income (loss) before income taxes - (4,805) 318 - (4,487) Provision for income taxes - - - - - ---------- ------------ -------------- ------------ ------------ Income (loss) before equity in income of consolidated subsidiaries - (4,805) 318 - (4,487) Equity in income (loss) of consolidated subsidiaries (4,487) 318 - 4,169 - ---------- ------------ -------------- ------------ ------------ Net income (loss) $ (4,487) $ (4,487) $ 318 $ 4,169 $ (4,487) ---------- ------------ -------------- ------------ ------------ ---------- ------------ -------------- ------------ ------------
16 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 3,662 $ 3,662 $ 924 $ (4,586) $ 3,662 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Total depreciation and amortization - 10,621 1,472 - 12,093 Amortization of deferred gain on debt restructure - (45) - - (45) Equity in income (loss) of consolidated subsidiaries (3,662) (924) - 4,586 - Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivable, net - (3,685) (792) - (4,477) Intercompany receivables, net 3,718 (10,262) 6,544 - - Other current assets - (1,241) 109 - (1,132) Accounts payable and other accrued expenses - (8,266) (105) - (8,371) ---------- ------------ -------------- ------------ ------------ Net cash provided by (used in) operating activities 3,718 (10,140) 8,152 - 1,730 ---------- ------------ -------------- ------------ ------------ INVESTING ACTIVITIES: Additions to property and equipment - (20,543) (6,322) - (26,865) Other - (1,135) (148) - (1,283) ---------- ------------ -------------- ------------ ------------ Net cash used in investing activities - (21,678) (6,470) - (28,148) ---------- ------------ -------------- ------------ ------------ FINANCING ACTIVITIES: Stock options and warrants exercised 11 - - - 11 Issuance of common stock 21 - - - 21 Principal payments of debt and capital lease obligations (3,750) (4,701) (143) - (8,594) Proceeds from issuance of debt and capital lease obligations - 4,506 - - 4,506 Other - - (266) - (266) ---------- ------------ -------------- ------------ ------------ Net cash used in financing activities (3,718) (195) (409) - (4,322) ---------- ------------ -------------- ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (32,013) 1,273 - (30,740) CASH AND CASH EQUIVALENTS: Cash, beginning of period - 43,250 1,490 - 44,740 ---------- ------------ -------------- ------------ ------------ Cash, end of period $ - $ 11,237 $ 2,763 $ - $ 14,000 ---------- ------------ -------------- ------------ ------------ ---------- ------------ -------------- ------------ ------------
17 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ -------------- ------------ ------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income (loss) $ (3,383) $ (3,383) $ 982 $ 2,401 $ (3,383) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Total depreciation and amortization - 6,189 584 - 6,773 Amortization of deferred gain on debt restructure - (1,319) - - (1,319) Provision for supplemental service fee termination - 6,309 - - 6,309 Equity in income (loss) of consolidated subsidiaries 3,383 (982) - (2,401) - Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivable, net - (3,907) - - (3,907) Intercompany receivables, net (97,296) 97,457 (161) - Other current assets - (1,232) 51 - (1,181) Accounts payable and other accrued expenses - 2,740 (181) - 2,559 ---------- ------------ -------------- ------------ ------------ Net cash provided by (used in) operating activities (97,296) 101,872 1,275 - 5,851 ---------- ------------ -------------- ------------ ------------ INVESTING ACTIVITIES: Additions to property and equipment - (13,213) (235) - (13,448) Acquisitions of imaging centers - (12,890) - - (12,890) Other - (951) - - (951) ---------- ------------ -------------- ------------ ------------ Net cash used in investing activities - (27,054) (235) - (27,289) ---------- ------------ -------------- ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuance of preferred stock 23,346 - - - 23,346 Stock options and warrants exercised 50 - - - 50 Payment of loan financing costs - (2,210) - - (2,210) Principal payments of debt and capital lease obligations - (78,136) (319) - (78,455) Proceeds from issuance of debt and capital lease obligations 73,900 9,259 - - 83,159 Other - - (7) - (7) ---------- ------------ -------------- ------------ ------------ Net cash provided by (used in) financing activities 97,296 (71,087) (326) - 25,883 ---------- ------------ -------------- ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS - 3,731 714 - 4,445 CASH AND CASH EQUIVALENTS: Cash, beginning of period - 5,845 1,039 - 6,884 ---------- ------------ -------------- ------------ ------------ Cash, end of period $ - $ 9,576 $ 1,753 $ - $ 11,329 ---------- ------------ -------------- ------------ ------------ ---------- ------------ -------------- ------------ ------------
18 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this report that are not purely historical or which might be considered an opinion or projection concerning the Company or its business, whether express or implied, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include statements regarding the Company's expectations, intentions, plans or strategies regarding the future, including statements related to the Year 2000 Issue. All forward-looking statements included in this report are based upon information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those described or implied in such forward-looking statements because of certain factors which could affect the Company. Such forward-looking statements should be evaluated in light of the following factors: availability of financing; limitations and delays in reimbursement by third party payors; contract renewals and financial stability of customers; technology changes; governmental regulation; conditions within the health care environment; Year 2000 issues; adverse utilization trends for certain diagnostic imaging procedures; aggressive competition; general economic factors; InSight's inability to carry out its business strategy; and the risk factors described in the Company's periodic filings with the Securities and Exchange Commission (SEC), on Forms 10-K, 10-Q and 8-K (if any) and the factors described under "Risk Factors" in the Company's Registration Statement on Form S-4, filed with the SEC on August 4, 1998, and any amendments thereto. ACQUISITIONS The Company believes a consolidation in the diagnostic imaging industry is occurring and is necessary in order to provide surviving companies the opportunity to achieve operating and administrative efficiencies through consolidation. InSight's strategy is to further develop and expand regional diagnostic imaging networks that emphasize quality of care, produce cost-effective diagnostic information and provide superior service and convenience to its customers. The strategy of the Company is focused on the following components: (i) to further participate in the consolidation occurring in the diagnostic imaging industry by continuing to build its market presence in its existing regional diagnostic imaging networks through geographically disciplined acquisitions; (ii) to develop or acquire additional regional networks in strategic locations where the Company can offer a broad range of services to its customers and realize increased economies of scale; (iii) to continue to market current diagnostic imaging applications through its existing facilities to optimize and increase overall procedure volume; (iv) to strengthen the regional diagnostic imaging networks by focusing on managed care customers; and (v) to implement a variety of new products and services designed to further leverage its core business strengths, including: Open MRI systems and the radiology co-source product which involves the joint ownership and management of the physical and technical operations of the multi-modality radiology department of a hospital or multi-specialty physician group. The Company believes that long-term viability is contingent upon its ability to successfully execute its business strategy. In fiscal 1997, the Company completed three acquisitions as follows: a Fixed Facility in Hayward, California; Mobile Facilities in Maine and New Hampshire; and a Center in Chattanooga, Tennessee. All three transactions included the purchase of assets and assumption of certain equipment related liabilities. The cumulative purchase price for these acquisitions was approximately $18.6 million. In fiscal 1998, the Company completed four acquisitions as follows: a Center in Columbus, Ohio; a Center in Murfreesboro, Tennessee; a Fixed Facility in Redwood City, California; and a Center in Las Vegas, Nevada. In connection with the purchase of the Center in Columbus, Ohio, InSight also acquired a majority ownership interest in a new Center in Dublin, Ohio. All transactions included the purchase of assets and assumption of certain equipment related liabilities. The cumulative purchase price for these acquisitions was approximately $18.4 million. In fiscal 1998, the Company also acquired all of the capital stock of Signal Medical Services, Inc. (Signal). The purchase price was approximately $45.7 million. The Signal assets primarily consisted of Mobile Facilities in the Northeastern and Southeastern United States. 19 In addition, in fiscal 1998, the Company installed three Open MRI Fixed Facilities in Atlanta, Georgia; Scarborough, Maine; and Santa Ana, California; and opened its first radiology co-source outpatient Center in Oxnard, California, all of which were financed through GE. Effective December 31, 1997, the Company terminated its agreement to operate a Gamma Knife Center and entered into an agreement to dissolve a partnership related to a Fixed Facility in Seattle, Washington. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company operates in a capital intensive, high fixed cost industry that requires significant amounts of working capital to fund operations, particularly the initial start-up and development expenses of new operations and yet is constantly under external pressure to contain costs and reduce prices. Revenues and cash flows have been adversely affected by an increased collection cycle, competitive pressures, declines in reimbursement and major restructurings within the healthcare industry. This adverse effect on revenues and cash flow is expected to continue, especially in the mobile diagnostic imaging business. The Company continues to pursue acquisition opportunities. The Company believes that the expansion of its business through acquisitions is a key factor in maintaining profitability. Generally, acquisition opportunities are aimed at increasing revenues and profits, and maximizing utilization of existing capacity; however, the Company has incurred and will continue to incur costs for the salaries, benefits and travel of its business development team. Incremental operating profit resulting from future acquisitions will vary depending on geographic location, whether facilities are Centers, Mobile Facilities or Fixed Facilities, the range of services provided and the Company's ability to integrate the acquired businesses into its existing infrastructure. On October 14, 1997, the Company consummated the Recapitalization pursuant to which (a) the Company issued to Carlyle 25,000 shares of Series B Preferred Stock having a liquidation preference of $1,000 per share and the Carlyle Warrants, generating net proceeds to the Company (after related transaction costs of approximately $2.0 million) of approximately $23.0 million; (b) the Company issued to GE 7,000 shares of Series C Preferred Stock, with a liquidation preference of $1,000 per share, in consideration of the termination of GE's right to receive supplemental service fee payments equal to 14% of InSight's pretax income, the GE Warrants and an additional 20,953 shares of Series C Preferred Stock in exchange for all of GE's shares of Series A Preferred Stock; and (c) the Company executed the Bank Financing. Initial funding under the Bank Financing occurred on October 22, 1997 and, on December 19, 1997, the Bank Financing was increased to a total of $150 million by converting $10 million of outstanding debt under the acquisition facility to the seven-year tranche (which was thereby increased to $40 million) and increasing the acquisition facility to $65 million. The net proceeds from the Carlyle investment were used to refinance a portion of the outstanding GE indebtedness (approximately $20 million). At the initial funding of the Bank Financing, all of the term loan facility was drawn down to refinance all of the remaining GE indebtedness (approximately $50 million) and approximately $8 million of the revolving facility was drawn down for working capital purposes. The terms of the Series B Preferred Stock and the Series C Preferred Stock, as well as the Bank Financing, contain certain restrictions on the Company's ability to act without first obtaining a waiver or consent from Carlyle, GE and NationsBank. On June 12, 1998, the Company completed a refinancing of substantially all of the Company's debt through the issuance of the Notes. The Notes bear interest at 9.625%, with interest payable semi-annually and mature in June 2008. The Notes are redeemable at the option of the Company, in whole or in part, on or after June 15, 2003. The Notes are unsecured senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness, as defined in the indenture, of the Company, including borrowings under the Bank Financing. Concurrently with the issuance of the Notes, the Company entered into an amendment to, and restatement of the Bank Financing, pursuant to which, among other things, the Company refinanced and consolidated its prior $20 million tranche term loan and $40 million tranche term loan into a $50 million term loan, with a six-year amortization. Borrowings under the $50 million term loan bear interest at LIBOR plus 1.75%. The Company 20 utilized a portion of the net proceeds from the Notes, together with the net proceeds of the borrowing under the term loan portion of the Bank Financing to repay outstanding indebtedness under the Bank Financing. The remaining net proceeds of approximately $28.8 million were added to working capital and are being used for general corporate purposes. As part of the amendment to the Bank Financing, the Company has available a $25 million working capital facility with a five-year maturity and a $75 million acquisition facility with a six-year maturity. Borrowings under both credit facilities bear interest at LIBOR plus 1.75%. The Company is required to pay an unused facility fee of between 0.375% and 0.5% on unborrowed amounts under both facilities, of which the Company has paid approximately $0.2 million through December 31, 1998. There were no borrowings under either facility at December 31, 1998. Net cash provided by operating activities was approximately $1.7 million for the six months ended December 31, 1998. Cash provided by operating activities resulted primarily from net income before depreciation and amortization (approximately $15.8 million), offset by an increase in accounts receivable (approximately $4.5 million) and a decrease in accounts payable and other accrued expenses (approximately $8.4 million). Net cash used in investing activities was approximately $28.1 million for the six months ended December 31, 1998. Cash used in investing activities resulted primarily from the Company purchasing new diagnostic imaging equipment or upgrading its existing diagnostic imaging equipment (approximately $26.9 million). Net cash used in financing activities was approximately $4.3 million for the six months ended December 31, 1998, resulting primarily from net principal payments of debt and capital lease obligations (approximately $4.1 million). The Company has committed to purchase or lease, at an aggregate cost of approximately $8.9 million, five MRI systems for delivery through September 30, 1999. The Company expects to use internal funds to finance the purchase of such equipment. In addition, the Company has committed to purchase or lease from GE, at an aggregate cost of approximately $29 million, including siting costs, 24 Open MRI systems for delivery and installation. As of January 31, 1999, the Company had installed 14 of such Open MRI systems: five at existing Centers, three in newly opened Fixed Facilities, and six in Mobile Facilities which operate in existing networks serviced by conventional Mobile Facilities. The Company may purchase, lease or upgrade other MRI systems as opportunities arise to place new equipment into service when new contract services agreements are signed, existing agreements are renewed, acquisitions are completed, or new imaging centers are developed in accordance with the Company's business strategy. The Company believes that, based on proceeds from the issuance of the Notes, current levels of operations and anticipated growth, its cash from operations, together with other available sources of liquidity, including borrowings available under the Bank Financing, will be sufficient through the fiscal year ending June 30, 2001 to fund anticipated capital expenditures and make required payments of principal and interest on its debt, including payments due on the Notes and obligations under the Bank Financing. In addition, the Company continually evaluates potential acquisitions and expects to fund such acquisitions from its available sources of liquidity, including borrowings under the Bank Financing. The Company's acquisition strategy, however, may require sources of capital in addition to that currently available to the Company, and no assurance can be given that the Company will be able to raise any such necessary additional funds on terms acceptable to the Company or at all. 21 YEAR 2000 ISSUE IMPACT OF YEAR 2000: The Year 2000 Issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date occurs, computer programs, computers and embedded microprocessors controlling equipment with date-sensitive systems may recognize Year 2000 as 1900 or not at all. This inability to recognize or properly treat Year 2000 may result in computer system failures or miscalculations of critical financial and operational information as well as failures of equipment controlling date-sensitive microprocessors. In addition, there are two other related issues which could also lead to miscalculations or failures: (i) some older systems' programming assigns special meaning to certain dates, such as 9/9/99 and (ii) the Year 2000 is a leap year. STATE OF READINESS: The Company started to formulate a plan to address the Year 2000 Issue in late 1995. To date, the Company's primary focus has been on its own internal information technology systems, including all types of systems in use by the Company in its operations, marketing, finance and human resources departments, and to deal with the most critical systems first. The Company is in the process of developing a Year 2000 Plan to address all of its Year 2000 Issues. The Company has given its Vice President-Information Technology specific responsibility for managing its Year 2000 Plan and a Year 2000 Committee has been established to assist in developing and implementing the Year 2000 Plan. The Year 2000 Plan being developed will involve generally the following phases: awareness, assessment, renovation, testing and implementation. Although the Company's assessment of the Year 2000 Issue is incomplete, the Company has completed an assessment of approximately 85% of its internal information technology systems. As a result of delays in obtaining information, the Company now estimates that it will complete the assessment of its remaining internal information technology systems by March 31, 1999 and will then establish a timetable for the renovation phase of the remaining technology systems. The Company has already completed the renovation of approximately 60% of its information technology systems, including modifying and upgrading software and developing and purchasing new software, and continues to renovate the portions of such systems for which assessment is complete. The Company has not begun or established a timetable for the testing and implementation phases. The Company's goal is to complete such phases by June 30, 1999, although complications arising from unanticipated acquisitions might cause some delay. The Company is assessing the potential for Year 2000 problems with the information systems of its customers and vendors. The Company has determined that direct contact with its vendors, customers, business partners, landlords and other third parties with which the Company has a material relationship will yield better results than submitting questionnaires, which historically have not been responded to adequately, if at all. The Company intends to send to its vendors, customers, business partners, landlords and other third parties, follow-up questionnaires and letters to confirm verbal assurances received. The Company expects to complete such assessment by March 31, 1999. The Company does not have sufficient information to provide an estimated timetable for completion of renovation and testing that such parties with which the Company has a material relationship may undertake. The Company is unable to estimate the costs that it may incur to remedy the Year 2000 Issues relating to such parties. The Company has received some preliminary information concerning the Year 2000 readiness of some of its customers, vendors and other third parties with which the Company has a material relationship and expects to engage in discussions with most of such parties through March 31, 1999 in an attempt to determine the extent to which the Company is vulnerable to those parties' possible failure to become Year 2000 compliant. All of the Company's diagnostic imaging equipment used to provide imaging services have computer systems and applications, and in some cases embedded microprocessors, that could be affected by Year 2000 Issues. The Company has begun to assess the impact on its diagnostic imaging equipment by contacting the vendors of such equipment. The vendor with respect to the majority of the MRI and CT equipment used by the Company has informed the Company (i) that certain identified MRI and CT equipment is Year 2000 compliant, (ii) it has developed software for functional work arounds to ensure Year 2000 compliance with respect to the balance of its noncompliant MRI and CT equipment and (iii) remediation will be made during future regular maintenance visits. The Company is in the process of contacting the other vendors of its diagnostic imaging equipment. While progress has been slow, the Company expects to receive information from such other vendors by March 31, 1999 with 22 respect to their assessment of the impact on the equipment that they provided to the Company and the nature and timetable of the remediation that such vendors may propose. In addition, the Company is utilizing other resources at its disposal, e.g. equipment vendor web sites, to assist in its assessment. The Company expects to complete its assessment by March 31, 1999, subject to equipment vendor response, and that renovation will be completed by June 30, 1999. The Company expects that its equipment vendors will propose timely remediation and will bear the cost of modifying or otherwise renovating the Company's diagnostic imaging equipment. In September 1998, the Company began an assessment of the potential for Year 2000 problems with the embedded microprocessors in its other equipment, facilities and corporate and regional offices, including telecommunications systems, utilities, dictation systems, security systems and HVACS. The Company has experienced delays in responses which have caused the Company to extend the completion of the assessment to March 31, 1999. The Company intends to engage consultants to independently evaluate the Company's progress with its Year 2000 Plan, to assist in the testing (i.e. verification and validation) of the Company's internal information technology systems, the information systems of its vendors, customers, business partners, landlords and other third parties and its diagnostic imaging equipment. COSTS TO ADDRESS YEAR 2000 ISSUE: The Company estimates on a preliminary basis that the cost of assessment, renovation, testing and implementation of its internal information technology systems and diagnostic imaging equipment will range from approximately $500,000 to $1,500,000, of which approximately $37,000 has been incurred. The major components of these costs are: consultants, additional personnel costs, programming, new software and hardware, software upgrades, travel expenses and diagnostic imaging equipment replacement. The Company expects that such costs will be funded through operating cash flows. This estimate, based on currently available information, will be updated as the Company continues its assessment and proceeds with renovation, testing and implementation and may be adjusted upon receipt of more information from the Company's vendors, customers and other third parties and upon the design and implementation of the Company's contingency plan. In addition, the availability and cost of consultants and other personnel trained in this area and unanticipated acquisitions might materially affect the estimated costs. RISKS TO THE COMPANY: The Company's Year 2000 Issue involves significant risks. There can be no assurance that the Company will succeed in implementing the Year 2000 Plan it is developing. The following describes the Company's most reasonably likely worst-case scenario, given current uncertainties. If the Company's renovated or replaced internal information technology systems fail the testing phase, or any software application or embedded microprocessors central to the Company's operations are overlooked in the assessment or implementation phases, significant problems including delays may be incurred in billing the Company's major customers (Medicare, HMOs or private insurance carriers) for services performed. If its major customers' systems do not become Year 2000 compliant on a timely basis, the Company will have problems and incur delays in receiving and processing correct reimbursement. If the computer systems of third parties with which the Company's systems exchange data do not become Year 2000 compliant both on a timely basis and in a manner compatible with continued data exchange with the Company's information technology systems, significant problems may be incurred in billing and reimbursement. If the systems on the diagnostic imaging equipment utilized by the Company are not Year 2000 compliant, the Company may not be able to provide imaging services to patients. If the Company's vendors or suppliers of the Company's necessary power, telecommunications, transportation and financial services fail to provide the Company with equipment and services, the Company will be unable to provide services to its customers. If any of these uncertainties were to occur, the Company's business, financial condition and results of operations would be adversely affected. The Company is unable to assess the likelihood of such events occurring or the extent of the effect on the Company. CONTINGENCY PLAN. The Company has not yet established 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 it expects to create such a plan by March 31, 1999. The Company intends to engage a consultant to assist in the development of its contingency plan. 23 RESULTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31,1998 COMPARED TO DECEMBER 31,1997 REVENUES: Revenues increased approximately 35.2% from approximately $56.8 million for the six months ended December 31, 1997, to approximately $76.8 million for the six months ended December 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $17.0 million), an increase in contract services and patient services revenues (approximately $4.8 million) at existing facilities and an increase in other revenues due to a one-time settlement payment in connection with an earn-out from the sale of the Company's lithotripsy partnerships in 1995 (approximately $0.4 million), partially offset by the termination of a Fixed Facility and a Gamma Knife Center in 1997 (approximately $2.2 million). Contract services revenues increased approximately 48.0% from approximately $27.1 million for the six months ended December 31, 1997, to approximately $40.1 million for the six months ended December 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $11.1 million) and an increase at existing facilities (approximately $1.9 million). The increase at existing facilities was due to higher utilization (approximately 10%) offset by a decline in reimbursement from customers, primarily hospitals (approximately 3%), as a result of increased price competition. Contract services revenues, primarily earned by the Company's Mobile Facilities, represented approximately 52% of total revenues for the six months ended December 31, 1998. Each year approximately one-quarter to one-third of the contract services agreements are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past where agreements have not been renewed, the Company has been able to obtain replacement customer accounts. While some replacement accounts have initially been smaller than the lost accounts, such replacement accounts revenues have generally increased over the term of the agreement. The non-renewal of a single customer agreement would not have a material impact on InSight's contract services revenues; however, non-renewal of several agreements could have a material impact on contract services revenues. In addition, the Company's contract services revenues with regard to its Mobile Facilities in certain markets depend in part on some customer accounts with high volume. If the future reimbursement levels of such customers were to decline or cease or if such customers were to become financially insolvent and if such agreements were not replaced with new accounts or with the expansion of services on existing accounts, InSight's contract services revenues would be adversely affected. Patient services revenues increased approximately 23.2% from approximately $28.5 million for the six months ended December 31, 1997, to approximately $35.1 million for the six months ended December 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $5.8 million) and an increase in revenues at existing facilities (approximately $3.0 million). The increase at existing facilities was due to higher utilization (approximately 11%), partially offset by declines in reimbursement from third party payors (approximately 2%) and reduced revenues from the termination of a Fixed Facility and a Gamma Knife Center in 1997 (approximately $2.2 million). Management believes that any future increases in revenues at existing facilities can only be achieved by higher utilization and not by increases in procedure prices; however, slower start-up of new operations, excess capacity of diagnostic imaging equipment, increased competition, and the expansion of managed care may impact utilization and make it difficult for the Company to achieve revenue increases in the future, absent the execution of provider agreements with managed care companies and other payors, and the execution of the Company's business strategy, particularly acquisitions. InSight's operations are principally dependent on its ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other healthcare providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a 24 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 32.4% from approximately $46.3 million for the six months ended December 31, 1997, to approximately $61.3 million for the six months ended December 31, 1998. This increase was due primarily to an increase in costs due to the acquisitions discussed above (approximately $13.5 million) and an increase in costs at existing facilities (approximately $3.2 million), offset by the elimination of costs at the two terminated facilities discussed above (approximately $1.7 million). Costs of operations, as a percent of total revenues, decreased from approximately 81.5% for the six months ended December 31, 1997, to approximately 79.9% for the six months ended December 31, 1998. The decrease was due primarily to reduced costs in diagnostic imaging equipment maintenance, equipment lease and medical supply costs, offset by (i) higher amortization costs associated with the Company's acquisition activities and (ii) higher salaries and benefits, occupancy and depreciation costs. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 11.6%, from approximately $4.3 million for the six months ended December 31, 1997, to approximately $4.8 million for the six months ended December 31, 1998. This increase was due primarily to (i) increased salaries, benefits and travel costs associated with the Company's acquisition activities, and (ii) increased occupancy and communication costs, offset by reduced legal costs. PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: In October 1997, as part of the Recapitalization and Bank Financing discussed above, the Company issued to GE 7,000 shares of Series C Preferred Stock to terminate GE's right to receive supplemental service fee payments equal to 14% of the Company's pre-tax income. The Series C Preferred Stock was valued at $7.0 million, and, during the six months ended December 31, 1997, the Company recorded a one-time provision of approximately $6.3 million, net of amounts previously accrued, for the Preferred Stock issuance. INTEREST EXPENSE, NET: Interest expense, net increased approximately 112.1% from approximately $3.3 million for the six months ended December 31, 1997, to approximately $7.0 million for the six months ended December 31, 1998. This increase was due primarily to additional debt related to (i) the issuance of Notes discussed above, (ii) the acquisitions discussed above, and (iii) the Company upgrading its existing diagnostic imaging equipment, offset by reduced interest as a result of amortization of long-term debt. PROVISION FOR INCOME TAXES: Provision for income taxes decreased from approximately $0.4 million for the six months ended December 31, 1997, to approximately $0.3 million for the six months ended December 31, 1998. The decrease in provision is due to anticipated benefits from the utilization of certain operating loss carryforwards in 1998. INCOME (LOSS) PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net loss per common and converted preferred share was ($0.49) for the six months ended December 31, 1997, compared to net income per common and converted preferred share of $0.39 for the same period in 1998. Excluding the one-time provision for supplemental service fee termination, net income for the six months ended December 31, 1997 would have been approximately $2.9 million, compared to approximately $3.7 million for the six months ended December 31, 1998 and net income per common and converted preferred share on a diluted basis for the six months ended December 31, 1997 would have been $0.42. The decrease in net income per common and converted preferred share was the result of (i) the additional shares outstanding as a result of the Recapitalization discussed above, (ii) increased interest expense, (iii) increased corporate operating expenses, and (iv) a decrease in earnings from unconsolidated partnerships, offset by increased gross profit. 25 THREE MONTHS ENDED DECEMBER 31,1998 COMPARED TO DECEMBER 31, 1997 REVENUES: Revenues increased approximately 33.7% from approximately $29.1 million for the three months ended December 31, 1997, to approximately $38.9 million for the three months ended December 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $8.6 million), an increase in contract services and patient services revenues (approximately $1.8 million) at existing facilities and an increase in other revenues due to a one-time settlement payment in connection with an earn-out from the sale of the Company's lithotripsy partnerships in 1995 (approximately $0.4 million), partially offset by the termination of a Fixed Facility and a Gamma Knife Center in 1997 (approximately $1.0 million). Contract services revenues increased approximately 47.4% from approximately $13.5 million for the three months ended December 31, 1997, to approximately $19.9 million for the three months ended December 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $5.8 million) and an increase at existing facilities (approximately $0.6 million). The increase at existing facilities was due to higher utilization (approximately 11%), offset by a decline in reimbursement from customers, primarily hospitals (approximately 3%), as a result of increased price competition. Patient services revenues increased approximately 20.1% from approximately $14.9 million for the three months ended December 31, 1997, to approximately $17.9 million for the three months ended December 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $2.6 million) and an increase in revenues at existing facilities (approximately $1.4 million). The increase at existing facilities was due to higher utilization (approximately 12%), partially offset by declines in reimbursement from third party payors (approximately 2%) and reduced revenues from the termination of a Fixed Facility and a Gamma Knife Center in 1997 (approximately $1.0 million). COSTS OF OPERATIONS: Costs of operations increased approximately 27.1% from approximately $24.0 million for the three months ended December 31, 1997, to approximately $30.5 million for the three months ended December 31, 1998. This increase was due primarily to an increase in costs due to the acquisitions discussed above (approximately $6.5 million) and an increase in costs at existing facilities (approximately $0.7 million), offset by the elimination of costs at the two terminated facilities discussed above (approximately $0.7 million). Costs of operations, as a percent of total revenues, decreased from approximately 82.5% for the three months ended December 31, 1997, to approximately 78.6% for the three months ended December 31, 1998. The decrease was due primarily to reduced costs in diagnostic imaging equipment maintenance, equipment lease and medical supply costs, offset by (i) higher amortization costs associated with the Company's acquisition activities and (ii) higher salaries and benefits, occupancy, and depreciation costs. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 36.8%, from approximately $1.9 million for the three months ended December 31, 1997, to approximately $2.6 million for the three months ended December 31, 1998. This increase was due primarily to (i) increased salaries, benefits and travel costs associated with the Company's acquisition activities and (ii) higher occupancy and communications costs. PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: In October 1997, as part of the Recapitalization and Bank Financing discussed above, the Company issued to GE 7,000 shares of Series C Preferred Stock to terminate GE's right to receive supplemental service fee payments equal to 14% of the Company's pre-tax income. The Series C Preferred Stock was valued at $7.0 million, and, during the three months ended December 31, 1997, the Company recorded a one-time provision of approximately $6.3 million, net of amounts previously accrued, for the Preferred Stock issuance. INTEREST EXPENSE, NET: Interest expense, net increased approximately 125.0% from approximately $1.6 million for the three months ended December 31, 1997, to approximately $3.6 million for the three months ended December 31, 1998. This increase was due primarily to additional debt related to (i) the issuance of Notes discussed above, (ii) the acquisitions discussed 26 above, and (iii) the Company upgrading its existing diagnostic imaging equipment, offset by reduced interest as a result of amortization of long-term debt. PROVISION FOR INCOME TAXES: During the three months ended December 31, 1998, the Company recorded a provision for income taxes of approximately $0.2 million, compared to no provision recorded in the same period in 1997. The increase in provision is due to higher pre-tax income in 1998, partially offset by anticipated benefits from the utilization of certain operating loss carryforwards in 1998. INCOME (LOSS) PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net loss per common and converted preferred share was ($0.53) for the three months ended December 31, 1997, compared to net income per common and converted preferred share of $0.21 for the same period in 1998. Excluding the one-time provision for supplemental service fee termination, net income for the three months ended December 31, 1997 would have been approximately $1.8 million, compared to approximately $2.0 million for the three months ended December 31, 1998 and net income per common and converted preferred share on a diluted basis for the three months ended December 31, 1997 would have been $0.21. The change in net income per common and converted preferred share is the result of (i) the additional shares outstanding as a result of the Recapitalization discussed above, (ii) increased interest expense, (iii) increased corporate operating expenses, (iv) a decrease in earnings from unconsolidated partnerships, offset by increased gross profit. NEW PRONOUNCEMENTS As of June 30, 1999, the Company will be required to adopt Statement of Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." The Company believes that adoption of these standards will not have a material impact on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK InSight's market risk exposure relates primarily to interest rates, where InSight's will periodically use interest rate swaps to hedge interest rates on long-term debt under its Bank Financing. InSight does not engage in activities using complex or highly leveraged instruments. At December 31, 1998, InSight's had outstanding an interest rate swap, converting the majority of its $46.3 million term loan floating rate debt to fixed rate debt. Since the majority of the Company's debt has historically been fixed-rate debt, the impact of the interest rate swap has not been material on the Company's weighted average interest rate. 27 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On December 15, 1998, the Company held its annual meeting of stockholders at which the single matter to be acted upon was the election of two directors, Grant R. Chamberlain and Ronald G. Pantello as Class II Directors, to serve for a three year term. (b) Inapplicable. (c) 2,294,957 shares were cast in favor of Messrs. Chamberlain and Pantello, and 3,935 shares were withheld. (d) Inapplicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. There are none. (b) REPORTS ON FORM 8-K No current reports on Form 8-K were filed by the Company for the quarter ended December 31, 1998. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INSIGHT HEALTH SERVICES CORP. /S/ E. Larry Atkins ---------------------------- E. Larry Atkins President and Chief Executive Officer /S/ Thomas V. Croal ---------------------------- Thomas V. Croal Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer February 16, 1999 29 EX-27 2 EXHIBIT 27
5 1,000 6-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 14,000 0 30,140 0 0 48,322 123,614 34,754 219,184 28,381 0 0 37,096 3 4,453 219,184 75,229 76,639 0 60,010 4,665 1,255 7,033 3,934 272 3,662 0 0 0 3,662 0.40 0.39
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